The basics still apply
Section 125 lets employees make pre-tax elections for qualified benefits - health insurance premiums, HSA and FSA contributions, dependent care, and a defined list of others. The election reduces the employee's taxable wage base on both income tax and FICA, with a matching effect on the employer's FICA liability.
What's stable in 2026
- FSA, dependent-care FSA, HSA, and qualified health insurance premium elections all remain qualified Section 125 elections.
- Plan documents and nondiscrimination testing requirements are unchanged.
- SIMERP-based pre-tax contributions remain qualified when structured as employee elections to fund their own self-insured reimbursement plan.
What's shifted
- IRS scrutiny of fixed-indemnity wellness products run through Section 125 has intensified since the 2023 Chief Counsel Memorandum.
- Many indemnity vendors have repackaged their products without changing the underlying structure - buyer beware.
- Audit conversations on Section 125 elections increasingly start with 'is this a reimbursement of an incurred 213(d) expense, or a fixed payment on a trigger?'
What to ask your benefits advisor
Most brokers don't earn revenue on SIMERP-style products. That's a structural reason they may not surface them. It doesn't mean the products are wrong - it means you may need to bring them to your broker rather than the other way around.