What Hawaii Employers Need to Know About Section 125 Plans

If you run a business in Hawaii, you already provide health insurance. The Prepaid Health Care Act requires it. What you may not realize is that there is a well-established IRS structure that can reduce your payroll tax burden by layering a compliant plan on top of the coverage you are already paying for.

That structure is a Section 125 cafeteria plan.

What Is a Section 125 Plan?

A Section 125 plan, also called a cafeteria plan, is an employer-established plan that allows employees to choose between receiving their compensation as cash or directing it toward qualified benefits on a pre-tax basis.

When employees make pre-tax contributions through a Section 125 plan, those contributions reduce their taxable wages. Lower taxable wages means lower FICA taxes for both the employee and the employer.

This is not a new concept. Section 125 has been part of the Internal Revenue Code since 1978. Millions of employers across the country use cafeteria plans. If you have ever offered employees the option to pay for health insurance with pre-tax dollars, you have likely already used a Section 125 structure.

How It Reduces FICA

The employer FICA rate is 7.65% (6.2% Social Security + 1.45% Medicare). When employees redirect a portion of their compensation into a qualified Section 125 plan, that portion is no longer subject to FICA tax.

For a straightforward illustrative example: if an employee contributes $1,200 per year through a Section 125 plan, the employer would save approximately $92 in FICA on that single employee. Scale that across 50 or 100 employees, and the savings can add up quickly. Actual savings are estimates that depend on your payroll, wage levels, and employee participation, which vary from employer to employer.

The WIMPER program structures this more comprehensively by integrating the Section 125 plan with a Section 105(b) self-insured medical reimbursement plan (SIMRP), which increases the savings and provides employees with real supplemental benefits.

Why Hawaii Employers Are Well-Positioned

Most states do not require employers to provide health insurance (outside of the ACA’s large employer mandate). Hawaii does. The Prepaid Health Care Act has required employer-provided health coverage since 1974.

This means Hawaii employers:

• Are already investing in employee health coverage
• Already have the infrastructure (carriers, payroll deductions, benefits administration) in place
• Can layer a Section 125/105 structure on top of existing coverage without changing anything about their current health plan

You are not starting from scratch. You are adding a compliant structure to an investment you are already making.

What Qualifies Under Section 125?

Qualified benefits under a Section 125 plan include:

• Health insurance premiums
• Health savings account (HSA) contributions
• Flexible spending account (FSA) contributions
• Dental and vision insurance
• Group-term life insurance (up to $50,000)
• Dependent care assistance
• Self-insured medical reimbursement plans (SIMRPs) under Section 105(b)

The WIMPER program specifically integrates the Section 105(b) SIMRP component, which allows for tax-free reimbursement of qualifying medical expenses under IRC Section 213(d).

Compliance Matters

A Section 125 plan must be established in writing, comply with nondiscrimination requirements, and follow specific election and cafeteria plan rules. Employers cannot just reduce wages and call it a cafeteria plan. The plan needs proper documentation, testing, and administration.

This is where working with a qualified implementation specialist matters. Brandon Attebury handles the plan documentation, nondiscrimination testing, payroll integration, and ongoing compliance for Hawaii employers through the WIMPER program.

Next Steps

If you are a Hawaii employer with 10 or more benefit-eligible employees and you want to see what FICA recovery looks like for your company, request a ProForma. Brandon will review your actual payroll data and project your savings. No obligation, no pressure.

You are already paying for employee health coverage. The question is whether you are recovering the FICA dollars you could be.

Sources

1. Cornell Law School, Legal Information Institute, 26 U.S. Code § 125, Cafeteria plans. Used for the statutory basis and pre-tax treatment of cafeteria plan contributions.
2. Cornell Law School, Legal Information Institute, 26 U.S. Code § 3121, Definitions (FICA). Used for the FICA tax framework (Social Security and Medicare).
3. Cornell Law School, Legal Information Institute, 26 U.S. Code § 79, Group-term life insurance purchased for employees. Used for the group-term life insurance reference.
4. Cornell Law School, Legal Information Institute, 26 U.S. Code § 105, Amounts received under accident and health plans. Used for the Section 105(b) self-insured medical reimbursement reference.
5. Cornell Law School, Legal Information Institute, 26 U.S. Code § 213, Medical, dental, etc., expenses. Used for the Section 213(d) qualifying medical expense reference.
6. IRS, About Publication 15-B, Employer’s Tax Guide to Fringe Benefits. Used for cafeteria plan written-plan and qualified-benefit background.
7. Hawaii Department of Labor and Industrial Relations, About the Prepaid Health Care Act. Used for the Hawaii Prepaid Health Care Act requirement and 1974 effective date.

This article is educational tax and benefits commentary, not legal, tax, payroll, or plan-administration advice. Dollar figures are illustrative estimates that depend on your specific payroll, wages, and employee participation. Consult a qualified tax or legal advisor and your plan administrator before acting.