Why Start A Section 125 POP Plan?

Why Start A Section 125 POP Plan?

The idea of an employee benefit plan that results in a win-win situation for both employers and employees may sound too good to be true for many. After all, there is no longer such a thing as a “free lunch” these days – everything comes at a cost.

Well, Section 125 POP Plans may not be exactly free, but in this day and age where health care costs are sky-high, a POP plan may well be the next best thing. It allows employees to enjoy health insurance coverage without this eating up a good portion of their paycheck. In addition, it helps even small businesses provide employees a way of reducing the cost of insurance premiums without having the company shoulder the difference.

How It Works

So just how does a Section 125 Plan work? If both the company and its employees come out ahead, who gets to lose?

The Premium Only Plan or POP is the most basic of the employee benefit plans covered under Section 125 of the Internal Revenue Code. Section 125 plans are government-initiated cost savings measures that allow group insurance premiums to be withheld using pre-tax dollars. The POP in particular, provide for health insurance coverage which typically includes Group Life Insurance, Group Dental and Vision, Group Disability, and Group Life Term.

Key to the substantial savings with Premium Only Plans is the tax exemption for the amount deducted as insurance premium. As most of us are well aware of, payroll-related taxes involve three parties: the company, the employer, and the government. In the case of a Section 125 POP Plan, the government is simply bowing out of the three-way equation, forgoing its share in the employee’s income tax and the corresponding employer taxes to give way to tax savings for the other two parties.

Employer Benefits

By sponsoring a POP Plan, employers can:

  • See a significant reduction in payroll-related taxes (such as FICA or workers’ compensation) for those dollars ran through a POP plan;
  • Deduct POP plan fees as a business expense;
  • Pave the way for increasing the employee’s share in the cost of contribution without adversely affecting his net pay;
  • Then encourage employees to invest in retirement plans out of their tax savings.

Employee Benefits

By participating in the company’s POP Plan, employees can:

  • Avoid paying federal, state, local (if any), and Social Security taxes on the amount withheld for insurance premiums;
  • Enjoy increased spendable income;
  • Have some cushion from the effects of increased cost in premiums.

Contrary to what many employers assume, Section 125 POP Plans are easy to set up and maintain. What’s more, these plans can be easily integrated into the employer’s existing health services coverage. With the rising cost of health insurance, there’s no better time than now to look into implementing a POP Plan within your organization.

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