What Is a Section 125 Plan?

A Section 125 Plan is a written plan that gives employees the option to choose between cash and qualifying benefits that are pre-taxed.

Section 125 is part of the IRS Code created to make benefit programs more affordable for employees. Under this code, employees are allowed to convert a taxable cash benefit (salary) into non-taxable benefits. The employee usually pays less in federal income and/or FICA taxes because the employee’s contribution is withheld before taxes.

Employers cannot include benefits that defer employees’ pay. Benefits allowed and not allowed can be found in IRS Publication 15-B. For a full list of the benefits you can include in your Section 125 plan, refer to IRS Publication 15-B.

We’ve also created this helpful article on pre-tax deductions. You can explore it here.

Paycor offers human capital management software to help make benefits administration easier. Learn more here.