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What is an IRC125?

IRC125 is a plan that allows employees to pay medical expenses and insurance premiums before income taxes are calculated. This type of plan, in existence since 1978, is also known as a section 125 cafeteria plan and was established by the City of New York and certain other New York City employees such as City University of New York. This arrangement is expressly approved by the Internal Revenue Service, and it can save enrollees as much as 40% on the payment of federal, state, and local income taxes. In essence, the employee receives more net pay from wages by enrolling in this plan.

The IRC125 must be set up by an employer. Enrolled employees can deduct qualified medical expenses before taxes are paid. A person or family with regular medical expenses is likely to receive the most benefits from this type of plan. Employers also receive benefits, as a company will pay significantly less on several taxes by opening a section 125 plan.

 


Learn more about an IRC125

When do I need to be aware of an IRC125?

The plans might have slightly different features from company to company. There are also at least three different versions of the 125IRC, but all plans are designed to pay for medical expenses before income taxes are calculated. There are some other important items you should know about IRC125:

  • Section 125 cafeteria plans allow for the pre-tax reimbursement of a long list of medical expenses.
  • Each plan must be set up by the employer and be administered by a qualified third party.
  • The employee must use the funds in the plan each year or lose a portion or all of the allocated money. 
  • An IRC 125 is similar to a Flexible Savings Account (FSA) as both authorize you to have pre-tax payroll deductions for certain medical and dependent care expenses, although the Section 125 also permits your insurance premiums to be taken on a pre-tax basis, which provides you with significant savings.