PREMIUM ONLY PLANS FOR YOU AND YOUR EMPLOYEES
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.
A POP is a simple type of Section 125 cafeteria plan that allows health insurance premiums to be paid pre-tax, creating immediate payroll tax savings and higher employee take-home pay.
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 through a Section 125 cafeteria plan).
- The total amount of employee contributions for benefits reduces your taxable payroll.
- 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.
Employers also benefit from reduced FICA and FUTA liabilities, creating measurable payroll tax savings with each pre-tax employee payroll deduction.
Compliance Reminder
POP plans require a written Section 125 plan document and annual nondiscrimination testing to remain compliant. PBS provides POP plan administration, documentation, and testing support so you stay audit-ready.
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.
Regular corporations, partnerships, S corporations, LLCs, professional corporations, and nonprofits can all sponsor a POP and realize payroll tax savings when employees elect pre-tax premiums.
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.
PBS streamlines setup, coordinates with your payroll provider, and supplies employee communications so you can launch quickly and compliantly.
Employer Payroll Savings Example
| Your Company - 20 Participants | Without POP | With POP |
|---|---|---|
| Average Pre-Tax Contribution | $0 | $3,000 |
| Number of Employees | x 20 | x 20 |
| Total Annual Pre-Tax Contributions | $0 | $60,000 |
| FICA (Medicare & Social Security) | x 0.0765 | x 0.0765 |
| Total Annual FICA Savings (Estimate) | $0 | $4,590 |
Result
By moving employee health insurance premiums to pre-tax, the employer saves an estimated $4,590 in FICA annually on this scenario alone.
Employee Tax Savings Example
| Your Employee | Without POP | With POP |
|---|---|---|
| Annual Salary | $32,000 | $32,000 |
| Annual pre-tax contribution | 0 | $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. Employees effectively pay health insurance premiums with pre-tax dollars, lowering out-of-pocket costs and increasing net pay without an employer pay raise.
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.
Common premiums included under a POP are medical, dental, vision, and certain supplemental plans paid through payroll deductions; PBS confirms eligibility during implementation.
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. PBS provides a turnkey POP plan document, Summary Plan Description, employee election forms, and enrollment templates to simplify rollout.
Employers should also ensure compliance with applicable laws and regulations. For instance, the plan must meet specific requirements under Section 125 of the Internal Revenue Code, including nondiscrimination rules that prevent favoritism towards highly compensated employees. We also coordinate annual nondiscrimination testing and keep your documentation current each plan year.
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.
PBS integrates with payroll to automate pre-tax employee payroll deductions and provides ongoing support to HR for updates, mid-year changes, and plan renewals.
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.
Ready to launch a compliant Section 125 POP and start saving on payroll taxes?