The Section 125 Premium Only Plan (POP) saves you and your employees money by reducing payroll taxes, making it a valuable employee benefit. It works by making one simple adjustment in your payroll process – employees pay their portion of the insurance premiums on a pre-tax basis rather than on an after tax basis.

The Premium Only Plan reduces your taxable payroll by reducing your employees’ taxable income. So, both you and your employees pay less in taxes.

Tax Benefits for Employers & Employees


IRS-sanctioned Premium Only Plans were created by the Revenue Act of 1978 and are governed by Internal Revenue Code Section 125. With a Premium Only Plan:

Employees don’t pay FICA, 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).

  • Employee’s tax savings help defray the cost of insurance premiums.
  • Employees can increase their take home pay (participating in a cafeteria plan for instance).
  • Your taxable payroll is reduced by the total amount of employee contributions for benefits.
  • Lower taxable payroll means lower payroll taxes.
  • You can allow employees to enjoy an increase in take-home pay and take credit for a terrific new benefit plan, while still saving money on taxes through a POP plan.
  • You can increase your employees’ share of insurance premiums without negatively affecting their take-home pay.

Any employer can sponsor a Premium Only Plan.

Regular corporations, partnerships, S corporations, Limited liability companies(LLCs), sole proprietors, professional corporations, and not-for-profits can all save money on payroll taxes by establishing a Premium Only Plan.

Who can participate?

While regulations prohibit a sole proprietor, partner, members of an LLC (in most cases), individuals owning more than 2% of an S corporation, or their spouse and dependents, from participating in the POP, they may still sponsor a plan and benefit from the savings on payroll taxes.

Begin saving taxes immediately.

You can start your Premium Only Plan at any time. Plus, you can have a short plan year for the first year so that future plan years coincide with either your fiscal year or the calendar year.

Your Company - 20 ParticipantsWithout POPWith POP
Average Pre-Tax Contribution$0$3,000
Number of Employeesx 20x 20
Total Annual Pre-Tax Contributions$0$60,000
FICA (Medicare & Social Security)x 0.0765x 0.0765
Total Annual FICA Savings (Estimate)$0$4,590

Employee Tax Savings Example

Your EmployeeWithout POPWith POP
Annual Salary$32,000$32,000
Annual pre-tax contribution0$3,000
Taxable Income$32,000$29,000
Estimated Taxes-$9,808-$8,888.50
Annual after-tax contribution-$3,000$0
Net take-home page$19,192$20,111.50
Increase in take-home page$919.50

The example above demonstrates the potential tax savings for both employers and employees with a Premium Only Plan. By reducing an employee’s taxable income through pre-tax contributions, they can save a significant amount of money on income taxes. 

In addition to the tax benefits, offering a Premium Only Plan can also be an attractive benefit to employees. It allows them to have easy access to affordable healthcare options and encourages them to take advantage of employer-sponsored insurance plans or contribute to their HSA. 

Implementing a Premium-Only Plan in Your Business

Implementing a POP is relatively straightforward. Employers must establish the plan and communicate the details to their employees. This includes providing information on how the plan works, the benefits of participating, and any enrollment periods or deadlines.

Employers should also ensure compliance with applicable laws and regulations. For instance, the plan must meet certain requirements under Section 125 of the Internal Revenue Code, including nondiscrimination rules that prevent favoritism towards highly compensated employees.

It is also important for employers to work closely with their benefits administrator or payroll provider to ensure that the plan is properly administered. This includes processing the pre-tax deductions accurately, providing necessary documentation to employees, and ensuring timely reporting and compliance with tax regulations.

Contact PBS for Your Premium Only Plan Today

A Premium Only Plan offers a win-win situation for both employers and employees. For employers, it provides cost savings in the form of reducing payroll taxes and can help attract and retain talented employees by offering a valuable benefit. Employees, on the other hand, can take advantage of tax savings on their healthcare expenses, resulting in increased take-home pay.  

Implementing a Premium Only Plan (POP) demonstrates an employer’s commitment to enhancing employee well-being and financial stability. This plan not only helps employees save on taxes, thereby increasing their net take-home pay, but it also encourages the utilization of employer-sponsored insurance plans or contributions to Health Savings Accounts (HSAs). Employers benefit, too, from enjoying significant savings on healthcare expenses while boosting their attractiveness as an employer. 

To discover how a Premium Only Plan can benefit your company, contact Progressive Benefit Solutions today to explore your options.