Premium Only Plans (Section 125 / POP)
A Premium Only Plan — also called a POP or Section 125 cafeteria plan — is a benefit plan structure authorized by Section 125 of the Internal Revenue Code that allows employees to pay their share of employer-sponsored insurance premiums with pre-tax dollars. Without a POP, employees pay their portion of health, dental, vision, and other benefit premiums with after-tax dollars. A properly structured Section 125 plan eliminates the income and payroll taxes on those contributions, increasing the take-home pay of employees at no additional cost to the employer.
How a Premium Only Plan Works
Under a POP, employees elect to have their benefit premium contributions deducted from their paycheck before federal income tax, Social Security tax (FICA), and Medicare tax are calculated. The pre-tax treatment reduces the employee's taxable income, which means they pay less in taxes and effectively receive a larger portion of their paycheck even though their gross pay has not changed. The employer benefits as well, because payroll taxes are calculated on a lower taxable wage base — reducing the employer's share of FICA and Medicare taxes on every employee who participates.
What Premiums Can Be Paid Through a Section 125 Plan
A POP can be used to pay employee contributions for a wide range of employer-sponsored benefits on a pre-tax basis, including:
- Group medical / health insurance premiums
- Group dental insurance premiums
- Group vision insurance premiums
- Group term life insurance premiums (up to IRS limits)
- Short-term and long-term disability premiums (with tax implications for benefits received)
- Accident, critical illness, and hospital indemnity premiums (where permitted)
Full Cafeteria Plans and FSAs
A Premium Only Plan is the simplest form of a Section 125 cafeteria plan. Employers can also offer a full cafeteria plan that adds Flexible Spending Accounts — healthcare FSAs and dependent care FSAs — which allow employees to set aside additional pre-tax dollars beyond insurance premiums. The POP is the foundation on which a more comprehensive cafeteria plan is built.
Compliance Requirements
Section 125 plans must be established under a written plan document and must comply with IRS nondiscrimination rules that prevent the plan from disproportionately benefiting highly compensated employees. Annual nondiscrimination testing is required for plans that include FSAs. The plan must also specify an annual election period during which employees make their benefit elections.
Industry Considerations
A Premium Only Plan is one of the simplest and most universally beneficial steps any employer can take to improve the value of its benefits package at essentially no cost. Any employer that sponsors group health insurance and requires employees to pay a portion of the premium should have a Section 125 plan document in place. If your organization does not currently have one — or if your existing plan document has not been updated recently — a consultation with Etowah Insurance Group is the right starting point.
