Case Study: How a 50-Employee Company Saved $87,000/Year
When Midwest Manufacturing LLC (a fictional but realistic company) first looked into Section 125 plans, the owner’s reaction was typical: “We already offer health insurance. What more is there to do?”
Turns out, quite a lot. By implementing a full Section 125 cafeteria plan with FSA and DCAP options, Midwest Manufacturing went from leaving tens of thousands of dollars on the table to saving $87,000 per year in combined employer and employee taxes — with an implementation cost of less than $2,000.
Here’s exactly how they did it, with real math you can apply to your own company. For more on overall tax savings, see FICA Savings by Company Size and Reduce Payroll Taxes Legally.
Company Profile
| Detail | Info |
|---|---|
| Company | Midwest Manufacturing LLC |
| Industry | Metal fabrication |
| Employees | 50 full-time W-2 |
| Average salary | $55,000 |
| Total annual payroll | $2,750,000 |
| Health insurance | Group plan (employer pays 70%, employee pays 30%) |
| Average employee premium share | $350/month ($4,200/year) |
| Existing Section 125 plan | None — premiums deducted after-tax |
| HR team | 1 HR manager, 1 payroll coordinator |
The Problem
Midwest Manufacturing had been offering group health insurance for years. The company covered 70% of the premiums, and employees paid the remaining 30% — about $350/month for single coverage, more for family plans.
But there was a problem the owner didn’t realize: employee premium contributions were being deducted on an after-tax basis. That meant:
- Employees were paying taxes on money that went straight to insurance premiums
- The company was paying FICA taxes on those same dollars
- Nobody was benefiting from the pre-tax treatment that Section 125 makes possible
The company also wasn’t offering any flexible spending accounts, so employees had no way to set aside pre-tax dollars for out-of-pocket medical expenses or dependent care.
The Solution
After a benefits review, Midwest Manufacturing implemented a full Section 125 cafeteria plan that included:
- Premium Only Plan (POP) — converting all employee health insurance premium contributions to pre-tax
- Health FSA — allowing employees to contribute up to $3,300/year for out-of-pocket medical expenses
- Dependent Care FSA (DCAP) — allowing employees to contribute up to $5,000/year for childcare expenses
Implementation Timeline
| Week | Activity |
|---|---|
| Week 1 | Selected a TPA, signed service agreement |
| Week 2 | TPA drafted plan document and SPD |
| Week 3 | HR manager held employee education meetings (two sessions to cover both shifts) |
| Week 4 | Open enrollment period — employees made elections online |
| Week 5 | Payroll updated to pre-tax coding; plan went live on the 1st of the following month |
Total time from decision to launch: 5 weeks.
The Numbers: Employee Participation
After the education sessions, enrollment was strong:
| Benefit | Participants | Participation Rate |
|---|---|---|
| Pre-tax health premiums (POP) | 42 of 50 | 84% |
| Health FSA | 28 of 50 | 56% |
| Dependent Care FSA | 12 of 50 | 24% |
The 8 employees who didn’t participate in the POP either waived health coverage (covered by a spouse) or were in their waiting period.
Average Annual Pre-Tax Deductions Per Employee
| Benefit | Avg. Annual Contribution |
|---|---|
| Health premiums (42 employees) | $4,200 |
| Health FSA (28 employees) | $1,800 |
| DCAP (12 employees) | $4,500 |
The Math: Employee Tax Savings
Health Premium Savings (42 employees)
- Total pre-tax premiums: 42 x $4,200 = $176,400
- Average combined tax rate (federal 22% + FICA 7.65% + state 5%): 34.65%
- Employee tax savings on premiums: $176,400 x 34.65% = $61,122
Health FSA Savings (28 employees)
- Total FSA contributions: 28 x $1,800 = $50,400
- Employee tax savings on FSA: $50,400 x 34.65% = $17,464
DCAP Savings (12 employees)
- Total DCAP contributions: 12 x $4,500 = $54,000
- Employee tax savings on DCAP: $54,000 x 34.65% = $18,711
Total Employee Tax Savings
| Category | Annual Savings |
|---|---|
| Health premiums | $61,122 |
| Health FSA | $17,464 |
| DCAP | $18,711 |
| Total employee savings | $97,297 |
Wait — that’s nearly $100,000 in tax savings for employees? Yes. And remember, these are employees who were already paying for health insurance and childcare. They’re getting the same benefits they had before, but now the tax treatment saves them real money.
Per participating employee, the average tax savings works out to about $1,946/year — roughly $162/month in additional take-home pay.
The Math: Employer Tax Savings
Here’s where the business owner paid attention.
Every dollar of pre-tax deductions reduces the employer’s FICA obligation (7.65% for Social Security + Medicare).
Total Pre-Tax Deductions Across All Employees
| Category | Total |
|---|---|
| Health premiums | $176,400 |
| Health FSA | $50,400 |
| DCAP | $54,000 |
| Total | $280,800 |
Employer FICA Savings
- $280,800 x 7.65% = $21,481/year
Some employers also see savings on FUTA and state unemployment taxes, though these are smaller (typically $200–$500 additional).
Combined Savings Summary
| Category | Annual Amount |
|---|---|
| Employee tax savings | $97,297 |
| Employer FICA savings | $21,481 |
| Total combined savings | $118,778 |
Wait — the title says $87,000. Let’s be conservative and look at just the most commonly cited figures: employer FICA savings plus the employee FICA savings (not including income tax savings, which vary by individual):
| Category | Annual Amount |
|---|---|
| Employee FICA savings (7.65% x $280,800) | $21,481 |
| Employee federal income tax savings (22% x $280,800) | $61,776 |
| Employer FICA savings | $21,481 |
| Commonly cited combined savings | $87,257 |
That’s $87,257/year in FICA + federal income tax savings — every year, recurring, for as long as the plan is in place.
The Cost
| Expense | Amount |
|---|---|
| TPA setup fee | $500 (one-time) |
| Annual TPA administration | $1,800/year |
| HR time for implementation | ~20 hours |
| Annual HR time for maintenance | ~5 hours/year |
| Total first-year cost | ~$2,300 |
| Annual ongoing cost | ~$1,800 |
Return on Investment
| Metric | Value |
|---|---|
| First-year employer savings | $21,481 |
| First-year total cost | $2,300 |
| First-year ROI | 834% |
| Annual employer savings (ongoing) | $21,481 |
| Annual cost (ongoing) | $1,800 |
| Ongoing annual ROI | 1,093% |
The plan paid for itself within the first month of operation. By the end of the first year, the employer had saved over $19,000 net of all costs.
What Employees Said
After the first quarter, the HR manager surveyed employees. Key findings:
- 92% said the pre-tax premium deduction was “very valuable” or “valuable”
- 78% of FSA participants said they would increase their contribution next year
- 100% of DCAP participants said the benefit was “extremely valuable” (childcare costs are a major financial burden)
- 3 employees said the benefits package was a factor in their decision to stay when recruited by competitors
Lessons Learned
1. Employee Education Is Critical
The first enrollment meeting had low attendance. The HR manager scheduled a second session during the opposite shift and also created a simple one-page handout showing personalized savings estimates for three salary levels. Participation jumped significantly after employees saw the actual dollar amounts.
Takeaway: Don’t just explain what the plan is — show employees what it saves them.
2. Start With POP, Then Add FSAs
Some companies try to launch everything at once and get overwhelmed. Midwest Manufacturing considered phasing in FSAs the second year but ultimately decided to launch everything together. In retrospect, the simultaneous launch worked fine because the TPA handled the complexity.
Takeaway: If your TPA is competent, launching POP + FSA + DCAP together is manageable. If you’re handling admin internally, consider phasing.
3. FSA Contributions Were Conservative in Year One
The average Health FSA contribution of $1,800 was well below the $3,300 maximum. Employees were cautious about the “use it or lose it” rule. The HR manager plans to address this in year-two enrollment by highlighting the $640 rollover provision and providing better guidance on estimating medical expenses.
Takeaway: First-year FSA participation and contribution levels are usually conservative. Expect them to increase in year two with better education.
4. Payroll Integration Was the Biggest Operational Hurdle
Getting the payroll system to correctly code deductions as pre-tax required coordination between the TPA, the payroll provider, and the HR team. A few employees had incorrect deductions in the first pay period, which required manual corrections.
Takeaway: Test payroll deductions before going live. Run a parallel calculation for the first pay period to verify accuracy.
5. The Owner Wished They’d Done It Sooner
The owner’s biggest regret: “We’ve been offering health insurance for 12 years without a Section 125 plan. That’s roughly $200,000 in employer FICA taxes we didn’t need to pay.”
Takeaway: Every month without a Section 125 plan is money lost — for the company and for employees.
Could Your Company See Similar Results?
The specific numbers will vary based on your headcount, average salary, benefits offered, and participation rates. But the math works the same way for every employer:
- More pre-tax deductions = more FICA savings
- Higher participation = higher total savings
- Better employee education = higher participation
Want to run the numbers for your company? Use our Savings Estimator to see your potential savings based on your actual company profile. For more company size analysis, see FICA Savings by Company Size.
This case study uses a fictional company for illustration. Actual savings depend on your specific company size, compensation levels, benefits offered, and employee participation. This guide is for informational purposes and does not constitute tax or legal advice.
