Section 125 Plans for Law Firms: The 2026 Employer Guide

• The American Bar Association's 2025 Profile of the Legal Profession counts 1.37 million active U.S. lawyers, with 49% practicing solo and firms of fewer than six attorneys making up more than 75% of all U.S. law firms.
• The Bureau of Labor Statistics puts the May 2024 median lawyer wage at $151,160 a year and the median paralegal and legal assistant wage at $61,010 a year.
• Equity partners on K-1 income are excluded from a firm's Section 125 plan under IRC Section 125(d)(1)(A), but a professional corporation electing C-corp tax treatment lets shareholder-attorneys participate as ordinary W-2 employees, since IRC Section 1372's 2% shareholder rule applies only to S corporations.
• A midsize firm with 35 eligible W-2 associates and staff electing $250 a month in pre-tax benefits recaptures approximately $8,033 a year in employer FICA, against Benecor's $35 per enrolled employee per month administration fee.
• Most multi-office law firms operate under one single legal entity, so unlike a franchise or dental support organization, aggregating nondiscrimination testing across offices generally requires no separate IRC Section 414(b)/(c) controlled group analysis.

An associate attorney at a Denver, Colorado firm earning the Bureau of Labor Statistics' national median lawyer wage of $151,160 a year has a paycheck that runs through four separate withholdings before she ever sees it: federal income tax, FICA, Colorado's 4.4% flat state tax, and a flat $5.75-a-month Denver Occupational Privilege Tax that has nothing to do with her salary at all. A Section 125 election can reduce three of those four. It cannot touch the flat city tax, since that levy is calculated on whether she earned over $500 that month, not on how much. Understanding which withholding a pre-tax election actually moves, and which W-2 people on the firm's payroll are even eligible to make one, is the difference between a law firm capturing real savings and assuming the whole partnership qualifies when most of it structurally cannot. The full benefit stack every eligible participant receives is in the table below.

How does a Section 125 plan work for a law firm?

A Section 125 plan works by moving a W-2 employee's benefit premiums out of taxable wages before payroll taxes are calculated, the same mechanism that applies at any employer, but a law firm has to sort its payroll into eligible and ineligible groups before that mechanism can run correctly. An associate attorney, a paralegal, and an administrative assistant are all W-2 employees whose wages a pre-tax election reduces. An equity partner drawing a K-1 distribution is not, because IRC Section 125(d)(1)(A) limits qualified benefits to employees, and Treasury Regulation 1.125-1(g)(1) treats a partner as self-employed for benefits purposes regardless of how many hours that partner bills or how the partnership agreement allocates profit. Getting this sort right before modeling savings is the single most important step for a firm, since it determines whether the plan covers most of the payroll or only a fraction of it. See the full mechanics in our Section 125 cafeteria plan guide→.

Can law firm partners use a Section 125 plan?

Whether a law firm partner can use a Section 125 plan depends entirely on how that partner is paid, not on seniority or title. A partner paid on K-1 through a partnership or LLP cannot participate under any circumstances. A shareholder-attorney at a professional corporation can participate if, and only if, the PC elected C-corp tax treatment rather than S-corp treatment, since the rule that excludes owners applies differently to each structure. Firms that assume every partner is automatically excluded, or automatically included, are usually working from the wrong entity's rule.

Are equity partners in a partnership or LLP eligible?

No. An equity partner in a law firm organized as a partnership or limited liability partnership is excluded from the firm's Section 125 plan because IRS rules treat partnership income as self-employment income, not W-2 wages, per IRC Section 125(d)(1)(A) and Treasury Regulation 1.125-1(g)(1). There is no payroll wage base tied to a K-1 distribution for a pre-tax election to reduce, which means the highest earners at most private-practice firms are also the ones structurally excluded from the firm's own benefits plan. This surprises firm administrators the first time they price out a plan, since it inverts the usual small-business assumption that the owner enrolls alongside everyone else.

What if the firm is a professional corporation that elected C-corp taxation?

A shareholder-attorney at a professional corporation that elected C-corp tax treatment is eligible for the firm's Section 125 plan on the same terms as any other W-2 employee, including an attorney who owns 100% of the firm's stock. That is because the 2% shareholder exclusion under IRC Section 1372 is written specifically for S corporations and does not extend to a PC taxed as a regular C-corp. A single-owner PC drawing a reasonable W-2 salary and electing C-corp taxation is, for Section 125 purposes, just an employer with one employee, a structural fact that changes the eligibility answer for a meaningful share of solo and small firms once they know to ask which tax election their PC actually made.

What if the firm's PC elected S-corp taxation instead?

A shareholder-attorney at a professional corporation that elected S-corp tax treatment is excluded from pre-tax benefits the moment their ownership exceeds 2% of the firm's stock, under the attribution rules in IRC Section 1372(a). This is the same restriction that applies to any S-corp shareholder in any industry, covered in full in our Section 125 guide for S-corp shareholders→, and it means two law firms with identical revenue, headcount, and ownership percentages can land on opposite eligibility answers for their partners depending purely on which box the firm checked on its entity tax election.

We assumed our two owner-shareholders were excluded the same way our old partnership's partners were. Turned out the PC elected C-corp status back in 2019 and nobody had revisited it. Both owners qualified once we confirmed the election.

How much do associates and staff save with a Section 125 plan?

Associates and staff save money under a Section 125 plan because a pre-tax election lowers federal taxable wages, Social Security wages, Medicare wages, and, in most states, state taxable wages all at once, the same four boxes reported on the employee's W-2. An associate attorney in Denver, Colorado earning the Bureau of Labor Statistics' national median lawyer wage of $151,160 a year and electing $500 a month, $230.77 per biweekly paycheck, in pre-tax benefits moves that election out of federal, Social Security, Medicare, and Colorado's 4.4% flat state taxable wages before any of those four are calculated. At a 24% federal marginal bracket, the combined 7.65% FICA rate, and Colorado's flat state rate, that single election is worth roughly $83.21 more take-home pay per paycheck than buying the identical benefit after tax. Denver's flat Occupational Privilege Tax, $5.75 a month for the employee and $4.00 a month for the firm, is unaffected either way, since it is a flat monthly charge tied to earning over $500 in the city, not to income.

A paralegal earning the Bureau of Labor Statistics' median wage of $61,010 a year and electing $250 a month, $115.38 per biweekly paycheck, sees a smaller dollar improvement but a larger proportional one, roughly $39.28 more per paycheck at a 22% federal bracket, or just over $1,021 a year, on identical coverage. The firm's own FICA recapture runs independently of either employee's bracket: the associate's $6,000 annual election is worth $459 a year in recaptured employer FICA, and the paralegal's $3,000 election is worth $229.50, figures that scale directly with how many W-2 associates and staff actually enroll rather than with total attorney headcount.

Who else on a law firm's payroll is eligible for a Section 125 plan?

Beyond the partner-versus-employee question, a firm's eligible group includes every true W-2 associate, paralegal, legal assistant, and administrative staff member without further complication, since none of those roles carries the self-employment or ownership issues that make partner and shareholder eligibility firm-specific. The two remaining questions firms usually have involve of counsel attorneys and contract or document review attorneys, both of which turn on the same underlying test as everything above: is this person actually paid on the firm's own W-2.

Are of counsel attorneys eligible?

An of counsel attorney is eligible for the firm's Section 125 plan whenever the firm pays that attorney as a W-2 employee, which is the most common arrangement for of counsel relationships at small and midsize firms. Some of counsel arrangements instead pay the attorney as a 1099 independent contractor or through their own separate PC, in which case that person is excluded the same way any 1099 arrangement is excluded under IRC Section 125(d)(1)(A). A firm should confirm how each of counsel relationship is actually structured on payroll rather than assuming the title implies a particular tax treatment.

Are contract attorneys and document reviewers eligible?

No, not through the firm that engages them, when those attorneys are placed by a legal staffing agency. A contract attorney or document reviewer sourced through a staffing agency is the common-law employee of that agency, which recruits, sets pay, and issues the W-2, the identical rule covered in our Section 125 guide for staffing agencies→. The engaging law firm is, in effect, the client in that relationship rather than the employer, and only if a contract attorney later converts to the firm's own direct W-2 payroll does eligibility for the firm's own plan begin.

What do associates and staff actually get pre-tax?

Associates working toward partnership and staff supporting a busy caseload rarely have time to shop for care during business hours, which is exactly the access gap Benecor's benefit stack is built to close.

• $0 Virtual Urgent Care, 24/7: Care between depositions, filings, and late nights without losing billable hours to an in-person appointment.
• $0 Virtual Primary Care: Ongoing care and prescription renewals that fit around a litigation calendar instead of a fixed clinic schedule.
• $0 Mental Health Counseling: Licensed counseling accessible virtually, relevant given the legal profession's well-documented stress and burnout rates.
• 800+ commonly prescribed medications at $0: Maintenance medications at no out-of-pocket cost for associates and staff alike.
• Procedures at 57% savings, specialist visits at 35% off, lab tests at 60% off, imaging at 75% off: Real discounts on in-person care for staff who may be carrying tighter benefit budgets than the attorneys they support.
• Dental, vision, and family coverage with 350,000+ doctors nationwide: Coverage that works the same way whether the firm has one office or five.

Section 125 for law firms of every size

Solo practitioners

A solo practitioner operating as a sole proprietor or single-member LLC has no W-2 wages of their own and cannot participate in a Section 125 plan for their own benefits under any structure. A solo attorney incorporated as a one-person PC that elected C-corp tax treatment and draws a W-2 salary is the one path to personal eligibility, while the same PC electing S-corp status excludes the owner regardless of salary. Either way, a solo practice with even one or two W-2 staff, a paralegal or a receptionist, can still set up a plan covering those employees: at a $200 average monthly election for 2 staff, that recaptures approximately $367 a year in employer FICA, a modest but real number for a practice this size.

Small firms, 2 to 10 lawyers

A small firm with 3 equity partners and 7 W-2 employees, a mix of associates and staff, at a $220 average monthly election, recaptures approximately $1,415 a year in employer FICA. Firms of fewer than six attorneys make up more than 75% of all U.S. law firms according to the American Bar Association's 2025 Profile of the Legal Profession, making this size tier the most common shape of law firm in the country, even though it recaptures the smallest total dollar figure on this table.

Midsize firms, 11 to 50 lawyers

A midsize firm with 8 equity partners and 35 eligible W-2 associates and staff, at a $250 average monthly election, recaptures approximately $8,033 a year in employer FICA. This is the size tier where firms most often discover the professional corporation C-corp-versus-S-corp distinction matters in dollar terms, since a handful of shareholder-attorneys crossing into or out of eligibility can meaningfully change the plan's total participant count.

Regional and multi-office firms

A regional firm with 40 equity partners and 180 eligible W-2 associates, of counsel attorneys, and staff spread across several offices, at a $280 average monthly election, recaptures approximately $46,253 a year in employer FICA. Because most multi-office firms operate as one single legal entity rather than separately incorporated locations, this scale generally requires no controlled group analysis before aggregating testing, a meaningfully simpler compliance picture than a multi-location dental support organization or auto dealership group facing the same headcount.

Compliance: testing, PC structure, and city taxes

Does excluding partners change nondiscrimination testing?

Excluding equity partners does not itself cause a Section 125 plan to fail nondiscrimination testing, since that exclusion is required by the tax code rather than a design choice the firm made, but it does change who counts as highly compensated within the remaining W-2 group the plan actually has to test. A firm's key employee concentration test caps benefits going to officers earning above $235,000 in 2026 and 1% owners above $150,000 at 25% of total plan benefits, described in full in our key employee definition guide→. Consider a midsize firm where 3 senior non-equity partners paid as W-2 employees each elect $6,600 a year, $19,800 combined, out of $72,000 in total plan elections across the whole eligible group, a 27.5% concentration that fails the 25% threshold by $1,800 and requires either raising participation among lower-paid staff or capping the senior partners' elections before the plan year starts.

Does a flat city tax like Denver's change the §125 math?

No, a flat per-employee city tax like Denver's Occupational Privilege Tax is not affected by a Section 125 election at all, because it is not calculated as a percentage of income the way federal, FICA, and most state taxes are. Denver charges $5.75 a month per employee, withheld from pay, plus $4.00 a month per employee paid by the firm, once an employee earns more than $500 from work performed in Denver during that month, a threshold and flat amount confirmed by the City and County of Denver's own tax guide. A law firm modeling its Denver office's Section 125 savings should show associates and staff the full four-line withholding picture, federal, FICA, Colorado's 4.4% flat state tax, and the untouched flat city tax, so nobody expects a pre-tax election to move a number it structurally cannot.

How does the ACA employer mandate apply to law firms?

A law firm's Affordable Care Act employer mandate status depends on its total full-time-equivalent count under IRC Section 4980H, calculated the same way for a law firm as for any other employer, counting every common-law employee including associates and staff but excluding equity partners, who are not employees for this purpose either. A firm approaching 50 full-time-equivalent employees should confirm applicable large employer status before a plan year begins, since that threshold triggers separate coverage-offer requirements independent of whether the firm also sponsors a Section 125 plan.

Launching §125 for a law firm: 5 weeks

1. Week 1: Benecor maps the firm's payroll into K-1 partners, PC shareholder-attorneys, and true W-2 employees, and confirms the firm's entity tax election. You receive a signed savings projection and select the benefit menu.
2. Week 2: Independent ERISA counsel confirms whether any PC shareholder-attorneys are eligible under a C-corp election or excluded under an S-corp election, and confirms which of counsel and contract attorneys are true firm W-2 employees.
3. Week 3: Counsel drafts the plan adoption agreement and summary plan description covering every eligible office under one plan document.
4. Week 4: Benecor runs the eligibility, contributions and benefits, and key employee concentration tests against the firm's actual W-2 group before the plan year starts.
5. Week 5: Election data transmitted to the firm's payroll system, deduction codes configured as pre-tax across every office, and a test payroll run confirms federal income tax and FICA are correctly reduced before the first live pre-tax payroll.