What is a Premium Only Plan (POP)?

A Premium Only Plan (POP) is a simple yet powerful tool designed to benefit both your business and your employees. Often referred to as a Section 125 Plan, it gets its name from Section 125 of the Internal Revenue Code, which permits employees to pay specific insurance premiums using pre-tax dollars. This type of plan plays a substantial role in enhancing the affordability of quality health coverage for your team, with clear financial advantages for your business.

Under a POP plan, employees can allocate pre-tax income to cover their portion of eligible insurance premiums. These premiums can include coverage for Medical, Dental, Vision, Chiropractic, and even Life Insurance policies. By deducting these costs before taxes are calculated, employees lower their taxable income, which increases their take-home pay. For example, if an employee earns $50,000 annually and allocates $5,000 of their salary toward health insurance premiums through a POP, they are taxed only on $45,000 of income instead of the full $50,000. This straightforward mechanism means employees see an immediate financial benefit, month after month.

 Advantages of a POP Health Plan

 POP plans can provide significant benefits for employers. Because the employee’s taxable income is reduced, your business may save on payroll taxes, such as Social Security and Medicare.

Pop Plan Scenario: For example, on a $5,000 pre-tax deduction per employee, your savings could add up quickly, especially for larger teams. These savings can offset administrative costs or even be reinvested into offering more comprehensive benefits, making your group health plan even more appealing.

The beauty of a POP lies in its simplicity and dual impact. For businesses of all sizes, adopting a POP is cost-effective and straightforward to implement. You maintain flexibility in managing your group health plan, while employees gain a valuable way to stretch their earnings further.

At CaliforniaChoice, we specialize in guiding business owners through the complexities of group health insurance, tailoring solutions to your needs. A POP plan is just one of the many strategies we can help you leverage to maximize your benefits for employees while controlling costs effectively. Whether you’re a small business owner or managing a large, diverse workforce, you owe it to yourself and your team to explore what a Premium Only Plan can bring to the table. It’s simple, smart, and good for everyone.

Check out this Video We Created that Discusses Premium Only (POP) Health Plans in More Detail 

A POP also benefits employers because it’s an easy way to make your benefits program even more competitive – plus it reduces your total taxable payroll.

Our POP Q&A highlights other advantages

How does a POP insurance save money?

Insurance premium payments made through a POP are exempt from federal, state, and FICA (Federal Insurance Contributions Act) payroll taxes.

Employers save approximately 7.65% because they are not paying FICA/FUTA taxes on amounts paid. Employees have reduced taxes which means increased take-home pay. The tax savings partially offset their share of premiums paid. According to the benefits administration software company PeopleKeep, a POP can save employees up to 40% on income and payroll taxes.

What type of benefit plans can be included in a POP?

An employer can include any of the following in a POP:

• Medical
• Dental
• Vision
• Short-Term Disability (STD)
• Long-Term Disability (LTD)
• Health Savings Accounts (HSAs)
• Group Term Life (up to $50,000 coverage)

Can employees make pre-tax contributions to a Health Savings Account (HSA) with a POP?

Yes, employee contributions are permitted on a pre-tax basis through a POP.

What kind of employer can establish a POP?

A POP is available to a single employer, a controlled group (multiple companies combined because of common ownership), and other types of employers like a trade, business, or affiliated service group. For more information about establishing a Section 125/POP/Cafeteria plan, check out this Investopedia article.

If an employer pays 100% of employees’ premiums, will the business benefit from a POP?

No. Tax savings offered by a POP are based on employee contributions to the cost of the plan(s). If employees are making 0% contributions to the costs of coverage, the employer will not gain any tax savings through a POP. However, an employer may still be eligible to write the costs of coverage off on business taxes. Be sure to consult a tax professional for guidance.

What employees can participate in a POP?

Common law employees and leased employees, as defined in Internal Revenue Code Section 414 (n), are eligible to participate in a POP.

Do all of the company’s employees need to participate?

No, each eligible employee can decide whether or not to take part in the POP.

Who is ineligible to participate in a POP?

Partners in a partnership, two percent shareholders in an S-corporation, and sole proprietors are not eligible to participate in a POP.

If employees choose to fund benefit contributions through a POP, can they make changes during the plan year?

No. POP elections are generally “irrevocable” until the conclusion of the plan year. Employees cannot revoke or make plan election changes until their annual Open Enrollment, under IRS rules. The exception is a “qualifying event” such as a change in marital status, change in the number of dependents, or change in employment (termination).

Interested in learning more?

If you have other questions regarding POPs, talk with your employee benefits broker. If you don’t already have a broker, you can search for one here.