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Premium Only Plan (POP)  

If you're looking for a simple and a cost-effective way to strengthen your benefits program without establishing a full-fledged Section 125 Cafeteria Plan, consider setting up a Premium Only Plan (POP). A Premium Only Plan, the simplest component of a Section 125 plan, can be established as a standalone program at virtually not cost to your company.

What is a Premium Only Plan?

Premium Only Plans (POPs) are designed to help a business and its employees reduce the tax expense associated with paying group insurance premiums. Under a Premium Only Plan, employees may elect to pay their portion of the their health insurance premiums on a pre-tax, rather than on a post-tax basis. This results in tax savings for both you and your employees. 

How do employers benefit from establishing a Premium Only Plan?

Premium Only Plans allow businesses to save Social Security (FICA), as well as federal unemployment taxes (FUTA) and generally, state unemployment taxes, on the money employees contribute to their premiums. Contributions for other coverages, such as Workers' Compensation, may also be reduced, because they are based on employees' taxable salaries. Employer tax savings can average from 7% to 10 % of employees' contributions.

Here's an example:

Assume that an employer has 20 participating employees, each contributing $1,800 in pre-tax insurance contributions annually. The employer's annual FICA savings alone will be $2,754.

Because the cost of establishing a Premium Only Plan is so low, a POP will generally pay for itself in short order.

Pre-tax Section 125 Premium Only Plan Contributions

$ 1,800

        Number of employees

x 20

        Total employee contributions


        FICA percentage

x .0765

        Estimated annual FICA savings

$ 2,754

How do employees benefit from participation in a Premium Only Plan?

Premium contributions are deducted automatically from employee salaries before taxes are taken out.  This results in savings in their FICA, federal and -- in most cases -- state income taxes. Because their taxable income is reduced by the amount they contribute, employees pay less taxes on the money they earn, thus, increasing their take-home pay. Employees can save as much as 17% to 40% of their pre-tax premium deductions, depending on their tax bracket.

Here's an example:

Assume that an employee is paid $2,000 per month, and her pre-tax premium contribution for her family coverage is $400. The table below shows how much additional spendable income she will have at the end of the year if she participates in her employer's Premium Only Plan.


Participating   in POP

Not Participating in POP

         Monthly gross pay



         Pre-tax insurance premium contribution



         Taxable gross pay



         Applicable taxes (approximate)



         After-tax insurance premium cost



         Net spendable income






         Increase in monthly spendable income



         Increase in annual spendable income



Who can participate in a POP?

Employees of C Corporations, S Corporations, Limited Liability Companies (LLCs), Partnerships, Sole Proprietors, Professional Corporations, and Not-for-Profits can all reduce payroll taxes by participating in a Premium Only Plan. While shareholders owning more than 2% of an S Corporation, Sole Proprietors, Partners and Members of an LLC (in most cases) may not participate in the POP, owners may still benefit from the savings on payroll taxes they realize by sponsoring the plan for their employees.

How do I set up a POP?

In order to take pre-tax contributions on health care premiums, you must have a plan document, and perform discrimination testing. Benefit Magic can help you select a Third Party Administrator, who will provide these services for you at a reasonable price.



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