What Is a Section 125 Plan, and How Does It Lower Payroll Tax?

A Section 125 plan, often called a cafeteria plan, is a written plan under Section 125 of the Internal Revenue Code that lets employees pay for qualified benefits out of their pay before tax. Because those dollars leave pay before payroll tax is calculated, the employer has less payroll to tax from the plan's start date forward. The section has been in the code since 1978.

How does it lower payroll tax?

Employers pay 7.65% in FICA on wages: 6.2% for Social Security, up to the annual wage base, and 1.45% for Medicare. Pre-tax premiums paid through a Section 125 plan are generally not FICA wages, so the employer's 7.65% share is calculated on a smaller number. The employee's own withholding falls in the same way, for federal, state and payroll tax. That is the difference from a 401(k), which only skips the first of the three.

Where does Quantum 125 fit?

Quantum 125, the program Longtable Benefits offers with Quantum Health Benefits, is a benefit overlay. It sits on top of the health plan you already have, changes nothing in it, and is paid for by payroll tax you already pay. Inside the Section 125 structure sits a fully insured supplemental health plan. The program is designed so the company keeps about $957 a year per enrolled employee after the program's costs, and each enrolled employee takes home about $96.14 more a month at a $50,000 salary. Your own payroll report sets your figures. See one paycheck, before and after.

What do employees get?

On Plan 1500: virtual primary and urgent care at $0 copay for the whole family, with their own doctor by video who keeps their records and orders labs; $0 copay on 1,000+ covered medications; hospital, ER, ambulance, surgery and anesthesia benefits paid in cash straight to the employee; a critical illness lump sum and accident coverage; a virtual vet for the family pet; and coaching. What your people get, one tile per benefit.

How does enrollment work?

Every eligible employee starts enrolled. Each employee gets written notice of the plan and the payroll deduction and can choose to opt out by contacting QHB, whose team answers questions first. Quantum 125 employers typically see 86 to 92% participation.

When can it start?

Any month. It is an overlay, so it is not tied to your renewal; QHB prefers to start just after open enrollment, when your people are not digesting other changes. Setup takes 60 to 90 days. How it works, week by week.

What does your CPA review?

Four documents, before anything is signed: the Section 125 plan document, the carrier's policy form, QHB's payroll reporting instructions and the proposal built from your own payroll, person by person. The page for CPAs walks through each one.

Is it a fit?

It fits employers with regular W-2 payrolls, hourly or salaried, with 100 or more on payroll; smaller companies can still ask. It does not fit a workforce of 1099 contractors. Start by finding your number: type your company and we read its public 2024 filing, or type your payroll.