Introduction

Despite the many advantages of a Section 125 Plan, there are still misconceptions that cause employers to hesitate when considering implementation. Some businesses worry about compliance risks, eligibility restrictions, or administrative complexity, but the reality is that Section 125 Plans are simple to implement, highly beneficial, and fully IRS-compliant when set up correctly.

In this article, we’ll address the most common myths about Section 125 Plans and separate fact from fiction.

Myth #1: Section 125 Plans Are Complicated to Set Up

The Truth: Employers don’t need to handle the setup themselves. A properly structured Section 125 Plan is simple to implement with the help of a third-party administrator. The process typically takes 30-60 days and requires minimal employer involvement beyond signing the initial plan documents.

Myth #2: Only Large Companies Can Benefit from a Section 125 Plan

The Truth: Even small and mid-sized businesses can experience substantial payroll tax savings. Any company with W2 employees can leverage a Section 125 Plan to reduce payroll costs, whether they have 10 or 10,000 employees.

Myth #3: Section 125 Plans Replace Major Medical Insurance

The Truth: A Section 125 Plan does not replace health insurance; it works alongside an employer’s existing benefits to allow employees to pay for health insurance premiums, FSAs, HSAs, and other qualified expenses pre-tax. This enhances current benefits rather than replacing them.

Myth #4: Section 125 Plans Aren’t Fully IRS-Compliant

The Truth: Section 125 Plans are IRS-approved and have been in place since 1978. As long as the plan follows IRS Code Section 125 guidelines—including a written plan document and nondiscrimination testing—it remains fully compliant and audit-ready.

Myth #5: Employers Don’t Save Much with a Section 125 Plan

The Truth: Employers typically save $600-$700 per W2 employee per year in payroll taxes. Larger businesses can see annual savings exceeding $220,000. The more employees participating, the higher the savings.

Final Thoughts

Many employers miss out on huge tax savings because of these misconceptions. A properly structured Section 125 Plan is easy to implement, IRS-compliant, and saves both employers and employees money.

Still have questions? Contact us for a free consultation to see how much your business can save.