There are countless ways for employers to provide insurance for their employees. And one of the most popular is a Premium Only Plan (POP) — also known as a cafeteria plan or Section 125 plan. This type of plan allows pre-tax payments toward insurance premiums, saving money for both the employer and employee. Here’s how it works.
What is a Premium Only Plan?
A Premium Only Plan (POP) allows employees to use pre-tax dollars to pay for insurance premiums. Since there’s no tax, they’re paying only the premium — hence the name.
With a POP, the employer withholds the insurance premiums from the employee’s paycheck. That way, the premiums are paid pre-tax, saving the employee money on their insurance.
Before setting up a POP, it’s important to have a formal document outlining your plan. Employers can’t take pre-tax deductions without official documents in place.
Benefits of a Premium Only Plan
The biggest benefit of a POP is the savings. Both employees and employers can expect to save money: one from lower premiums and the other on taxes.
The main benefit of using a POP from an employee perspective is an increase in take-home pay. Since they no longer have to pay taxes on their insurance premiums, they can keep more in their paycheck.
For employers, a POP enhances the competitiveness of your benefits program. You can provide better benefits for employees. Insurance payments made through a POP are also exempt from federal, state, and FICA (Federal Insurance Contributions Act) payroll taxes, which helps when tax time rolls around.
Overall, employers save around 7.65% on average by avoiding FICA and FUTA taxes on premium payments, and employees can save up to 40% on income and payroll taxes. With a POP, everyone wins.
What type of a benefit plan can be included in a POP?
Premium Only Plans are very versatile and allow for a wide variety of benefit plans. Employers can include any of the following on their POP:
- Medical
- Dental
- Vision
- Short-term disability (STD)
- Long-term disability (LTD)
- Health Savings Accounts (HSA)
- Group Term Life (up to $50,000 coverage)
And because employers will save money on taxes with a POP, they can include more benefits to their insurance offerings, maximizing their hiring competitiveness.
Have questions about POPs? Talk to an insurance expert
Health insurance isn’t the easiest to understand. If you have questions about Premium Only Plans, or any other type of insurance offerings, contact the experts at Health Benefits Associates. We’ll walk you through the various options and help you choose the one that best fits your unique situation.
Call Health Benefits Associates today at 775-828-1216 to talk to a local group insurance expert.
Premium Only Plan (POP) frequently asked questions
Looking for more information about Premium Only Plans? Here are some of the most frequently asked questions about POPs:
Can employees make pre-tax contributions to a Health Savings Account with a POP?
Yes, employees can contribute to a Health Savings Account (HSA) on a pre-tax basis through a Premium Only Plan.
Does a POP benefit employers who cover 100% of employee premiums?
No. The tax savings from a POP are based on employee contributions toward the coverage. If your employees don’t contribute to insurance premiums, there won’t be any savings for either employees or employers.
With that said, employers may still be able to deduct coverage costs on their business taxes. But it’s best to consult a tax professional for specific guidance.
Do all the company’s employees have to participate?
No. Employees can decide whether they want to participate in the POP.
Who is not eligible to participate in a POP
There are a few people who won’t be eligible to participate in a POP:
- Partners in a partnership
- 2% shareholders in an S-corp
- Sole proprietors
Everyone else is eligible to participate in a company’s Premium Only Plan.
