Section 125 POP : The Basics
Whether you have a small, mid-sized, or large business, there’s a way to bring down your payroll tax costs and increase employees’ take home pay without sacrificing on their benefits – the Section 125 Premium Only Plan (POP).
What isSection 125 POP Plan?
The Premium Only Plan (POP) is the most basic option of the employee benefits program provided for in Section 125 of the US Tax Code, also known as a Cafeteria Plan. It gives qualified employees the opportunity to make contributions for their health coverage with the use of pre-tax dollars. Health insurance coverage for a POP Plan 125 includes Group Life Insurance, Group Dental and Vision, Group Disability, and Group Life Term.
An Effective Way to Save on Taxes
Because insurance contributions are deducted on a pre-tax basis, a POP Plan saves significant tax dollars for both employees and employers. This is perhaps the greatest benefit that the two parties can gain, and perhaps the most persuasive argument for establishing a Section 125 POP in any business.
For the premiums regularly paid for insurance coverage of employer-sponsored POP Plans, employees can realize savings on Federal Insurance Contribution Act (FICA) tax, as well as other federal, state, and local (if any) taxes. The resulting tax savings, which could be as much as 40% of the premium cost, can then augment employees’ take home pay, or be used to cover the cost of insurance premiums. Should there be a sudden increase in premiums, the tax savings could help cushion the effects such that employees will not see a substantial reduction in their net pay.
Employers on the other hand, are not required to pay the corresponding 7.65% FICA tax, .80% FUTA tax, and depending on the specific state may avoid SUTA or SUI or any state-mandated workers’ compensation tax for the amount contributed by the employee under a Section 125 POP Plan.
Aside from the reduction in tax expenses, a company can also benefit greatly from a Section 125 POP if it currently shoulders the bulk of the employees’ insurance premiums and want to transfer part of the burden of payment contributions to the employees themselves. With the implementation of a Premium Only Plan, employers can do this without having to make a hefty deduction from the employees’ take-home pay.
Employers: Who Are Considered as Qualified Sponsors?
Any type of employer can sponsor a Premium Only Plan — Sole Proprietors, Partnerships, Non-Profits, Regular Corporations, Professional Corporations, Limited Liability Corporations or LLCs, S Corporations, and C Corporations.
There is however, a prohibition in the regulations which specifies that a sole proprietor, partner, members of an LLC, individuals owning more than 2% of an S corporation, or their respective spouses and dependents, cannot participate in a Section 125 POP Plan. But since they are eligible to sponsor a POP, savings from payroll taxes can still be gained.
Employees: How to Enroll In and Pay for a Section 125 POP
According to federal regulations, employee elections for those wish to participate in a company’s Section 125 POP Plan should be made only on the following instances:
● During the designated annual enrollment period;
● Within a specified time frame following the employment date for new hires; or
● On the date when the employee becomes eligible under the plan.
Most POP plans establish automatic or default enrollment meaning all qualified employees once given notice are automatically enrolled in the POP plan but depending the plans specific documents gives the option to waive the benefit. It’s worth noting that employees are not required or obliged to participate in the company’s Section 125 POP. If an employee opts out of a Section 125 plan, any subsequent contributions made towards health care insurance shall no longer be considered on a pre-tax basis.
A Premium Only Plan can be started
at any time during the year. The plan must be a written document and notice of the plan must be given via Summary Plan Descriptions (SPD) to eligible employees. Many states require employers to sponsor a Section 125 POP if the employer requires the employees to pay any portion of their premiums. However all employers are required to have a Section 125 POP if they are deducting premiums on a tax-free basis.
Most plans are established on a calendar year basis however, the employer may also decide to start a short Plan Year at any given time. This is often a temporary option if the company or the employees want to start a Section 125 POP mid-year that coincides with the calendar year. For instance, if the plan year is January 1 to December 31 and the employer sponsors the plan in mid May it is possible to arrange for a short plan that will be effective June 1 to December 31 of the present year.