Every year, millions of Americans overpay in taxes. Not because of a mistake, but because of a missed opportunity. They skip one of the most powerful, IRS-approved tax-saving tools available through their employer: the Section 125 Cafeteria Plan.
It’s time to change that.
What Is a 125 Cafeteria Plan?
A 125 Cafeteria Plan, named after Section 125 of the IRS tax code, allows employees to pay for certain expenses using pre-tax dollars. These qualified expenses typically include:
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Health insurance premiums
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Out-of-pocket medical expenses
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Dental and vision care
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Dependent care (such as daycare or after-school programs)
By paying for these expenses before taxes are calculated, you reduce your taxable income. This means you owe less in taxes and take home more of your paycheck.
How Much Can You Save?
Let’s look at a simple example.
If you spend $3,000 annually on childcare and another $1,500 on medical expenses, that’s $4,500 in eligible costs. Running that amount through a 125 Plan could save you roughly $1,000, assuming a 22 percent tax bracket.
You’re already spending the money. The only difference is whether you pay tax on it or not.
The Real Cost of Not Participating
Here’s the hard truth: if you’re not using a 125 Cafeteria Plan, you could be losing between $1,000 and $2,000 every year.
That’s money you could be using to:
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Pay off credit cards
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Build up an emergency fund
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Cover your holiday shopping
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Take a weekend trip
Instead, it’s going to taxes you didn’t need to pay.
Why Isn’t This Talked About More?
Many employees aren’t even aware their company offers this benefit. And unfortunately, it often gets overlooked during onboarding or open enrollment.
It’s usually listed as an optional benefit. But just because it’s optional doesn’t mean it’s not important.
Are You Eligible?
If your employer offers a 125 Plan and you are a W-2 employee, chances are you’re eligible. Even if you’re already enrolled in company health benefits, you can still maximize savings on things like dependent care or unreimbursed medical expenses.
The Takeaway
A 125 Cafeteria Plan isn’t just a perk. It’s a simple and legal tax strategy that helps you keep more of what you earn. All it takes is a few minutes of planning to unlock hundreds or even thousands of dollars in annual savings.
In today’s economy, every dollar matters. Don’t pay more in taxes than you have to.
What You Can Do Now
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Ask your HR department if a 125 Plan is available
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Review your eligible expenses
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Enroll during open enrollment, or ask if mid-year changes are possible
If you’re a business owner, keep in mind that offering a 125 Plan not only benefits your employees, it also reduces your payroll tax liability. It’s a smart move for everyone.
If you’re ready to explore ways to maximize your savings and make smarter financial decisions, I’m here to help.
Let’s stop leaving money on the table.
Jason Guck
Entrepreneur | Speaker | Advocate for Financial Intelligence