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Section 223 vs. 125 plans

Lively · January 27, 2019 · 4 min read


Every dollar counts when it comes to balancing the family budget. As the cost of living goes up, it’s important to scrutinize where your hard-earned dollars are going. As diligent as you are, it’s possible you are overlooking a couple of benefits built into the tax code — section 223 and section 125 plans.  

These plans are similar but operate in different ways. Both offer tax incentives that may save your family money every year. We will take a closer look at each one and the impact they may have on your family’s wallet.

What is a section 223 plan?

When someone mentions a “section 223 plan” they are talking about section 223 of the tax code. This section deals with health savings accounts, or HSAs, and their tax benefits.

How to qualify for a section 223 plan

Certain high-deductible health plans make you eligible to contribute money to an HSA. A high-deductible alone isn’t enough to qualify. You can’t receive any other health insurance benefits until you meet your deductible. If you have co-pays and get discounts, your plan isn’t HSA-eligible. The only exception is preventative care — like your annual physical or flu shots.

The perks of a section 223 plan

The reason why the IRS is such a stickler about your health insurance is because HSAs offer several different tax benefits:

  • You can deduct your contributions — up to an annual limit — even if you don't itemize deductions on your taxes.

  • If your employer puts part of your paycheck into an HSA, you can subtract that money from your total income.

  • The money in your HSA rolls over every year, even if you change jobs. There’s no deadline to use the money.

  • If you decide to invest your HSA money, your earnings are tax-free.

  • If you use the money for qualified medical expenses, you don’t have to pay extra taxes when you withdraw it.

There are a lot of perks to your HSA, but you will only reap these benefits if you follow the IRS’ rules. This means keeping track of your health insurance details, contribution limits, and withdrawals. If it feels like too much, don’t be afraid to work with a tax professional.

What is a section 125 plan?

Section 125 plans are also named after — you guessed it — their section of the tax code. But more often, folks refer to them as cafeteria plans. Your company may have a written cafeteria plan and it allows you to receive certain benefits before taxes.

The basic rules of section 125 plans

Like other types of tax-friendly plans, cafeteria plans have several rules. You must have the option of picking at least one taxable benefit, like cash, and one benefit the IRS deems qualified. Qualified benefits aren’t paid for by diverting your salary and aren’t taxed as part of your income. Some examples of these include:

  • Accident and health benefits

  • Adoption assistance

  • Dependent care assistance

  • Group-term life insurance

  • Health savings accounts (HSAs)

What is a flexible spending arrangement (FSA)?

Flexible spending arrangements (FSAs) are one way to receive your cafeteria plan benefits. Your employer can use an FSA to reduce your salary to pay for certain benefits. Some of these include dependent care, adoption, or medical care reimbursement.

One of the perks is you can save on paying taxes on the money you set aside. The downside is, you have limited time to spend the money or it goes back into your employer’s pocket. Because of the “use it or lose it” rule, you need to stay organized to be successful with your FSA.

Save on taxes with section 223 and 125 plans

It’s safe to say paying less in taxes is a good thing, but staying on the government’s good side does need some extra attention. If following all the rules and tax law changes feels overwhelming, tapping a professional is always a good idea. It’s not worth losing sleep over and knowing you are straight with the IRS is priceless.



Lively is the modern HSA experience built for—and by—those seeking stability in the ever-shifting healthcare landscape. By harnessing modern innovation and deep industry expertise, Lively is committed to bridging today’s savings with tomorrow’s unknowns. Unlike traditional institutions hindered by bureaucracy, Lively’s commitment extends beyond initial set up to providing dedicated, ongoing support and education for every step. So each HSA can reach its maximum potential with minimal headache.

piggy bank on pink background


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Lively · May 9, 2024 · 3 min read

On May 9, 2024 the Internal Revenue Service announced the HSA contribution limits for 2025. For 2025 HSA-eligible account holders are allowed to contribute: $4,300 for individual coverage and $8,500 for family coverage. If you are 55 years or older, you’re still eligible to contribute an extra $1,000 catch-up contribution.

comparing hsa versus fsa


What is the Difference Between a Flexible Spending Account and a Health Savings Account?

Lauren Hargrave · February 9, 2024 · 12 min read

A Health Savings Account (HSA) and Healthcare Flexible Spending Account (FSA) provide up to 30% savings on out-of-pocket healthcare expenses. That’s good news. Except you can’t contribute to an HSA and Healthcare FSA at the same time. So what if your employer offers both benefits? How do you choose which account type is best for you? Let’s explore the advantages of each to help you decide which wins in HSA vs FSA.

Benefits of HSA employer matching

Health Savings Accounts

Ways Health Savings Account Matching Benefits Employers

Lauren Hargrave · October 13, 2023 · 7 min read

Employers need employees to adopt and engage with their benefits and one way to encourage employees to adopt and contribute to (i.e. engage with) an HSA, is for employers to match employees’ contributions.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.



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