This site explains, in plain English, how limited indemnity benefits can be offered within a Section 125 plan. It is vendor‑neutral. Use the checklists and comparison framework to evaluate the major providers objectively and pick what fits your company.
Nothing here is tax, legal, or compliance advice. Always consult qualified counsel and your broker/TPA.
Limited Indemnity Section 125 plans generally intend to offer health benefits to employees at zero cost out of pocket, as well as decrease the employer's payroll tax expenses through the qualified reduction of employees' taxable income.
The information below is provided for general educational purposes only and should not be interpreted as legal, tax, or benefits advice. Confirm plan design and compliance responsibilities with qualified professionals and your selected vendor or administrator.
A Section 125 plan allows eligible employees to elect to have certain benefit contributions deducted from their pay on a pre-tax basis. This means the elected amount is taken out of gross wages before federal income tax, Social Security, and Medicare taxes are calculated, which may reduce taxable income.
The IRS requires the plan sponsor (employer) to maintain a written plan document describing the terms and benefits of the Section 125 arrangement. This is sometimes referred to as a Premium-Only Plan (POP) document if the only function is allowing pre-tax payroll deductions. In addition, a Summary Plan Description (SPD) must be made available to eligible employees in a clear, accessible format. Employers are responsible for ensuring documents are current and reflect the benefits being offered.
Once an employee makes a pre-tax election, it generally must remain in place for the entire plan year unless the employee experiences a qualified change-in-status event (for example, marriage, divorce, birth of a child, loss of other coverage, or changes in employment status). There will often be a 30 day window upon enrollment into the plan, where the employee may opt out without any penalty or without proving a qualified hardship or change-in-status event. The plan document outlines which change-in-status events are permitted and the timeframe for requesting an election change.
Pre-tax elections reduce the amount of wages subject to federal income tax, Social Security, and Medicare taxes. As a result, the taxable wages reported in Box 1 of Form W-2 may differ from gross earnings. Employers are responsible for ensuring that payroll systems and reporting processes correctly reflect pre-tax deductions in accordance with IRS requirements.
Comparison below is based on publicly available information and may not reflect current terms. Confirm details directly with each vendor.
Funding model materially affects cost predictability, risk retention, regulatory treatment, and administration. See definitions of self-funded and fully insured.
| Criterion | HealthCues | SmartHealth+ | Amaze Health | Capstone |
|---|---|---|---|---|
|
Funding model Self-funded vs Fully insured |
Fully Insured | Fully Insured | Self Funded | Self Funded |
| Eligible employees | All W2 Employees (Full Time and Part Time) | All W2 Employees (Full Time and Part Time) | All W2 Employees (Full Time and Part Time) | All W2 Employees (Full Time and Part Time) |
| Enrollment, Support, & administration | App based, Optional Auto Enrollment, Employee/Employer Support via Phone and Email | App based, Optional Auto Enrollment, Employee/Employer Support via Phone and Email | [[Portal / call center / file feeds]] | [[Portal / call center / file feeds]] |
| Claims processing | 20-40 min data turnaround at payroll time, 7 day claim repayment after hospitalization | 20-40 min data turnaround at payroll time, 7 day claim repayment after hospitalization | [[Turnaround, EOB access, TPA handling]] | [[Turnaround, EOB access, TPA handling]] |
| Integration with Major Payroll Processors | Fully automated with ADP WFN, Paycom, Paycor, Paylocity, Gusto, Etc. Less automated with Quickbooks or ADP Run | Fully automated with ADP WFN, Paycom, Paycor, Paylocity, Gusto, Etc. Less automated with Quickbooks or ADP Run | [[POP/SPD, NDT support, payroll deductions]] | [[POP/SPD, NDT support, payroll deductions]] |
| Employee average increase in pay | $1-$150/mo | $1-$150/mo | $ | $ |
| Employer average FICA Savings | $600-$950/yr | $500-$1,000/yr | $ | $ |
| Employer cost model | Admin Fees $35 base (paid for with tax savings, still $0 out of pocket) | Admin Fees between $35 and $45 (paid for with tax savings, still $0 out of pocket) | [[PEPM / contribution / fees]] | [[PEPM / contribution / fees]] |
| Employee cost model | Deduction amounts between $100/mo and $300/mo (paid for with tax savings, still $0 out of pocket) | Deduction amounts between $100/mo and $300/mo (paid for with tax savings, still $0 out of pocket) | [[Payroll deduction / net benefit]] | [[Payroll deduction / net benefit]] |
| Notable exclusions / limits | 1099 Contractors may not participate as they do not have tax withholding. Owners of S Corps may also not participate. | 1099 Contractors may not participate as they do not have tax withholding. Owners of S Corps may also not participate. | [[Your notes]] | [[Your notes]] |
| Differentiator | Long standing provider, biggest firm, most well versed in complicated setups | Best professionalism, well trained teams ensure you will never be waiting around for the next step, seamless implementation | ? | ? |
| Bottom Line | Fully insured provider with a lot of experience and large client list. May have to wait longer for service. Larger teams. Large names on client list. | Fully insured provider with a record of high professionalism and top notch customer service. Large names on client list. | ? | ? |
| Referral link | Visit provider ↗ | Visit provider ↗ | Visit provider ↗ | Visit provider ↗ |
No. This is a neutral resource. Some outbound links may be referral links; if you click them, the destination may compensate the site at no extra cost to you.
Yes, in fact, that is precisely why plans like these exist. Employees may participate in these types of plans regardless of their enrollment status in a major medical plan, whether or not they are a full or part time employee. These plans do also not discriminate based on how long and employee has been employed at the business. An employee may qualify for these plans after their first paycheck in which they have earned enough income to qualify.
Employees who are either not offered a major medical plan or have otherwise declined it, are the metaphorical 'perfect fit' for this type of plan. However, there is no reason that an employee who IS currently taking advantage of the major medical plan (or has it through other means like a parent or spouse), can or should also not take advantage of the limited indemnity plan in order to increase their access to benefits and further decrease their taxable income.
These definitions are provided for general educational purposes only and are based on widely used industry terminology. They are not legal or tax interpretations. Confirm definitions and applicability directly with vendors, plan administrators, and licensed professional advisors.
In a self-funded plan, the employer is financially responsible for some or all of the cost of covered claims. The plan is typically administered by a third-party administrator (TPA), and the employer may purchase stop-loss insurance to limit exposure from high-cost claims. Self-funded arrangements may allow more flexibility in plan design and structure, but also involve variable claim cost risk and require administrative oversight. Regulatory treatment differs from carrier-issued insurance products and may be subject to ERISA preemption depending on the design and sponsoring entity. Bottom line: With a self funded plan, the employer may end up on the hook for some claim amounts if their employees use the benefits in excess of premiums collected.
In a fully insured plan, the employer pays a fixed premium to an insurance carrier (although these premiums may be covered by produced tax savings, resulting in a net decrease in FICA spend.) The carrier assumes the financial risk of covered claims as defined in the insurance policy. Costs are predictable at the employer level, though plan design may be more standardized compared to self-funded plans. Fully insured products are typically regulated under state insurance law and carrier policy terms. Premiums and coverage conditions are determined by the insurance provider. Bottom line: Employers will NEVER end up on the hook for claims or any other surprises, because the insurance will cover any unexpected expenses or claims above the premiums collected.
A form of insurance commonly purchased by employers who self-fund some or all health benefits. Stop-loss coverage reimburses the employer when claims exceed a defined threshold, either per individual or in aggregate. It does not pay claims to members directly; rather, it protects the employer from high-cost variability. This may impact the advertised 'zero cost out-of-pocket' costs of a self funded plan, especially if there are a lot of claims.
A service organization that handles administrative functions such as enrollment, claims processing, Explanation of Benefits (EOB) production, and customer support on behalf of a plan sponsor or employer. TPAs do not insure or fund claims; their role is administrative.
A tax code provision allowing eligible benefit contributions to be made on a pre-tax basis by employees, when the plan meets relevant IRS requirements including plan documentation, nondiscrimination testing, and administrative compliance. Employers should verify plan documents and ongoing compliance with qualified tax or benefits professionals.
The information below is for general educational purposes only. It does not constitute legal, tax, or compliance advice. Employers should review plan design decisions with qualified counsel, licensed insurance professionals, and tax advisors.
The IRS has issued guidance indicating that, in certain plan designs, benefit payments made to employees may be treated as taxable income. This guidance reflects the agency’s interpretation of existing tax law but does not itself constitute a change in statute or a finalized regulation. Guidance is intended to help clarify enforcement expectations, but employers should understand that guidance and law are not identical. Formal rulemaking or legislative action would be required to definitively alter how specific claim payments are treated for tax purposes.
Self-funded benefit arrangements and fully insured benefit arrangements are subject to different regulatory frameworks. Fully insured plans are issued by licensed insurance carriers and are regulated under state insurance law, which generally defines how premiums and claims are treated for tax and reporting purposes. Self-funded plans operate under a different framework in which the employer is responsible for funding eligible claims and may rely on third-party administrators for processing and documentation. Because of these structural differences, the application of IRS guidance may vary based on plan design.
Employers typically consider factors such as plan structure, State Dept. of Insurance approval, administrative oversight, regulatory environment, and risk tolerance when evaluating benefit plan options. The choice between self-funded and fully insured arrangements is not one-size-fits-all and depends on the employer’s operational capacity, workforce needs, and compliance posture. Independent legal and tax review is advisable to validate alignment with the organization’s policies and objectives.
The information presented on this website is provided for general educational and informational purposes only. While every effort has been made to ensure that the content is accurate as of the date of publication, no guarantee is made regarding its completeness, accuracy, or continued applicability. The concepts, vendor comparisons, and plan descriptions may change over time and should be independently verified with the vendor, plan administrator, or qualified professional advisors before any decision is made.
This website does not provide legal, tax, accounting, medical, insurance, financial, or benefits advisory services, and nothing on this site should be construed as such. No statements contained herein should be interpreted as recommendations or advice regarding the suitability or appropriateness of any plan, provider, or product for any particular business, employee population, or financial circumstance. Employers are solely responsible for evaluating and selecting any employee benefit programs, and for ensuring compliance with ERISA, IRS, state insurance, and employment regulations.
The operator of this site is not an insurance agent, broker, producer, advisor, or consultant, and does not represent, negotiate, or sell insurance products. No fiduciary duty is created by the use of this site. If you require advice regarding plan design, legal compliance, tax implications, plan selection, or financial impact, you should consult with a licensed insurance broker, attorney, CPA, or other qualified professional.
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