What the structure accomplishes

Section 125 provides the framework that allows an employee to choose qualifying benefits without the choice itself causing those benefits to become taxable. Common designs include premium-only plans, health FSAs, and dependent care assistance elections. Each underlying benefit still must satisfy its own exclusion rules.

Written plan first

The plan document should describe eligibility, available benefits, election procedures, plan year, contribution structure, and applicable administrative rules. Payroll configuration must follow that document. An informal practice or a deduction code cannot substitute for the written plan.

2026 figures to route correctly

• Health FSA voluntary employee salary reductions: $3,400 for plan years beginning in 2026.
• Maximum health FSA carryover, if the plan adopts it: $680.
• Dependent care assistance exclusion: $7,500, or $3,750 for married filing separately, for 2026.

These are different benefits with different substantiation, eligibility, election, and reimbursement rules. A health FSA limit should not be applied to a dependent care FSA, and an HSA salary-reduction election should not be treated as a health FSA election.

Administration checkpoints

• Confirm eligibility before activating deductions.
• Apply election-change rules consistently and retain support.
• Reconcile payroll deductions to vendor funding and enrollment records.
• Run required nondiscrimination testing using the correct plan population and test.
• Coordinate W-2 reporting for benefits with separate reporting requirements.