Like all employers, you want to provide a competitive benefits program that attracts and retains top talent. But even if you offer benefits under a Section 125 Plan, you may still be wondering if you’re making the most of possible tax savings.

The Basics of Section 125 Plans

A Section 125 Plan is an employer-sponsored program designed to help employees save money on important expenses—like eligible insurance premiums, health-related expenses, and dependent care expenses. First, employers choose which benefits to include in the plan. After employees select the benefits that best fit their needs, the monthly costs for the benefits are deducted from their paychecks before taxes.

Because Section 125 Plan benefits are not subject to federal and state income and payroll taxes, an employee’s taxable income is reduced. This not only leads to more take-home pay for the employee, but also benefits employers by reducing employer payroll tax liabilities.

To understand how this plan works, consider this example of an employee’s semi-monthly paycheck. The sample is based on 24 pay periods, 20% Federal and State income tax, and 7.65% FICA tax.


How Reimbursement Accounts Affect Employer Savings

Not only can Section 125 Plans help save employees money, but employers can also benefit from the implementation of this plan. Because premiums withheld from employee paychecks are not subject to Social Security and Medicare tax, you need not pay taxes on those dollars—directly impacting your company’s bottom line.

Employee Education Is Key

When employees don’t understand the importance of their benefits—especially Section 125 Plan benefits—they’re less likely to purchase them during annual enrollment. This can cost both you and your employees potential tax savings.

In fact, for every dollar your employees pre-tax in a Flexible Spending Account, you could save 7.65% on an annual pre-tax basis.1 And employers, on average, save $115 per participant in a Section 125 Plan on FICA alone.2

At American Fidelity Assurance Company, we provide employee education so you don’t have to. Our onboarding and enrollment process is specifically designed to help your employees make the best decisions for their families. Through customized education and year-round communication, we can help your employees understand their benefits—leading to a potentially greater participation in your Section 125 Plan.

Let Us Help

While offering a Section 125 Plan brings tax savings for both you and your employees, the administration of the plan can be time-consuming. In addition to encouraging education and participation, American Fidelity can also help you keep track of Section 125 Plan changes and new regulations.

If you’re ready to get started, visit for more information about implementing a Section 125 Plan today!



1 Flexible Spending Accounts: accessed May 9, 2018.
2 Investopedia: Section 125 Plan: How Does It Work?; August 9, 2016.