Section 125 cafeteria plans for employers with 2 to 50 employees

For most companies with 2 to 50 employees, the first and often only cafeteria plan they need is a premium-only plan: pre-tax deduction of the employee's share of group health, dental, or vision premiums. A health flexible spending arrangement can be added if you want it and are prepared to administer it.

A cafeteria plan is an administration decision. It is not a substitute for a medical plan, an ICHRA, or a QSEHRA.

What a premium-only plan does

Employees make an election before the plan year (or when they first become eligible). Their share of eligible group premiums is deducted from wages before federal income tax and, in the usual case, before Social Security and Medicare tax. IRS Publication 15-B describes the exclusion for accident and health benefits and the cafeteria-plan rules that sit around it.

A premium-only plan does not, by itself, change the coverage you offer. It changes how the employee's share is paid.

What usually does — and does not — go through the plan

Eligible salary-reduction elections commonly include the employee's share of a group medical, dental, or vision premium, and, if you offer one, a health FSA.

Two limits matter for reimbursement arrangements:

• A QSEHRA may not be funded by salary reduction. Employees cannot pay into a QSEHRA through the cafeteria plan.
• If you offer an ICHRA, HealthCare.gov states that pre-tax payroll deductions can be used for the unpaid portion of the premium only when the employee buys individual coverage outside the Marketplace, not through HealthCare.gov.

Do not assume every premium can be run through payroll tax-free. The Code and the way the coverage was purchased both matter.

Health FSA limits

If the cafeteria plan includes a health FSA, the IRS caps the amount an employee may contribute by salary reduction. Those caps are indexed.

Those figures come from IRS Revenue Procedure 2025-32 and Revenue Procedure 2026-35. A plan does not have to permit carryover. If it does, the carryover cannot exceed the IRS maximum.

Rules that matter on day one

• Written plan document. A cafeteria plan has to exist in writing, with the elections and eligibility the Code requires.
• Irrevocable elections, with the change-in-status exceptions the regulations allow.
• Uniform availability and the nondiscrimination rules that apply to cafeteria plans. Highly compensated or key-employee concentration can make benefits taxable. A company with a small ownership group should have this reviewed, not assumed.
• Coordination with the coverage you actually offer. A premium-only plan next to a group policy is straightforward. A premium-only plan next to an ICHRA or a QSEHRA has to follow the contribution rules for that arrangement.

We will help you stand up a premium-only plan — or a cafeteria plan that also includes a health FSA — as part of the same engagement as the coverage itself. Your tax advisor should confirm the payroll-tax treatment.

Add payroll benefits to the proposal