Section 125 Plans for Technology Companies: The 2026 Employer Guide

• The Bureau of Labor Statistics puts the May 2024 median software developer wage at $133,080 a year, with the top 10% earning more than $211,450 (BLS Occupational Outlook Handbook).
• CompTIA's State of the Tech Workforce 2026 report estimates the U.S. tech workforce will reach nearly 9.8 million workers in 2026, up from 9.6 million in 2025.
• The 2026 Social Security wage base is $184,500 per the Social Security Administration, up from $176,100 in 2025, and RSU income counts as FICA wages the moment shares vest.
• The 2026 highly compensated employee threshold is $160,000 under IRC Section 414(q)(1)(B), a figure a large share of senior and staff engineers clear every year, unlike at most other industries covered on this site.
• A 45-person Series B company with a $600 average monthly election recaptures approximately $24,786 a year in employer FICA against Benecor's $35 per enrolled employee per month administration fee.

A staff engineer at an Austin, Texas SaaS company pulling $150,000 in base salary plus $150,000 in RSUs vesting monthly crosses the 2026 Social Security wage base of $184,500 by early August, purely from combined cash pay and equity vesting. From that point forward, the company stops owing the 6.2% employer share of Social Security tax on that engineer's wages entirely, equity or cash, for the rest of the calendar year. A Section 125 election made in September still saves that engineer federal income tax, but it only recaptures the uncapped 1.45% Medicare portion for the employer, not the full 7.65% a lower-paid or less equity-heavy employee generates all year long. Getting this timing right, alongside knowing which engineers and staff are even eligible, is what separates an accurate tech company savings model from one that overstates the number. The full benefit stack every participant receives is in the table below.

How does a Section 125 plan work for a technology company?

A Section 125 plan works for a technology company the same way it works for any W-2 employer: a written plan document lets employees redirect part of their cash salary toward qualified benefits like health insurance before federal income tax and FICA are calculated on that amount. The mechanism only touches cash wages. Stock compensation, whether RSUs, incentive stock options, or nonqualified stock options, is taxed under a completely separate set of rules and is not itself eligible to be run through a §125 election. What changes at a tech company is not the mechanism but the payroll composition around it: a workforce paid partly in cash and partly in equity that frequently converts to FICA wages on its own schedule, which affects how much employer FICA a §125 plan actually recaptures over a full year. See the full mechanics in our Section 125 cafeteria plan guide→.

How much does a software engineer save with a Section 125 plan?

A software engineer saves money under a Section 125 plan because the election lowers federal taxable wages, Social Security wages, and Medicare wages all in the same paycheck, the same three boxes reported on the employee's W-2. A software engineer in Austin, Texas earning the Bureau of Labor Statistics' May 2024 median wage of $133,080 a year and electing $600 a month, $276.92 per biweekly paycheck, in pre-tax health insurance premiums moves that election out of federal, Social Security, and Medicare taxable wages before any of the three are calculated. Texas has no state income tax, so the full improvement comes from the federal and FICA layers alone. At a 24% federal marginal bracket under the 2026 brackets set by IRS Revenue Procedure 2025-32, that single election is worth $87.65 more take-home pay per paycheck than buying the identical benefit after tax.

That improvement holds for every pay period across the whole year for an employee whose total wages stay under the Social Security wage base, which is true of most individual contributors and early-career engineers. The employer's side of the math is simpler at this wage level too: $600 a month times 12 times 7.65% recaptures $550.80 a year in FICA for the company on that one engineer, with no cap concern, since $133,080 sits well below the 2026 Social Security wage base of $184,500. The picture changes for senior and staff-level engineers whose total compensation, cash plus vesting equity, regularly clears that cap, covered next.

We modeled our FICA savings using a flat 7.65% across the board and it overstated the number by almost a third once we accounted for how much of our senior team's total comp is RSUs. The cash-only engineers hit the full rate every paycheck. The equity-heavy ones didn't.

How does equity compensation affect a tech company's FICA recapture?

Equity compensation affects a tech company's Section 125 FICA recapture because stock-based pay that counts as wages, RSU vesting and nonqualified stock option exercises, adds to the same cumulative wage total that determines when an employee crosses the Social Security wage base for the year. Once an employee's total FICA wages for the calendar year, cash salary plus any vesting equity combined, exceed $184,500 in 2026, the 6.2% employer share of Social Security tax stops applying to that employee's wages for the rest of the year. A §125 election made after that point only recaptures the 1.45% Medicare share, which has no wage cap, instead of the full 7.65% combined rate. Companies that model tech company FICA savings using a flat 7.65% assumption across every salary band systematically overstate recapture for their highest earners, exactly the employees whose larger elections would otherwise generate the largest dollar savings.

Do RSU vests count toward the Social Security wage base?

Yes. Restricted stock units become taxable wages, including FICA wages, the moment they vest and are no longer subject to a substantial risk of forfeiture, the same trigger that starts federal income tax withholding on the shares. A staff engineer at a public SaaS company like HubSpot, which reported 8,882 full-time employees in its fiscal year 2025 Form 10-K, receiving $150,000 in base salary plus $150,000 in RSUs vesting in equal monthly tranches crosses the $184,500 wage base around the 16th biweekly pay period of the year, roughly early August. A §125 election running that engineer's full $600 monthly premium through the plan recaptures the full 7.65% employer rate for the first 16 pay periods, worth $338.95, then drops to the 1.45% Medicare-only rate for the last 10 pay periods, worth $40.15, for a total of $379.10 instead of the $550.80 a flat-rate assumption would predict, a 31% shortfall against the naive estimate.

Do nonqualified and incentive stock options affect FICA the same way?

No. Exercising a nonqualified stock option creates FICA wages immediately, equal to the spread between the strike price and the stock's fair market value on the exercise date, the same mechanic as an RSU vest. Exercising an incentive stock option that qualifies under IRC Section 422 creates no FICA wages at exercise at all, only a potential alternative minimum tax adjustment calculated separately from regular payroll tax. A seed or Series A startup that grants mostly ISOs, common before a company has a public market for its shares, keeps its engineers further from the Social Security cap for longer into the year than a public or late-stage company issuing RSUs and NSOs, which means the startup's employer FICA recapture rate stays closer to the full 7.65% for more of the year even at comparable total compensation levels.

What does every enrolled employee get pre-tax?

Engineers and product staff on call, on deploys, or heads-down on a sprint rarely have time to book a doctor's appointment during business hours, which is exactly the access gap Benecor's benefit stack closes.

• $0 Virtual Urgent Care, 24/7: Care that fits around on-call rotations and release schedules without losing a day to an in-person visit.
• $0 Virtual Primary Care: Ongoing care and prescription renewals scheduled around sprint planning instead of a fixed clinic calendar.
• $0 Mental Health Counseling: Licensed counseling available virtually, relevant in an industry with well-documented burnout and layoff-cycle stress.
• 800+ commonly prescribed medications at $0: Maintenance medications at no out-of-pocket cost for every enrolled employee, from junior engineer to VP.
• Procedures at 57% savings, specialist visits at 35% off, lab tests at 60% off, imaging at 75% off: Real discounts on in-person care that matter as much to a support engineer as to a staff-level IC.
• Dental, vision, and family coverage with 350,000+ doctors nationwide: Coverage that works identically whether the team is fully remote or in one Austin office.

Section 125 for tech companies of every size

Seed and pre-seed startups

A 12-person seed-stage startup with a $550 average monthly election recaptures approximately $6,059 a year in employer FICA. Equity at this stage is almost always ISOs, which create no FICA wages at exercise, so early employees rarely approach the Social Security wage base through equity alone, keeping the employer's recapture rate close to the full 7.65% across the whole team even without a formal wage-base model.

Series B and Series C growth-stage companies

A 45-person growth-stage company with a $600 average monthly election recaptures approximately $24,786 a year in employer FICA. This is the size and stage where NSOs and early RSU grants typically start appearing alongside ISOs for senior hires, making it the point where a company first needs a wage-base-aware model rather than a flat 7.65% assumption to project savings accurately.

Mid-market SaaS companies

A 120-person mid-market SaaS company with a $625 average monthly election recaptures approximately $68,850 a year in employer FICA. At this scale, a meaningful share of senior engineers and managers are RSU-heavy and clear the Social Security wage base mid-year, so the true recapture figure runs below the naive flat-rate projection unless the model accounts for salary band and vesting schedule.

Public and late-stage tech companies

A public or late-stage tech company's individual business unit or regional office with a hypothetical 500 eligible W-2 employees and a $650 average monthly election would recapture approximately $298,350 a year in employer FICA under a flat-rate assumption, though the actual figure runs meaningfully lower once RSU-heavy senior and staff engineers' wage-base crossover is modeled. Public companies like HubSpot, which reported 8,882 full-time employees globally in its FY2025 Form 10-K, are used here as a named reference for scale and typical public-company RSU vesting cadence, not as the basis for this table's math.

How does a Section 125 plan work for remote and multi-state engineering teams?

A Section 125 plan works the same way for a remote engineering team as it does for a single-office one, because the plan is governed by federal law under IRC Section 125 and ERISA rather than by any individual state. One plan document covers a company's entire W-2 workforce, whether every engineer sits in one Austin, Texas office or the team is spread across a dozen states. The federal income tax and FICA savings layers apply identically regardless of where an employee lives. The state income tax savings layer is the only piece that varies: an engineer in Texas, Washington, or another no-income-tax state gets federal and FICA savings only, while an engineer in California or New York adds a state income tax savings layer on top, at that state's applicable rate. Payroll platforms configure state-specific withholding automatically once the plan is set up, and no separate plan document is required per state.

Compliance: HCE concentration and nondiscrimination testing

Why do tech company payrolls skew highly compensated?

A tech company payroll skews highly compensated because software engineering wages sit well above the national median across nearly every level, and senior and staff-level individual contributors routinely clear the 2026 highly compensated employee threshold of $160,000 under IRC Section 414(q)(1)(B). The Bureau of Labor Statistics reports a May 2024 median software developer wage of $133,080, with the top 10% earning more than $211,450, a spread that puts a meaningfully larger share of a typical engineering team above the HCE line than at a retail, restaurant, or manufacturing employer of comparable headcount, covered in our highly compensated employee definition guide→. Consider a hypothetical 60-person SaaS company where the majority of senior and staff engineers, plus most of the leadership team, exceed $160,000 in prior-year compensation: a much larger share of that company's eligible group enters the plan year as HCEs than would be typical at a non-tech employer the same size, leaving less room for the nondiscrimination tests to pass without deliberate plan design.

How does the key employee concentration test apply to a tech company?

The key employee concentration test under IRC Section 125(b)(2) caps the share of total plan benefits going to officers earning above $235,000 and 1% owners above $150,000 in 2026 at 25% of everything the plan pays out, described in full in our key employee definition guide→. A tech company with a small founding team still drawing outsized salaries alongside a larger, lower-paid engineering and operations staff runs a real risk of concentrating too much of the plan's total benefit dollars among a handful of key employees unless enough of the broader W-2 team also enrolls and elects meaningful amounts. This is less a tech-specific rule than a tech-specific risk: the same top-heavy compensation pattern that produces strong FICA recapture per capita also produces a smaller base of lower-paid participants to keep the concentration ratio under 25%.

How does the ACA employer mandate apply to a tech company?

A tech company with 50 or more full-time-equivalent employees is an applicable large employer under IRC Section 4980H and must offer minimum essential coverage to at least 95% of full-time employees or risk an employer shared responsibility payment. A Section 125 Premium Only Plan does not satisfy this requirement by itself, but it typically increases enrollment in the qualifying health plan by making the employee's share of the premium cheaper on a take-home basis, which helps a growing company maintain the 95% offer threshold as headcount crosses the 50-FTE line.

Launching §125 for a tech company: 5 weeks

1. Week 1: Benecor maps the engineering org into W-2 employees, 1099 contractors, and agency-placed contract engineers, then models each salary band's cash-versus-equity mix. You receive a signed savings projection and select the benefit menu.
2. Week 2: Benecor projects where RSU vesting and option exercises push each salary band past the 2026 Social Security wage base, so the savings projection reflects real recapture rather than a flat 7.65% assumption.
3. Week 3: Independent ERISA counsel drafts the plan adoption agreement and summary plan description covering every state where W-2 staff work, and runs the eligibility, contributions and benefits, and key employee concentration tests against the actual W-2 group.
4. Week 4: Payroll deduction codes are configured in the company's existing platform, whether Gusto, Rippling, Justworks, Deel, or ADP. A test payroll run confirms federal income tax and FICA reduce correctly for both capped and uncapped earners.
5. Week 5: First pre-tax payroll runs. Employee take-home increases and employer FICA recapture both appear on the same check, and Benecor delivers a compliance report showing actual savings against the signed projection.