Section 125 Premium Only Plan (POP)

Let Employees Pay Their Health Insurance Contribution With Pre-Tax Dollars

If your employees contribute toward the cost of their group health insurance, a Section 125 Premium Only Plan — commonly called a POP plan — may allow their contribution to be deducted from their paycheck before taxes.

• Employees may pay less in federal income and payroll taxes and keep more of their paycheck.
• Employers may reduce payroll taxes because employee pre-tax contributions reduce taxable payroll.
• A POP is generally inexpensive and relatively simple to establish through a POP administrator.
• Once established, the employer simply processes the eligible employee premium contribution through payroll on a pre-tax basis.

The basic idea is simple: if employees are already paying part of their health insurance premium, why pay that contribution with after-tax dollars if it qualifies to be paid pre-tax?

Ask Steve About Adding a POP Plan

How Does a POP Plan Work?

• Your company offers group health insurance.
• The employer decides how much of the premium the company will pay.
• The employee pays the remaining eligible portion of the premium.
• With a properly established Section 125 POP plan, that employee contribution can generally be taken from payroll before taxes instead of after taxes.
• The POP administrator provides the plan documents, enrollment materials, instructions and administrative support.
• Your payroll company or payroll department then handles the employee deduction as instructed.

That’s really the heart of the program.

Why Would an Employer Set Up a POP Plan?

Employees Can Save

• Their eligible health insurance contribution may reduce taxable income.
• They may pay less federal income tax.
• They may pay less Social Security and Medicare tax when applicable.
• The result may be more take-home pay without the employer having to increase wages.

The Employer Can Save Too

• Pre-tax employee premium contributions can reduce taxable payroll.
• That may reduce the employer’s share of Social Security and Medicare payroll taxes.
• The savings continue as long as eligible employees continue making qualifying pre-tax premium contributions.

Want to see what the savings might look like?
Use the POP Tax Savings Calculator below.

Important Note for Business Owners

Special rules apply when the person participating in the POP is also an owner of the business.

• Sole proprietors generally cannot personally participate.
• Partners and LLC members taxed as partners generally cannot personally participate.
• More-than-2% shareholders of an S corporation generally cannot personally receive Section 125 treatment.
• The business may still be able to establish a POP for its eligible employees.

Other owner-employees may qualify depending on how the business is structured. Check with the POP administrator, payroll company or tax adviser when an owner will personally participate.

How Do I Set Up a POP Plan?

If employees will be contributing toward their group health insurance premium, let me know when we are setting up your group coverage.

• I can help determine whether a POP option is available with the group health plan.
• The POP administrator provides the formal plan documents and setup materials.
• The employer follows the administrator’s instructions and coordinates the pre-tax deduction with payroll.
• Keep the plan documents and employee elections with your company records.

You do not have to become a Section 125 expert just to establish a basic Premium Only Plan.

Email Steve About Setting Up a POP Plan

[email protected]

POP Brochures & Additional Information

• Anthem Blue Cross — Employer’s Guide to the Premium Only Plan
  

   

  •  paychex.com making-sense-of-section-125-and-benefit-plans
  •  wikipedia.org Above-the-line_deduction
  • Get Instant Employer Group Quote
• IRS Publication 15-B — Cafeteria Plans
  • 26 U.S. Code § 125 – Cafeteria plans
  •  wikipedia.org/ Federal_Insurance_Contributions_Act  
    • Funds Social Security & Medicare
    • 26 U.S. Code Subtitle C Chapter 21 – FEDERAL INSURANCE CONTRIBUTIONS ACT
  • irs.gov/ understanding-employment-taxes
  • Employer’s Supplemental Tax Guide  15 A
  •  edd.ca.gov/ de231eb.pdf  taxation of employee benefits

Note: Carrier and administrator procedures, pricing and forms can change. Check current materials when establishing a new plan.