One of the most common questions we hear from employers after implementing an ICHRA is:
“Can employees pay their share of the premium with pre-tax dollars?”
The answer is often yes, but only if the right pieces are in place.
Many employers spend significant time evaluating contribution amounts, employee classes, enrollment strategies, and compliance requirements when setting up an ICHRA. Yet one of the biggest tax-saving opportunities is often overlooked.
A properly structured Section 125 Plan may allow eligible employees to pay certain premium costs using pre-tax payroll deductions while helping employers reduce payroll taxes at the same time.
For employers already offering an ICHRA, adding a Section 125 Plan can be one of the simplest ways to increase the value of an existing benefits program without increasing contributions or changing health plans.
Why Section 125 Matters More Than Ever
The ICHRA market continues to evolve.
Carriers are investing in dedicated ICHRA resources, enrollment support teams, and improved digital enrollment experiences. At the same time, more employers are embracing individual coverage as a long-term benefits strategy rather than a temporary alternative to traditional group health insurance.
As more ICHRA enrollments occur outside of the public Marketplace, employers are increasingly evaluating how Section 125 Plans can help maximize available tax advantages.
As this shift continues, employers are looking for ways to maximize both flexibility and tax efficiency.
For eligible employees enrolled in qualifying off-exchange individual health insurance coverage, a Section 125 Plan may create additional opportunities for pre-tax premium contributions. That makes Section 125 more than just a compliance document. It becomes an important part of a broader benefits strategy designed to help both employers and employees get the most value from their healthcare dollars.
As the individual market continues to mature, employers that combine ICHRA flexibility with Section 125 tax advantages may be better positioned to control costs while delivering a stronger employee benefits experience.
Why More Employers Are Adding Section 125 Plans to Existing ICHRA Programs
As ICHRA adoption continues to grow, employers are looking for ways to get even more value from their benefits strategy.
A Section 125 Plan often becomes the missing piece.
Rather than increasing employer contributions, employers can potentially help employees save money through pre-tax payroll deductions while simultaneously reducing payroll taxes for the business.
In many cases, employers discover they already have an ICHRA in place but have not implemented the Section 125 Plan documentation necessary to take advantage of available tax savings opportunities.
When properly structured, the combination can improve the overall value of the benefits package without increasing healthcare spending.
How Section 125 Works With an ICHRA
An ICHRA allows employers to reimburse employees tax-free for eligible individual health insurance premiums and other qualified medical expenses.
However, there are situations where an employee’s monthly insurance premium exceeds the employer’s ICHRA contribution.
For example:
- Employee’s monthly individual health insurance premium: $600
- Employer’s monthly ICHRA contribution: $400
- Remaining employee responsibility: $200
Without a Section 125 Plan, the employee would generally pay the remaining $200 with after-tax dollars.
When the coverage qualifies and the proper plan documents are in place, a Section 125 Plan may allow the remaining premium amount to be deducted from payroll on a pre-tax basis.
This creates tax savings on both sides of the equation.
The employer contribution remains tax-free through the ICHRA, while the employee’s share may also receive favorable tax treatment through the Section 125 Plan.
The Employee Tax Advantage
Using pre-tax payroll deductions lowers an employee’s taxable income.
Depending on income level and state tax rates, many employees save approximately 20% to 30% on dollars contributed through a Section 125 Plan.
For an employee contributing $200 per month toward eligible premiums, that could translate into hundreds of dollars in annual tax savings.
The result is often lower federal income taxes, lower Social Security and Medicare taxes, and potentially lower state income taxes.
The Employer Tax Advantage
The savings are not limited to employees.
Because pre-tax deductions reduce taxable payroll, employers may also reduce payroll tax liabilities.
Most employers save approximately 8% to 10% on dollars contributed through a Section 125 Plan through reductions in FICA and certain payroll-related taxes.
In many cases, those savings help offset some or all of the cost of administering the plan.
Section 125 Is More Than Just Health Insurance Premiums
When most employers and brokers hear the term “Section 125 Plan,” they immediately think about pre-tax insurance premiums.
While that’s certainly one important use, Section 125 serves as the foundation for many of the tax-advantaged benefits offered in today’s workplace.
A properly structured Section 125 Plan may support:
- Premium-Only Plans (POP)
- Flexible Health Spending Accounts (FSAs)
- Dependent Care FSAs
- Health Savings Account (HSA) payroll contributions
- Certain voluntary and supplemental benefits
For many employers, Section 125 becomes the framework that ties multiple benefit programs together while creating tax savings for both employees and the business.
As employers continue building more flexible benefits packages, understanding the broader role of Section 125 becomes increasingly important. For many organizations, it serves as the foundation that connects multiple tax-advantaged benefits while creating savings for both the employer and employees.
The Bottom Line
Many employers focus on the contribution side of an ICHRA but overlook the tax savings opportunities available through a Section 125 Plan.
When used together, these strategies can help employers reduce payroll taxes, help employees keep more of their paycheck, and create a more valuable benefits package without increasing employer contributions.
As ICHRA adoption continues to grow and the individual insurance market evolves, employers that understand how Section 125 fits into their overall benefits strategy may be better positioned to maximize both flexibility and tax savings.
Need Help with Your ICHRA or Section 125 Plan?
Whether you’re considering an ICHRA for the first time, looking to enhance an existing ICHRA strategy, or simply need compliant Section 125 Plan documentation, Flyte HCM can help.
Many of our clients rely on us to administer both their ICHRA and Section 125 Plan as part of a complete benefits solution. However, we also work with employers that already have an ICHRA in place and need assistance implementing the Section 125 Plan necessary to maximize available tax advantages.
From plan design and compliance support to ongoing administration, our team helps employers and brokers build benefit programs that are flexible, compliant, and easy to manage.
If you’re wondering whether your current benefits strategy is leaving tax savings on the table, let’s have a conversation.
Schedule a Discovery Call with Flyte HCM and we’ll review your current setup, answer your questions, and help you identify potential opportunities for additional tax savings.
