How It Works
The mechanics, without the hand-waving.
Most benefits programs are explained vaguely on purpose. Here's exactly where the savings come from, what the plan is made of, and which sections of the tax code it operates under.
The mechanism
Where the money comes from
Employees elect benefits through a Section 125 cafeteria plan
The election is a pre-tax deduction from gross wages, permitted under IRC §106(a) for employer-provided coverage that constitutes medical care as defined by §213(d).
Taxable wages go down
Because the deduction is pre-tax, the employee's taxable income falls. So does the wage base your company calculates employer payroll tax on.
Employer FICA falls with it
Employer FICA is 7.65% of taxable wages — 6.2% Social Security and 1.45% Medicare. A smaller taxable wage base means a smaller employer FICA liability. That reduction is the savings.
A reimbursement restores the employee's net pay
The self-insured medical expense reimbursement plan (SIMERP) pays a non-taxable reimbursement under §105(b). It's calculated on the benefits provided by the plan, not on claims filed, and it brings the employee's take-home pay back to exactly where it started.
The employee keeps the benefits
They now carry disability, critical illness, hospital, accident, and life coverage plus a virtual care platform — funded by tax savings the arrangement generated rather than by a pay cut.
Why the employer's savings aren't the full 7.65%
They are, gross. But administering the plan — documents, compliance, enrollment, the benefits themselves, and audit support — costs $40 per participating employee per month. That's netted against the gross savings, which is why we quote roughly $640 per employee per year rather than $1,120.
The components
Four documents make up the plan
Preventive Care Plan
Specifies the benefits provided under the employee wellness program. All benefits are §213(d) compliant, which is what permits the premium to be pre-taxed and reimbursed.
Section 125 Cafeteria Plan
The vehicle for the pre-tax election, funded under IRC §106(a). This is the document that allows §213(d)-compliant medical expenses to be paid with pre-tax dollars.
SIMERP (105-11) Documents
The self-insured medical expense reimbursement plan. Reimburses participating employees dollar-for-dollar so there's no reduction in take-home pay.
Audit Support
The IRS audits an estimated 1–3% of businesses. Plan document delivery and audit support are provided to the company and to all employees at no additional charge.
Compliance
The code it operates under
This isn't a novel structure. Section 125 cafeteria plans have been in the Internal Revenue Code since 1978, and self-insured medical reimbursement plans are governed by long-standing regulation.
The pre-taxing of the plan cost is addressed in IRS Office of Chief Counsel Memorandum 201703013 (January 20, 2017), which addresses the treatment of employer-provided wellness programs that provide medical care under §213(d).
The program must be paired with an ACA-compliant medical plan to form an integrated 105 plan — which is why participating employees are required to carry qualifying health coverage.
Nothing here is tax or legal advice. We'll provide your CPA with the plan documents and citations so they can evaluate it against your specific circumstances.
Wellness
IRC §106(a) · ERISA · §213(d) · ADA · §105(b) · HIPAA · §125 · 1.105-11
Medical
IRC §213(d) · ACA
Pre-tax treatment
IRC §213(d) · §106(a) · §125
Post-tax treatment
IRC §213(d) · §105(b) · §104(a)(3) · 1.105-11(i) · 1.105-11(k)(1) · 1.105-11(k)(2)
Wellness framework
Federal Register Vol. 78, June 3 2013, p. 33,161 · 42 U.S.C. §300gg-4(j)(3)(c)
Next step
Send the numbers to your CPA.
Run the calculator, request the itemized analysis, and forward it. If your accountant has questions, we'll get on the phone with them directly.