Section 125 Plan Requirements — The Complete Checklist

A compliant Section 125 plan requires: a written plan document, eligible employees (10+ W-2), annual nondiscrimination testing, qualifying-event procedures, and proper W-2 reporting. The plan administrator handles every requirement.

This post covers the structural detail, the practical implementation path, and the math at common employer sizes.

The Section 125 Preventive Care variant we work with is administered by a licensed specialist team and reviewed by Virginia Fish, CPA. Implementation runs the same 6–8 weeks regardless of employer size or industry. The plan administrator handles documentation, payroll integration, and ongoing nondiscrimination testing. Your business operates exactly as it does today during setup.

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
• 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

Safety Net Inc. — multi-industry operations company · COO/CFO calls the program a "lifeline" that kept their doors open — saves $500,000/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 →

The complete eligibility checklist for Section 125 enrollment

Five conditions must all be satisfied for an operator to qualify for a complete Section 125 Preventive Care plan. The plan administrator pre-screens each condition before issuing a plan document; failure of any condition is rare but disqualifying.

1. W-2 employee count of 10 or more. 1099 contractors, sole proprietors, and 2%+ S-Corp shareholders are not eligible plan participants under IRC § 125. The 10-employee minimum is counted on W-2 employees only. Headcount is verified against the prior year's W-3 (the cumulative W-2 transmittal).

2. Each enrolled employee earns $25,000 or more annualized. The $25K threshold ensures the salary-reduction amount is meaningful relative to the employee's wage and that the participatory wellness component delivers proportional value. Variable-hour employees are evaluated on annualized W-2 wages, not on hours per week.

3. ACA-compliant group health coverage in place. This is the precondition that distinguishes the program from stand-alone arrangements the IRS has flagged. The operator's existing group health plan must satisfy ACA minimum-essential-coverage standards. Coverage can be the operator's plan, a spouse's plan, or another qualifying source — but it must exist for the enrolled employee.

4. Payroll provider integration. The operator's payroll system must support pre-tax deduction codes (functionally any modern payroll system: ADP, Gusto, Paychex, Rippling, QuickBooks Payroll, BambooHR, Square Payroll, OnPay, Justworks, etc.). The plan administrator coordinates the integration; the operator's payroll vendor handles the deduction code configuration.

5. Active business operations. The plan administrator confirms the operator is actively running W-2 payroll (verified via state employment registration and current payroll register). Inactive entities, dissolution-pending operations, or shell companies are not eligible.

The pre-screen runs on the free 15-minute analysis call. Operators meeting all five conditions can proceed to plan document drafting; operators failing any condition receive an explanation of which condition wasn't met and any remediation path available.

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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