A Premium Only Plan (POP) offers benefits to your employees and your business. Sometimes referred to as a Section 125 plan, because it’s allowed under Section 125 of the Internal Revenue Code, a POP lets employees use pre-tax dollars to pay their portion of eligible insurance premiums. That includes Medical, Dental, Vision, Chiropractic, and Life Insurance.

The bottom line for employees is an increase in take-home pay.

 

 

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 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.