Section 125 Cafeteria Plans

What is a Section 125 Cafeteria Plan?

It is a written plan that gives employees the option to participate in pre-tax deductions of their employee benefits.

Why is it sometimes called a Cafeteria Plan?

Think of a Section 125 plan like a cafeteria. In a cafeteria, individuals can pick the foods they want from the selections offered. Similarly, employees can pick the benefits they want to include in a Section 125 plan. This is why a Section 125 benefit plan is also called a cafeteria plan.

Types of section 125 plans
Common examples of cafeteria plans include:

  • Premium Only Plans (POP) – With this type of plan, an employee’s pretax contributions can only be used to cover the cost of group health insurance premiums.
  • Flexible Savings Arrangements (FSA) – Employees enrolled in an FSA set aside pretax dollars, which can be used to reimburse qualified medical expenses. These plans have an annual maximum contribution limit and unused funds are lost at the end of the year.
  • Simple Cafeteria Plans – Employers with 100 employees or less can receive safe harbor from plan non-discrimination tests if they make the same benefit contributions to each eligible employee.
  • Full Flex Plans – Eligible employees purchase benefits using contributions from their employer. Any benefit not fully covered by the employer can be paid for by the employee via pretax payroll deductions.

What benefits are included in Section 125 Plans?
The IRS considers the following to be qualified benefits under Section 125:

  • Group Health Benefits, including
    • Medical
    • Dental
    • Vision
    • Ambulatory
    • Chiropractic
    • Psychiatric
  • Accident and disability coverage
  • Adoption assistance
  • Dependent care assistance
  • Group-term life insurance coverage
  • Health savings accounts (HSAs)

What benefits are Excluded from Section 125 Plans?
Benefits that don’t meet Section 125 requirements may still be offered by employers. They just can’t be paid for with pretax dollars. Examples include, but are not limited to:

  • Long-term care insurance
  • Tuition assistance
  • Employee discount programs
  • Work cell phones
  • Moving expenses
  • Commuter benefits
  • Gym memberships
  • Minimal or de minimis benefits

Who can participate in a section 125 plan?

Any employer with employees can sponsor a cafeteria plan, including:

  • C corporations
  • S corporations
  • LLCs
  • Partnerships
  • Sole proprietorships
  • Government Entities


Unfortunately, not everyone who performs work for the business can participate in the plan. Non employees cannot enroll in a Section 125 plan, including:

  • 1099 Contractors
  • Partners in the Partnership
  • Members of an LLC
  • Individuals who own more than 2% of the S corporation

Do I need a Section 125 plan?
Section 125 plans are popular because they allow employers to offer benefits that attract and retain talent, while reducing tax liabilities for themselves and their employees. Employers should weigh their options to determine which plan is best for them and ensure that they comply with Affordable Care Act requirements.

Creating your Section 125 Plan
You must have a written Section 125 Plan document before taking out pre-tax deductions. Otherwise, the IRS may think you’re not withholding enough taxes.

Your written plan should describe and list all employee benefits you offer as well as detail the contribution limits for each benefit, participation rules, employer contributions, plan year, and any other necessary information.

For help writing your cafeteria plan, we recommend turning to a professional. Dumbaugh Insurance works with several Third Party Administrators (TPA) who may assist employers with a Section 125 Plan document and ensure is it accurate, legal, and understandable.

How much does it typically cost to set up a Section 125?

A Section 125 Premium Only Plan typically will cost a one time set up fee between $225 to $300. After that, you can pay for an annual update or adjust as necessary if needed which is typically much less.

Who do I contact to get started on a Section 125 Cafeteria Plan?

As a Section 125 Cafeteria Plan encompasses all employee benefits plans it is best to work with the broker or agency that assists with your health insurance benefits. If you would like to work with us, we are happy to help, and can assist you in switching your current benefits to us with a Broker of Record transfer.

Please reach out to Liz Mason, our Benefits Coordinator who can assist with the process.

  • Call or text me at 1-740-397-1234
  • Email me directly at liz@dumbaughinsurance.com

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