There’s a persistent belief that pre-tax benefits like Section 125 only matter for high earners. The math feels obvious: if you’re making $30,000 a year, saving $200/month pre-tax can’t possibly add up to much.
But the math doesn’t work that way. In reality, lower-income workers see higher percentage savings from pre-tax benefits than high earners do. And because money is tighter at lower incomes, that savings matters more.
The Misconception
The myth probably comes from this intuition: rich people pay higher taxes, so they save more dollars. That’s true. But it misses the real measure: percentage savings on every dollar earned.
A higher earner in a 32% combined tax bracket saves 32 cents on every pre-tax dollar. A lower earner in a 15% combined tax bracket saves 15 cents. Sounds like the high earner wins.
But the higher earner is also earning more total dollars. The question is: percentage of income, what’s the impact?
The answer: lower earners see larger percentage gains.
The Math: Two Scenarios
Let’s walk through a concrete example. Both scenarios: pre-tax healthcare contribution of $200/month ($2,400/year).
Scenario A: $30,000/year earner
Federal income tax: 10% bracket Social Security and Medicare (FICA): 7.65% State and local taxes: varies, assume 2% for this example
Combined rate: 19.65%
Annual tax savings from $2,400 pre-tax contribution: $2,400 × 0.1965 = $471/year
As a percentage of gross income: $471 / $30,000 = 1.57% of annual income
Scenario B: $100,000/year earner
Federal income tax: 22% bracket Social Security and Medicare (FICA): 7.65% State and local taxes: assume 3% for this example
Combined rate: 32.65%
Annual tax savings from $2,400 pre-tax contribution: $2,400 × 0.3265 = $784/year
As a percentage of gross income: $784 / $100,000 = 0.78% of annual income
The high earner saves more dollars ($784 vs. $471). But the lower earner sees a higher percentage savings: 1.57% of income vs. 0.78% of income—more than double the percentage impact.
For someone making $30,000/year, that $471 is real money—it’s groceries, gas, or childcare for two months. For someone making $100,000, it’s less than 1% of their income.
Why This Matters More for Lower-Income Workers
When you’re earning $30,000/year, a $471 annual savings is not trivial. It’s a 1.57% raise, essentially for free, just by paying for healthcare with pre-tax dollars instead of after-tax dollars.
When you’re earning $100,000/year, a $784 savings is nice—but it’s also a smaller fraction of total spending flexibility.
From a quality-of-life perspective, the lower-income worker benefits more.
The Social Security Wage Base Cap
Here’s another factor that actually benefits lower-income earners even more: the Social Security wage base cap.
In 2025, the Social Security wage base is $168,600. You only pay Social Security tax (12.4%) on wages up to that threshold. Above $168,600, you don’t pay Social Security tax.
What does this mean?
For someone earning $30,000: pre-tax contributions save the full 7.65% FICA rate (both Social Security and Medicare).
For someone earning $200,000: pre-tax contributions above $168,600 only save the Medicare portion (2.9%), not Social Security (5.9%). That’s a smaller savings rate.
So the high earner’s advantage actually shrinks above the wage base cap. A $2,400 pre-tax contribution for a high earner might save only $784, while the same contribution for a lower earner saves $471—closer than the pure tax bracket difference suggests.
Real-World Impact: Industries That Matter
This is especially important in certain industries where lower-wage workers are the majority:
Restaurants and Food Service
Average wage: $25,000–$32,000/year. Employees often pay out-of-pocket for healthcare or are on thin coverage. A pre-tax benefit that saves 15–20% of healthcare costs is meaningful. At 20 employees with average $300/month contribution, that’s $14,400 in annual tax savings (mostly going to employees’ take-home).
Retail
Average wage: $28,000–$35,000/year. High turnover means benefits are crucial for retention. Pre-tax savings can swing the choice between staying or leaving for a competitor.
Construction
Average wage: $32,000–$45,000/year. Many are self-employed or on 1099, but crew members and junior staff benefit significantly. A $100/month pre-tax FSA contribution saves roughly $20/month in taxes—which adds up to $240/year of unexpected budget relief.
In all these industries, every dollar counts. Pre-tax benefits aren’t luxuries; they’re part of competitive pay.
The Bottom Line
Pre-tax benefits help high earners—they save more dollars. But they help lower earners even more in percentage terms. And because money is tighter at lower incomes, that percentage savings has more impact on quality of life.
If you’re in food service, retail, construction, or any lower-wage industry, pre-tax benefits are not a luxury perk. They’re a way to get a tax-free raise—one that’s larger, as a percentage of income, than for higher earners.
If you’re an employer in one of those industries, offering Section 125 isn’t about serving high earners. It’s about giving the people who need it most a concrete way to keep more of their paycheck.
