Within Section 125 of the Internal Revenue Code, employees are allowed to pay for group health premiums, unreimbursed medical expenses and child and dependent care expenses with pretax dollars. Employees can exclude from gross income, qualified expenses and benefits, thereby reducing income taxes withheld. The effect on employee paychecks is that they realize more take home pay, while paying fewer taxes. In addition, employers realize a benefit of paying reduced payroll taxes.


A Section 125 flexible spending account (FSA) is one of the key components within a consumer directed healthcare plan. Today, many Fortune 500 companies realize the benefits of offering cafeteria plans to employees enabling both the employee and employer additional benefits through this tax saving strategy. They remain a popular source for paying premiums, unreimbursed health expenses and other expenses, while gainfully employed.

Section 125 plans offer three major areas beneficial to employees;

  • Insurance Premiums

    • Employees can use pretax dollars to pay for group insurance premiums for medical, dental, vision, cancer, disability or group term life.
  • Unreimbursed, Out-of-Pocket medical expenses

    • Costs applied toward health plan deductibles,
    • Out-of-pocket expenses for medical care for members and dependents,
    • All other unreimbursed health care expenses allowed under the Internal Revenue Code. For a complete list please read the “Qualified Medical Expenses Listing” document provided below.
    • For further Explanation on Medical and dental expenses – refer to IRS Publication #502.
  • Dependent Care Expenses (day care)

    • Expenses incurred for the care of dependents while employed,
    • Dependent care expenses for a disabled dependent,
    • Pre-school tuition and school age dependent care expenses,
    • For further Explanation on Dependent care expenses refer to IRS Publication #503

Some of the information offered on this page is provided in Adobe Acrobat (pdf) format. If you do not have Adobe Acrobat Reader, you can download it for FREE!