Section 125 Health Benefits in Arizona: What Employees Should Know

• Employee-paid health premiums through a cafeteria plan are exempt from income tax withholding, Social Security tax and Medicare tax (IRS Publication 15-B, 2026).
• The employee share of FICA is 7.65%, made up of 6.2% Social Security and 1.45% Medicare, and the Social Security wage base is $184,500 in 2026 (IRS Publication 15, 2026).
• Arizona has had a flat individual income tax rate of 2.5% since the 2023 tax year (AARP Arizona tax guide, 2026).
• In 2024, 10.3% of Arizonans had no health insurance, compared with 8.2% nationally (U.S. Census Bureau American Community Survey, via America's Health Rankings, 2024).
• Arizona uses HealthCare.gov, and 2027 open enrollment is listed as November 1, 2026 to January 15, 2027 (healthinsurance.org, 2026).

If you work in Arizona and see a Section 125 line on your pay stub, the short answer is that it is probably your health premium, taken out before most taxes. Arizona taxes income at a flat 2.5%, so the savings can come from federal income tax, FICA and a small state layer. This guide shows what you save, when you can change it, and what to ask HR if a deduction surprised you.

Reviewed by a licensed benefits professional. Last reviewed: October 16, 2026.

What are Section 125 health benefits in Arizona?

Section 125 health benefits in Arizona are health, dental or vision premiums that your employer lets you pay with pay that has not been taxed yet. The federal rule is the same in every state.

A Section 125 plan, also called a cafeteria plan, is a written employer plan that lets employees choose between cash pay and certain benefits. A cafeteria plan can offer accident and health coverage, dependent care assistance, group-term life insurance and an HSA (IRS Publication 15-B, 2026). Employee-paid accident and health benefits are exempt from income tax withholding, Social Security tax and Medicare tax (IRS Publication 15-B, 2026). Benecor's Section 125 pre-tax guide→ covers the federal rules in more detail.

How much does a Section 125 plan save on an Arizona paycheck?

A Section 125 plan saves the typical Arizona employee about 22.15 cents on every pre-tax dollar in this example, which is 12% federal income tax, 7.65% FICA and 2.5% Arizona income tax. Your real number depends on your bracket and how Arizona treats your wages.

Here is a worked example. The numbers are hypothetical. An employee earns $5,000 a month and pays $400 a month toward health premiums. The 7.65% FICA rate comes from 6.2% Social Security plus 1.45% Medicare (IRS Publication 15, 2026). The example assumes a 12% federal income tax bracket and applies Arizona's flat 2.5% rate to the same $400 for illustration.

If you earn above the Social Security wage base of $184,500 in 2026, the 6.2% part stops applying to your pay above that line (IRS Publication 15, 2026). Ask your payroll team or a tax professional how Arizona applies to your own wages.

Is Section 125 taxable in Arizona?

Arizona has a flat 2.5% individual income tax, so your wages can be taxed at the state level (AARP, 2026). Your own savings depend on your pay and bracket, so use the example below as a guide, not a quote.

You can see the federal effect on your own W-2. Box 1, wages for federal income tax, should be lower than your gross pay by the amount of your pre-tax deductions. If it is not, ask HR or payroll why. Benecor's guide to W-2 Box 14→ explains the Section 125 line that some employers print there.

Arizona employees often ask about the employer-side Section 125 rules in Arizona→. Those cover plan setup and employer savings, while this page covers what a single employee sees on a pay stub.

Can I change my Section 125 election in Arizona?

Usually only after a qualifying life event, and only if your plan allows it. Under 26 CFR 1.125-4, a plan may permit a change when your status changes, such as marriage, divorce, a birth or adoption, or a change in employment (26 CFR 1.125-4, 2026).

The plan is not required to allow every change, and the change must fit the event. Benecor's list of Section 125 qualifying life events→ shows the common ones and the timing rules. Section 125 elections are generally locked for the plan year, so an Arizona employee who wants out mid-year needs an event the plan recognizes.

What happens if I decline my Arizona employer's coverage?

Declining employer coverage in Arizona can leave you facing a marketplace with rising prices, so check the alternatives before you opt out. Arizona has expanded Medicaid, but a work requirement starts in 2027.

The 29% figure is the proposed increase, not a final rate, so check HealthCare.gov for what insurers actually charge. Premiums paid through Section 125 come out before federal income tax and FICA (IRS Publication 15-B, 2026), which lowers what coverage costs you. If the plan itself is the problem, a case review can help you understand your options before you decide.

How do I ask HR about my Section 125 plan?

Send HR a short written request and keep the reply. Copy this email and fill in the brackets.

Benecor's Section 125 cafeteria plan guide→ explains how the plan works. If you want a Benecor benefits expert to look at your situation, contact Benecor Health→.

Sources: IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits (2026); IRS Publication 15, Employer's Tax Guide (2026); IRS Tax Topic 424, 401(k) Plans (2026); AARP, Arizona Tax Guide (2026); U.S. Census Bureau American Community Survey 1-year data, as reported by America's Health Rankings (2024); healthinsurance.org, Arizona Health Insurance Marketplace and Arizona Medicaid guides (2026); 26 CFR 1.125-4, Permitted election changes (2026).