Premium Only Section 125 Plan

Premium Only Plan

If you are looking at restructuring your benefit plans to help your employees save more, Premium Only Plan (POP) could be a smart solution. With health care costs continually on the rise, the POP can not only help augment your employee benefits package, but it also offers certain employer and employee tax advantages.

What is a ‘Premium Only Plan’ (POP)?

A POP, provided by U.S. code Section 125 of Revenue Act, permits employees to pay their share of the premiums for certain health and welfare benefits with pre-tax salary reductions, rather than paying for these benefits with post-tax dollars. Any employer - sole proprietors, regular corporations, partnerships, Limited liability companies (LLCs), professional corporations and even not-for-profits can save money on payroll taxes by establishing a Premium Only Plan. Implementation of your POP requires a simple change in the way you calculate payroll taxes and goes a long way in benefitting you and your employees.

How does it benefit your employees?

With a POP, taxable payroll is reduced by the total amount of employee contributions for benefits. Employees don't pay FICA (Federal Insurance Contributions Act), federal, or where applicable, state or local taxes on money used to pay for their portion of employer-sponsored insurance premiums or contributions to their Health Savings Account (HSA). Lower taxable payroll means lower payroll taxes, allowing employees to realize an increase in take-home salary.

Illustration:

Your Employee	Without POP	With POP
Gross Annual Salary	$40,000	$40,000
Pre-tax contribution	$0	$3,000
Taxable Income	$40,000	$37,000
Taxes (assumed @ 30%)	-$12,000	-$11,100
Post-tax contribution	-$3,000	$0
Take-home Salary	$25,000	$25,900
Increase in take-home		$900

How does it benefit you as employer?

Increase in take-home salary obviously improves your employee’s satisfaction levels and retention ratios. But there is more you can look forward to as a business owner. Any amount that employees deduct pre-tax for their premiums is subtracted from their total wages, which in turn reduces the amount of employer payroll taxes that you have to pay. With a POP plan employers do not have to pay the FICA/FUTA taxes (charged at 7.65%) on dollars that employees use toward the cost of their individual or group health insurance premiums. Depending on the state, employers may also be eligible for workers compensation savings.

Illustration:

You (Business Owner)	Without POP	With POP
Average Pre-Tax Contribution	$0	$3,000
Number of Employees	25	25
Total Pre-Tax Contributions	$0	$75,000
FICA (Medicare & Social Security)	x 0.0765	x 0.0765
Total FICA Savings (Estimate)	$0	$5,738

Sounds great. How do I setup a Section 125 POP?

To establish a Section 125 POP, you need to put the details of your plan in writing, sign it and file it within the company records. There is no separate requirement to file the Section 125 plan document with any government agency. Also, once you have a Section 125 POP, the IRS requires you to submit to non-discrimination testing once a year to avoid the abuse of these benefits by highly compensated employees. Nondiscrimination testing is a big factor in way of compliance.