Section 125 Premium Only Plan (POP)

• Pre-tax premium savings for employees. Payroll tax savings for employers.
  Internal Revenue Code  (IRC) Section  §125 

   

  • Calculate your Savings  FICA Tax 
  • POP Brochure & Explanation
    • Video Explanation for Employers
      • Employees
• Already have a plan? I can review whether it is set up correctly and whether you are actually capturing the available tax savings.
•  
• 
  Email Steve for Section 125 Help
  

[email protected]

“Serving CA employers since 1975″

Who Can Use a Section 125 POP Plan?

A Section 125 Premium Only Plan allows an eligible employee to pay certain health insurance premiums with pre-tax compensation. This can reduce the employee’s federal taxable income and, when applicable, Social Security and Medicare wages. The employer may also save its share of applicable payroll taxes.

What if you own the business?

Being an owner does not automatically tell you whether you can personally use the POP plan. The important question is how the business is taxed and whether you are treated as an employee for Section 125 purposes.

• Regular employees: Generally may participate if eligible under the employer’s written Section 125 plan.
• More-than-2% S corporation shareholders: Generally cannot make their own health insurance premium contribution through a Section 125 salary reduction. Separate S corporation health insurance deduction rules may apply.
• Sole proprietors: Generally cannot personally participate in their own Section 125 plan, although they may establish a plan for eligible employees.
• Partners and LLC members taxed as partners: Generally cannot personally participate as employees in the Section 125 plan, although eligible employees of the business may participate.
• Other owner-employees: Eligibility depends on the entity, employee status, plan terms and tax rules. Check with your tax professional or plan administrator before assuming the owner’s own premiums qualify.

What if the company pays toward a Bronze plan and you choose Platinum?

Suppose the employer contributes a set amount toward employee health coverage, but an eligible employee chooses a more expensive plan and pays an additional $1,000 per month. If that additional $1,000 is an eligible pre-tax salary reduction under the Section 125 plan, enter $1,000 as the monthly employee premium contribution in the calculator.

For example, an eligible employee paying $1,000 per month is contributing $12,000 per year. The potential tax savings can be much greater than just the 7.65% FICA figure because the contribution may also reduce taxable income for income-tax purposes.

Special Rule for Owners and Highly Compensated Employees

A business should not assume that it can simply provide more favorable Section 125 benefits to the owner or other highly compensated employees. Cafeteria plans have nondiscrimination rules covering eligibility, contributions and benefits. The fact that an owner chooses a richer health plan is not necessarily the problem; the plan design, employer contribution and opportunity offered to similarly situated employees are what need to be reviewed.

What This Calculator Does — and Does Not — Estimate

The calculator estimates federal income-tax savings using the marginal rate you enter, optional state income-tax savings, regular employee Social Security and Medicare savings, and possible employer FICA savings.

It does not calculate workers’ compensation savings, FUTA or state unemployment taxes, Additional Medicare Tax, tax credits, deductions available to self-employed owners, or every federal and state tax consequence. Actual savings depend on the employee’s income, filing situation, business entity, payroll setup and plan design.

• IRS Publication 15-B — Employer’s Tax Guide to Fringe Benefits
• IRS — S Corporation Compensation and Medical Insurance

Questions? Email Steve

This information and calculator are for general educational purposes. Employers and owners should confirm tax treatment with their CPA, payroll provider or Section 125 plan administrator.

Before You Set This Up, Read This

A Section 125 Premium Only Plan can be simple, but only if it is set up correctly. Common problems include missing documents, payroll deductions not handled as true pre-tax deductions, and employers not understanding the compliance rules.

• No written plan document
• Payroll not truly set up pre-tax
• Employee elections not documented
• Compliance misunderstandings

Request a Quick Review

Quick Compliance Checklist

Use this quick checklist to make sure your plan is not missing a step that could reduce the tax savings or create a compliance problem.

• Written POP plan document is in place
• Employee elections are documented and stored
• Payroll deductions are truly pre-tax
• Employer payroll tax savings are being applied
• The plan is reviewed annually
• Non-discrimination rules are satisfied

Request Free Review

Start Here

How a Section 125 POP Plan Can Help

• Employees may pay eligible health insurance premiums with pre-tax dollars
• Employers may reduce certain payroll taxes on those pre-tax amounts
• Employees may see more take-home pay
• The plan can be simple, but it still needs proper documentation and administration
• Internal Revenue Code  (IRC) Section  §125

A POP plan can be attractive to small employers because it is often simpler than more complicated cafeteria plan arrangements. But simple does not mean automatic. The paperwork and payroll setup still need to be done correctly.

Already Have a Plan? Here Is What to Check

• Do you have a current written plan document?
• Are employee elections documented?
• Are payroll deductions set up as pre-tax?
• Are employer payroll tax savings actually being captured?
• Has the setup been reviewed recently?

Request a Quick Plan Review

Need Help With a Section 125 POP Plan?

Whether you are starting from scratch or reviewing an existing setup, I can help you understand the moving parts and spot issues before they become expensive mistakes.

Email Steve at [email protected]