June 6, 2025

Section 125 cafeteria plans are one of the most important ways to give smarter, more tax-efficient perks to employees. Employers can lower their payroll taxes with these plans, and workers can get benefits before taxes without having their take-home pay go down. However, to unlock these advantages, businesses must navigate specific Section 125 cafeteria plan requirements and ensure full compliance.

Whether you’re evaluating your first plan or reviewing your current setup, this post breaks down everything you need to know about Section 125 compliance—and how Health Sphere’s Core360 program takes it further with a fully managed, modern approach.

What Is a Section 125 Cafeteria Plan?

IRS Code Section 125 sets the rules for a Section 125 cafeteria plan, which is a tax-advantaged benefits scheme. The law lets workers decide whether to get taxable cash pay or tax-free benefits, like a health plan or other qualifying benefits. When structured and managed correctly, both the employer and the employee benefit from significant tax savings.

But it’s not just a menu of benefit options—it’s a legally structured plan that must meet very specific criteria to remain compliant.

Section 125 Cafeteria Plan Requirements: The Essentials

To stay compliant and reap the tax advantages of Section 125, your plan must meet the following requirements:

1. Written Plan Document

A formal, written plan is required and must describe:

The benefits offered
Eligibility rules
Election procedures
How can changes be made?

Without this document, the plan does not qualify for favorable tax treatment under the IRS rules.

2. Eligible Participants

Employees are the only ones who can join a Section 125 plan. People who work for themselves, own more than 2% of an S-corp, or are partners in a company are not allowed to participate.

3. Qualified Benefits

The plan can only include benefits approved under Section 125, such as:

Health plan premiums
Dental and vision coverage
Flexible spending accounts (FSAs)
Dependent care assistance

It cannot include long-term care plans, tuition reimbursement, or other non-qualified offerings.

4. Election Timing and Consistency

Employees must make their benefit elections before the start of the plan year. These elections are typically irrevocable during the year unless a qualifying life event occurs (e.g., marriage, birth of a child).

5. Non-Discrimination Testing

Plans must pass three separate IRS tests to ensure they don’t favor highly compensated or key employees:

Eligibility Test
Contributions and Benefits Test
Key Employee Concentration Test

Failure to pass these tests can result in the loss of tax advantages for select employees.

6. Compliance with Other Regulations

A compliant cafeteria plan must also align with additional regulations, including:

COBRA continuation coverage requirements
HIPAA privacy and security rules
ACA employer mandate provisions (if applicable)

Section 125 Compliance Is Not Optional

If these conditions are not met, the IRS can reject your plan and take away any tax benefits you got in the past. That means companies might have to pay back taxes, fines, and interest. That is, following Section 125 rules is more than just a technical matter. It’s a business necessity.

That’s why many employers are now turning to fully managed solutions like Core360 from Health Sphere. This program simplifies compliance while delivering more value, without extra costs or complexity.

How Core360 Elevates the Section 125 Model

While Section 125 plans offer clear advantages, Health Sphere’s Core360 plan goes a step further. It’s not just a cafeteria plan—it’s a smarter, more modern benefit solution that leverages Section 125 alongside two powerful components:

Preventative Care Management Plan (PCMP)
Self-Insured Medical Reimbursement Plan (SIMRP)

This trio makes one of the most compliant and benefit-rich programs on the market right now. It makes sure that employers meet all plan standards while also getting extra value.

Core360: Built to Comply, Designed to Deliver

Here’s how Core360 aligns with—and surpasses—traditional Section 125 cafeteria plan requirements:

Full Legal Compliance:

Core360 includes a written plan, structured eligibility, and strict compliance with all IRS and healthcare regulations. The program is fully managed by experts, ensuring all documentation, testing, and election procedures are handled properly.

Enhanced Employer Savings:

Employers save ~$600 per W2 employee annually—that’s $60,000 per 100 employees—without spending a single dollar out of pocket. Core360 also reduces healthcare claims by an average of $1,400 per employee over three years.

Elevated Employee Benefits:

Unlike standard cafeteria plans, Core360 delivers:

3–4% net paycheck increases (roughly $100/month)
$0 copay 24/7 telehealth for physical and mental health
Access to Mayo Clinic wellness tools
Universal Life, Disability, and Critical Illness insurance
Spouse and dependent coverage

And it does all this with no change to existing health plans.

Fast, Automated Implementation

The Core360 plan rolls out in 30–45 days, with minimal lift required from HR or finance teams. It’s plug-and-play, fully compliant, and ready to start generating ROI in the first payroll cycle.

Why Compliance and Simplicity Matter More Than Ever

In today’s complex regulatory landscape, compliance is non-negotiable—but so is simplicity. HR teams are stretched. Finance departments are focused on efficiency. And employees are demanding better benefits.

Core360 was built with all of that in mind. It checks every box required for Section 125 compliance, without burdening your team or disrupting existing systems. And it offers real value to your workforce, because better benefits shouldn’t be complicated.

Health Sphere wants to change the lives of 250,000 people, and more than 40,000 workers have already signed up for Core360. This is the next step you need to take to update your method while still following the rules and saving money.

Frequently Asked Questions About Section 125 Cafeteria Plan Requirements

Why do employers offer a Section 125 cafeteria plan?

It saves money for both employers and workers because benefits can be paid with pre-tax dollars. This lowers taxable income and payroll taxes, which is a simple way for everyone to get ahead financially.

Do we really need a written plan?

Yes, a written plan is required by the IRS to qualify for tax benefits. Without it, you risk losing those benefits and may face audits or penalties.

What if we don’t have time to manage compliance?

Core360 is fully managed and takes care of all compliance jobs. This means that your HR and finance teams don’t have to do any hard work, and your plan stays fully compliant.

How is Core360 different from a typical cafeteria plan?

Core360 comes with all the usual Section 125 rules plus extras like higher take-home pay, no out-of-pocket costs, and free telehealth. This makes it easier and more valuable for your workers.

Final Thoughts

It is important to know the rules for Section 125 cafeteria plans so that you can give tax-effective benefits without breaking the law. The rules are clear and strict, and they include things like written plan papers and tests for non-discrimination. But that doesn’t mean the process has to be hard or complicated.

With Core360 from Health Sphere, businesses can stay in compliance, improve the health and happiness of their workers, and save real money—all without having to pay more or change the coverage they already have. It’s a plan that works for everyone that modern businesses need.