By John Medwin | (336) 408-7935 | jmedwin@legacytaxrs.com

A little-known tax code provision is helping employers offer better benefits at no cost — and the IRS is fully on board

When the Affordable Care Act was being written, federal actuaries made a discovery that quietly changed how smart employers think about benefits. They found that wellness and preventive care dramatically reduce long-term costs — not out of goodwill, but because it saves money.

Consider this: Medicare will pay for millions of beneficiaries to get a colonoscopy — completely free. Some Medicare Advantage plans will even pay the patient $50 to get one. A procedure that runs $2,500 in most states. Why? The same reason your auto insurer gives you a discount for side airbags. Reducing risk saves money in the long run.

That same logic — baked into federal law — is now available to your business.

How the tax code turned wellness into a business benefit

Starting around 2018, a new category of benefits companies emerged offering employer-sponsored wellness plans that supplement existing group health insurance at no net cost to the employer or employee. The mechanism is Section 125 of the IRS tax code — on the books for decades, but underutilized by most small businesses.

Here's how it works. Under a Section 125 Cafeteria Plan, certain benefits are paid with pre-tax dollars. An employee's paycheck is reduced — say by $1,000 — to fund a suite of supplemental benefits: hospital indemnity coverage, critical illness plans, accident plans, and a wellness component covering weight loss, smoking cessation, stress management, and more – all at no net cost. That wellness element is the IRS-recognized component that qualifies the entire structure for favorable tax treatment.

The pre-tax deduction lowers the employee's taxable income. Both the employee and employer pay FICA taxes on that lower number. Then, separately, the insurance company issues a benefit payment back to the employee tied to the risk-reduction value of the wellness component. Net result: the employee takes home the same pay or more, while receiving a meaningful package of additional benefits — and the employer reduces their FICA payroll tax liability by typically $700 to $900 per employee per year.

The real-world impact on your workforce

Financial anxiety doesn't disappear when employees clock in. Consider what the data says:

  • 94.7% of insured Americans worry about hospital bills, and an unexpected bill of roughly $4,354 is the average breaking point that causes serious financial strain. (JG Wentworth Survey, 2026)

  • Nearly 4 in 10 adults with health insurance still worry about affording premiums and out-of-pocket costs. (KFF Health Cost Survey)

  • 78% of employees say they would consider changing jobs for better benefits. (SHRM Benefits Survey)

A benefits upgrade that costs employees nothing — and actually puts more money in their pocket — is one of the most direct ways to improve morale, reduce absenteeism, and keep your best people from walking out the door.

Companies that have implemented these plans report benefits beyond tax savings. When employees have access to $0-cost prescriptions and no-cost telemedicine, they stop routing those expenses through the company's group health plan — which has helped some employers avoid premium increases at renewal. Employees who can handle a medical event without financial panic return to full productivity faster. Some companies report turnover reductions of up to 30%.

What about the IRS?

A fair question. When these plans first emerged around 2018, some faced scrutiny. Programs built on solid legal foundations held up. Those that didn't made adjustments or exited. The marketplace has been stress-tested, and what remains is on firm ground.

Consider:

  • Many of the largest corporations in the country have fully vetted and implemented these plans.

  • Most reputable programs have tax attorneys on staff who will walk you through the legal basis and compliance requirements.

  • At least one major program carries backing from Lloyd's of London.

  • Many programs will provide or fund legal representation if you are ever audited.

  • Insurance components have been reviewed and approved by state Departments of Insurance.

The IRS has quickly shuttered non-compliant plans — which means the fact that these programs have operated and expanded for years is itself a signal that the structure works.

The competitive reality

Your competitors are not standing still. Many businesses in your industry have already implemented Section 125 wellness plans — currently offering better benefits at no additional cost while reducing their payroll tax burden.

If you're losing candidates to competitors offering "better benefits," this may be exactly what they're offering. And if you're retaining employees through wage increases alone, you may be spending more than necessary to achieve what a benefits upgrade could accomplish for far less.

The math is simple. For a company with 30 employees, $700 in average annual FICA savings per employee adds up to more than $21,000 per year — every year — while simultaneously making your compensation package more competitive.

Is this right for your company?

If you have 20 or more employees and an existing group health plan, you likely qualify. A brief eligibility review — typically a 20-minute conversation — is all it takes to determine whether the structure fits your payroll setup and what the projected savings would look like.

The question isn't whether you can afford to offer better benefits. With the right structure, you may find you can't afford not to.

John Medwin is a business consultant based in Winston-Salem, North Carolina, specializing in payroll tax optimization, employee benefits, and tax credit recovery for small and mid-sized businesses. He can be reached at (336) 408-7935 or jmedwin@legacytaxrs.com