Section 125 Nondiscrimination Testing — What It Tests, How It Passes

Section 125 nondiscrimination testing is the annual compliance check that confirms a cafeteria plan doesn't disproportionately favor highly compensated or key employees. The testing rules are codified in IRC § 125(b) (eligibility test, contributions and benefits test, key employee concentration test) and IRC § 125(g) (specific to certain salary-reduction-only plans).

For employers, the practical question is: will my plan pass? For the Preventive Care variant we work with, the structure is designed to pass cleanly because participation is uniform across W-2 employees crossing the $25,000 salary threshold.

The plan administrator runs three tests annually: (1) Eligibility test — confirms the plan is available to a non-discriminatory group of employees. (2) Contributions and Benefits test — confirms the benefits and contributions don't disproportionately favor highly compensated employees. (3) Key Employee Concentration test — confirms key employees (officers earning $235K+ for 2026, etc.) aren't receiving more than 25% of the plan's nontaxable benefits.

The Preventive Care structure passes these tests because every eligible W-2 employee earning $25K+ participates on the same terms. Highly compensated and key employees receive the same per-employee FICA savings + ~$72/paycheck raise as everyone else — the $14,400 annual pre-tax reduction is uniform across participants.

How the math works (in 90 seconds)

For every enrolled W-2 employee earning $25,000+/year and covered under an ACA-compliant group health plan:

• Pre-tax salary reduction: $1,200/month · $14,400/year
• Employer FICA savings (7.65%): $1,101.60/year
• Less program admin fee ($35/mo): −$420/year
• Net employer savings: $681.60/employee/year
• Employee net take-home raise: +$71.96/paycheck (~$863/year)
• Workers' Comp reduction: 30–60% real-world at next audit cycle (because WC base = taxable payroll, which Section 125 reduces by definition)

A 50-employee company nets $34,080/year in net FICA + industry-specific WC reduction. Run the calculator → for your specific number.

Verified compliant — May 2025 + August 2025

The Section 125 Preventive Care program described above was independently reviewed in 2025 by:

• HitesmanLaw P.A. (May 5, 2025) — 8-page formal legal opinion from Darcy L. Hitesman, J.D., a Super Lawyer-rated ERISA attorney with 35+ years in IRC § 125 practice, AV-rated since 1998, co-author of the national ERISA compliance manual. Concludes the program "satisfies applicable IRS requirements."
• CBIZ Advisors LLC (August 22, 2025) — top-7 U.S. accounting firm, 135,000+ clients. Independent review confirms compliance with IRC §§ 125, 105, 106, ERISA, ACA, and COBRA when operated per its provisions.
• $500,000 insurance-backed legal protection per enrolled employer + $10,000 per employee participant.

Read the full compliance authority page → · IRS.gov — Cafeteria Plans (Section 125) · 26 U.S. Code § 125

A real result from a real company

Affinity Hospice — multi-state hospice care · CFO Ariel Joudai (CPA) commissioned the CBIZ review before enrolling — saves $140,000+/year through this exact program structure. Read the full case study →

This isn't a projection — it's reported, on the public record, from operators whose own CPAs and attorneys reviewed the documentation before signing. Browse the full case study set →

How to verify it yourself

Three primary sources, all public:

1. IRS.gov — Cafeteria Plans — the law in the IRS's own words.
2. 26 U.S. Code § 125 — the federal statute itself.
3. The Hitesman opinion + CBIZ review — both share-able PDFs, available on your free 15-minute analysis call.

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