Section 125 Premium Only Plan (POP) – Implementation and Compliance

Section 125 Premium Only Plan (POP) – Implementation and Compliance

Taxfreepremiums blog

Few people would argue that a Section 125 Premium Only Plan is a great way of realizing substantial tax savings not just for employees but employers as well. This is because a Section 125 POP gives employees the opportunity to contribute to their insurance coverage on a pre-tax rather than an after-tax basis. Under such a scheme, both employers and employees get to pay lesser taxes.

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.

Even with such obvious benefits however, Section 125 POP Plans remain greatly undervalued and underused by many small businesses. One reason for this could be because business owners are simply unaware that such an employee benefit plan exists. And for those employers who do know about it, they mistakenly assume that Premium Only Plans are difficult to set-up and even more difficult to maintain.

But this isn’t exactly the case. With the right guidance, a POP Plan for employees can be set up in no time and with little adjustment in the company’s existing payroll process. Regular compliance and updating of documents is also included with most services so that the whole process is seamless and trouble-free.

That said, we’ll outline the basic administrative procedures needed to comply with Section 125 POP Plan requirements:

  • POP Plan Document. In addition to defining the particular plan year covered, this document specifies all pertinent details about the coverage and eligibility under the plan, election procedures, and rules of participation.

  • Summary Plan Description (SPD). The SPD provides a summary of the important details of the POP Plan Section 125 such as procedures for filing of claims, and other information on the sponsorship and administration of the POP. This document should then be distributed to all plan participants as well as to their beneficiaries upon eligibility and again once every five years, or whenever a change is made.

According to Section 104b of the Employee Retirement Income Securities Act of 1974 (ERISA), the regulation crafted primarily to protect the rights of participants and dependents of employee benefit programs, a copy of the SPD should be distributed to participants within 90 days of participation, or no more than 120 days of the plan becoming subject to ERISA. Beneficiaries should also be given the SPD within 90 days of eligibility.

  • Compliance and Updating. With tax and benefit laws constantly being modified, the employer carriers the responsibility of ensuring that the company’s Section 125 POP Plan is updated in accordance with the latest legislative changes.  If the employer makes changes to entity type, employer address, or other key elements of the document these items all have to be amended for the document to remain in compliance.

For tax-favored status to exist the Department of Labor requires a written document that is current and in compliance with the statute of the time.  Failure to comply could result to a loss of the employer’s tax-favored status.

Learn more about how TaxFreePremiums can help your company establish, or update your Section 125 POP in a matter of minutes and at the best value available.  All compliance updates are included in the annual fee and provided real-time.