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A premium only plan (POP) is the most basic – and most popular – type of Section 125 Cafeteria Plan that allows employer-sponsored premium payments to be paid by the employee on a pre-tax basis instead of after-tax. Many employers are not compliant with this important IRS regulation because they don't have a formal POP document memorializing their plan. Employers often aren't aware of this requirement and payroll processors assume everything is in place and take deductions from employees on a pre-tax basis. A POP plan allows an employer to take pre-tax deductions on coverage that may include the following:
- Group Medical
- Group Dental
- Group Vision
- Group Disability
- Group Term Life Insurance
The result is a tax savings for employers and employees alike!
Why offer a POP?
A POP provides a cost-effective alternative to satisfy an employer's legal obligation when offering a pre-tax option for employer-sponsored benefits such as group insurance, or a Health Savings Account (HSA).
Employer Advantages:
- Reduces payroll taxes (including Social Security and Medicare): for every dollar of employee contribution into the POP, employers save 7.65% FICA taxes
- Saves on the cost of administration: the tax savings gained often covers the entire cost of Plan administration
Example:
| Number of POP Participants | National Average Paid Employee Premiums | Plan Year | Pre-Tax Dollars Spent Per Year | |||
| 30 | x | $300 per month | x | 12 months | = | $108,000 |
Employer FICA savings = $8,262 annually
Employer Disadvantages:
- Responsible for the cost, establishment and maintenance of the plan
Employee/Participant Advantages:
- Reduces income taxes (Federal, State, and FICA): pre-tax payroll deductions result in a lower taxable salary
- Increases take-home pay
Employee/Participant Disadvantages:
- May not change election throughout the plan year without a qualified event
- May reduce other benefits that are calculated using employee’s income, ie. Social Security or retirement benefits
Remain Compliant With Our POP Service:
- Every cafeteria plan must have a written plan document
- Must be formally adopted by employer prior to first day of plan year
- No cafeteria plan document = adverse tax consequences
- Must notify employees / allow option for participation
- Annual Nondiscrimination Rules/Testings – tests are designed to ensure plan does not discriminate in favor of highly compensated employees
NOTES:
S-Corp Owner - with 2% or more stock cannot participate in plan (Attribution Rules apply which also excludes a spouse, children, parents and grandparents of a more than 2% shareholder)
C-Corp - subject to non-discrimination testing
LLC, LLP, Partnership, Sole Proprietorship owners - cannot participate in the plan
PC, PLC, PLLC - depends on how taxes are filed.
C-Corp - subject to non-discrimination testing
S-Corp - No
| Section 125 - Premium Only Plan Through our Vendor | ||
| # of Eligible Employees | Year 1 | Year 2 and After |
| 2+ | $100 | $100 |
Vendor Generates and Provides:
- Employer Plan Document
- Employee Summary Plan Description (SPD)
- Non-Discrimination Test instructions/worksheets
Other types of Section 125 Plans include:
- Flexible Spending Accounts
- Full Cafeteria plan
- Simple Cafeteria Plan (Employers with an average of 100 or fewer employees during either of the two preceding years). Treated as meeting nondiscrimination rules if certain criteria are met.
How can we help you?
Contact info@GoCGO.com
This blog is for educational and/or informational purposes only and does not constitute legal advice.
