Employees like to hear that their benefit premiums will be coming out of their paycheck pre-tax! It lowers the tax liability on their salary and makes the total premium coming out feel like less than what was advertised. Employers win, too, as they save 7.65 percent on FICA taxes for every dollar an employee contributes pre-tax!
In order to handle your employees’ premium deductions this way, the IRS requires that you have a premium only plan (POP) in place. This is a type of section 125 plan.
Getting this set up involves creating a plan document, giving certain notices to employees, and conducting annual nondiscrimination testing. All of these pieces must be kept on file in case of an audit. Another important item to note is pre-tax benefit premiums for the employees means they can only enroll and add dependents at certain times in the year (one is during open enrollment and the other is if they have a qualifying life event like marriage, birth of a child, their dependent loses coverage elsewhere, etc.).
If you are interested in providing this pre-tax premium benefit to your employees, reach out to The BenefitWorks! We can provide additional information and ensure you are in compliance.
Premium Only Plans Overview
A premium only plan (POP) is the most basic and most popular type of Section 125 plan, which are often referred to as “cafeteria plans.” While there are different types of Section 125 plans, each provides employers and employees with the chance to save money by reducing their tax liabilities.
A POP plan allows employees to pay their portion of insurance premiums with pre-tax dollars. Benefits that are typically offered within a POP plan include health, dental, vision, accidental death and dismemberment, short- and long-term disability, and group life insurance up to $50,000.
With a POP plan, employees have the option of choosing an amount of pre-tax salary that will be withheld from their wages for insurance premiums. Depending on the amount they elect, employees can save up to up to 40 percent on their payroll deductions due to savings on Medicare, Social Security and unemployment taxes (depending on the state). As a result, employees have more money to take home each pay period. For employers, POP plans can decrease company payroll expenses and federal and state tax liabilities. For every dollar an employee contributes into a POP, employers save 7.65
percent on FICA taxes—a substantial financial savings. In addition, employee morale may improve since their take home paychecks are larger.
While POPs can save costs, it is important to be aware of the potential disadvantages of these plans for both employees and employers.
- Since a POP plan decreases an employee’s taxable income, it may also reduce other benefits, like Social Security, that are calculated using an employee’s income.
- Employers are responsible for the implementation and maintenance costs associated with a POP plan.
- Often, the tax savings gained covers most or all of the cost of the plan administration. Still, administering a POP plan is another responsibility for already busy HR professionals.
- While POPs can offer tax savings to employees, they do not offer the same advantages of flexible spending accounts (FSAs), which allow employees to use FSA funds for qualified medical expenses in order to help offset their out-of-pocket costs. Employees may find POP plans to be less comprehensive than FSAs or other health care account options potentially offered at other companies.
Employees are only eligible to enroll in POPs during your annual open enrollment period, within a specified date for new hires or after a qualifying event (marriage, birth of a child, etc.). Employers are required to provide participants with a summary plan description (SPD) that explains the plan’s benefits, claims review procedure and participants’ rights.
In addition, employers offering a POP should perform nondiscrimination testing annually to make sure the benefit plan does not discriminate in favor of certain highly compensated or key employees. A POP test is deemed to satisfy the Section 125 plan nondiscrimination requirements if it passes an eligibility test. All tests should be kept on file in case of an audit.
If you are interested in setting up a POP or want more information, contact The BenefitWorks today.