Most Florida employees already pay a share of their health, dental, or vision premiums every pay period. The question is whether that money comes out before or after taxes are calculated. Through a Section 125 premium-only plan, often called a POP, an employer can route the employee’s share of premiums through pre-tax payroll deductions. The employee keeps more take-home pay, and the employer lowers its share of payroll taxes. It is one of the simplest tax-advantaged benefits an employer can offer, but it only works if the plan is set up correctly under IRS rules. This guide covers what a premium-only plan requires, what it can and cannot include, and a payroll checklist, as of October 23, 2026.
What a Section 125 premium-only plan does
Internal Revenue Code Section 125 authorizes cafeteria plans, which let employees choose between receiving part of their compensation as cash or directing it toward qualified benefits. A premium-only plan is the simplest and most common type. It does one thing: employees pay their share of employer-sponsored insurance premiums with pre-tax salary reductions. Health, dental, and vision premiums are the typical candidates.
The mechanics are straightforward. During open enrollment, the employee signs a salary reduction agreement electing coverage before the coverage period begins. Each pay period, the premium amount is withheld before federal income tax and FICA are calculated. The employee never receives the premium dollars as income, so the reduced wages simply appear on the W-2 at year-end. Employer contributions toward health coverage are already generally excludable from income under Section 106. Section 125 is the provision that makes the employee’s share pre-tax too.
Why employers and employees both save
Because the premium is deducted before FICA is calculated, both sides skip the 7.65 percent combined payroll tax (6.2 percent Social Security plus 1.45 percent Medicare) on the premium amount. Consider an employee whose share of premiums is $400 per month. Run through a Section 125 plan, FICA taxable wages drop by $400, saving about $30.60 per month for the employee, and the employer saves the same amount on its matching share. That is roughly $735 per year in combined FICA savings for a single employee, before counting any federal income tax savings for the worker.
These savings scale across a workforce. Because the employer’s Social Security and Medicare matches are both calculated on the reduced wage base, every premium dollar routed through a cafeteria plan reduces payroll tax on both sides of the ledger. This is a major reason employers of all sizes offer Section 125 plans, even when no other pre-tax benefits are involved.
What a premium-only plan requires
A premium-only plan is simple, but it is not automatic. These are the requirements employers commonly miss:
- A written plan document must exist before the plan year begins. An oral understanding or a payroll setting is not a Section 125 plan. The document must spell out eligibility, the benefits offered, and the election procedures.
- Salary reduction elections happen during open enrollment, before coverage starts. Employees agree to reduce their taxable wages by the premium amount for the plan year. Without a timely election, the pre-tax treatment does not apply.
- Elections are generally locked for the plan year. An employee cannot change or drop coverage mid-year because circumstances feel different. Changes are allowed only after a qualifying life event recognized by IRS rules, such as marriage, divorce, the birth or adoption of a child, or a loss of other coverage, under 26 CFR 1.125-4.
- The plan document can authorize automatic adjustments. If the carrier adjusts premium rates mid-year, the plan can allow the salary reduction to adjust automatically without requiring a new election, as long as the document says so.
- The plan must not discriminate in favor of highly compensated or key employees. Cafeteria plans are subject to nondiscrimination testing. If a plan fails, the tax benefit can be lost for the favored group, creating retroactive tax liability and payroll corrections.
What can and cannot run through a premium-only plan
Qualified benefits include the employee’s share of employer-sponsored health, dental, and vision premiums. Group-term life premiums can also run through a Section 125 plan up to a point: employer-provided coverage above $50,000 triggers imputed income under Section 79, so the cost of the excess is added back to taxable wages.
Some benefits specifically cannot be offered pre-tax through a cafeteria plan. Long-term care insurance, education assistance, commuter benefits (covered under separate code sections), and most fringe benefits such as gym memberships are excluded. Only qualified benefits in the written plan document get the pre-tax treatment.
The Section 125 payroll checklist for Florida employers
Here is a practical sequence for Florida businesses setting up or reviewing a premium-only plan:
1. Confirm you have a written plan document in place
If your company has been running pre-tax deductions without a formal Section 125 document, that is the first gap to close. The document must be in place before the plan year it covers begins, and it should reflect your current benefit offerings and election procedures.
2. Align the plan year with your open enrollment
Salary reduction agreements are signed during open enrollment for the coming plan year. Coordinate with your carrier renewal, your benefits enrollment communications, and your payroll provider so election amounts and effective dates match.
3. Build the qualifying-life-event rules into your process
Decide which IRS-permitted election changes your plan allows and make sure HR and payroll handle mid-year requests consistently. Train managers to route qualifying-life-event requests to HR rather than promising changes on the spot.
4. Verify payroll deduction order with your payroll provider
Confirm that the premium deduction reduces gross wages before federal income tax and FICA are calculated, and that W-2 reporting reflects the reduced Box 1 wages. A common error is deducting pre-tax on the pay stub while reporting full wages to the IRS.
5. Run nondiscrimination testing annually
Testing is not a one-time event. Changes in workforce composition can push a plan out of compliance, so build testing into the annual benefits calendar and correct failures before year-end.
6. Review any supplemental benefits on the menu
When reviewing the benefit menu, ask your agent which supplemental offerings fit your workforce. CB Premier Benefits, for example, is a supplemental employee-benefits program offered through Coverage Babe, not insurance and not a replacement for major medical. Confirm with your CPA how any supplemental benefit is treated for tax and payroll purposes.
7. Work with a Florida-licensed agent on the benefit side
Plan design, carrier selection, and enrollment communications are where employees actually experience the benefit. Sean Wigand and Lishele Wigand of Coverage Babe are Florida-licensed health insurance agents who work with Florida businesses on group coverage.
Compliance watch-outs before you act
- This article is general information, not tax, legal, or financial advice. Section 125 rules, nondiscrimination testing, and payroll reporting are detail work. Confirm plan documents, elections, and testing with your CPA or benefits counsel before the plan year begins.
- No one can guarantee savings or outcomes. The FICA examples above are math illustrations, not projections of what any specific employee or employer will save. Tax rules, rates, and plan terms change.
- All facts above are date-stamped as of October 23, 2026. Verify current IRS guidance before acting on time-sensitive details.
- This guidance is written for Florida employers. Coverage Babe’s agents are licensed in Florida.
Frequently asked questions
Is a premium-only plan the same as a cafeteria plan?
A premium-only plan is the simplest type of Section 125 cafeteria plan. A full cafeteria plan can also include flexible spending accounts, dependent care assistance, and other qualified benefits, but a premium-only plan covers just the employee share of insurance premiums through pre-tax salary reductions.
Can employees change their pre-tax elections mid-year?
Generally no. Elections are locked for the plan year. Mid-year changes are permitted only for specific qualifying life events under 26 CFR 1.125-4, such as marriage, divorce, the birth or adoption of a child, or a loss of other coverage, and the plan document must permit them.
Do we need a Section 125 plan if we only have a few employees?
No employer size is too small to benefit. The FICA savings accrue per employee, so even a small group with meaningful employee premium contributions can see worthwhile combined savings. The written plan document and nondiscrimination rules apply regardless of size.
Can premiums for spouses and dependents go through pre-tax too?
Yes. Premium-only plans can cover the employee’s share of premiums for the employee, spouse, and dependents, as defined in the plan document. The exclusion applies to the family-tier premium the employee pays through salary reduction.
Review your pre-tax benefits setup with a Florida-licensed agent
If your employees pay a share of premiums through payroll, a premium-only plan may already be within reach. It just needs the right document, the right timing, and the right payroll setup. Book a consultation with Coverage Babe to review your benefits and payroll alignment before your next open enrollment. Learn more about Coverage Babe or explore CB Premier Benefits, our supplemental employee-benefits program.