Home Contact Login

Compliance Blog

Did you Know?

Annual Non-Discrimination Testing is included in all your testing software at no additional cost.

Learn More

Clients Love Tax Free Premiums

December 28th, 2010 • 0 Comments • Posted by admin

Benefits employees as well as employers

Employees can immediately increase their take-home pay and realize significant tax savings by participating in a Section 125 Premium Only Plan (POP), often referred to as a Cafeteria Plan. With a POP, employees’ health insurance premium contributions and out-of-pocket medical expenses are automatically deducted from their paychecks before income taxes are taken out. This in turn reduces their taxable income, which lowers their taxes and increases their take-home pay. POP employer advantages include lower payroll taxes, meaning more company funds can be used for other business needs.

See how an employee with a monthly gross salary of $3,200 benefits from participating in a Tax Free Premiums POP. Of note, deducting her POP contributions before her income taxes are calculated moves this employee into a lower tax bracket!

For Employees


Monthly gross pay $3,200 $3,200
Pre-tax health insurance premium contribution $500 $0
Taxable monthly income $2,700 $3,200
Applicable income taxes $783* $928*
After-tax insurance premium cost $0 $500
Net spendable income $1,917 $1,772
Increase in monthly spendable income $145
Increase in annual spendable income $1,740

For Employers


Average employee premium pre-tax contribution $3,000
Number of employees x 20
Total employee annual contributions $60,000
FICA factor (Medicare and Social Security) x .0765
Estimated annual employer FICA savings $4,590

How a Premium Only Plan (POP) works

A POP is a simple, IRS-approved change in your payroll process that allows you to use pre-tax salary dollars to pay your employees share of benefit premiums. Any size employer can take advantage of this special provision of Section 125 of the IRS code.

Automatic compliance

Many states legally require employers to sponsor a POP if their employees pay any portion of their health insurance premiums. However, it is common for companies to misplace their POP documentation, or they may have a POP document on file but it is out of date. Often companies fail to realize the need for this document even though they are currently deducting their employees premiums pre-tax. In the event of an audit, this could lead to expensive fines and legal fees. Tax Free Premiums makes it very easy to reinstate an existing POP, or create a completely new one. With our automated and real-time updates, companies can be in compliance in less than five minutes. And ongoing monitoring by our specialized legal team ensures that changes needed for a company to remain in compliance are done automatically—we make it easy to stay in compliance.


 

Leave a Reply

Your email address will not be published. Required fields are marked *