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Everything You Need to Know About Premium-Only Plans (POPs)

Lauren Hargrave · April 18, 2022 · 5 min read

Premium only healthcare plans

Premium-Only Plans (POPs) are benefits plans that allow employees to allocate a part of their pre-tax salary to pay for insurance premiums. POPs are part of a group of IRS-defined benefits known as Section 125 cafeteria plans which provide a vehicle for employees to choose whether they want to receive their compensation in the form of cash or benefits. Another type of Section 125 benefits plan you might be familiar with is a 401k.

With a POP, employees can save money on income taxes and up to 40% on the cost of premiums (depending on their tax bracket) and employers save in payroll taxes for each dollar employees contribute. Both employers and employees can contribute to a POP and both benefit in doing so.

Employer advantages of offering a POP

There are several advantages for employers that offer a POP. The first and probably most attractive is that employers save money in payroll taxes. For every dollar that employees contribute to their POP account, employers save 7.65%. That means if each employee diverts $200 of their salary each month, that employer saves $15/month or $180/year per employee.

The other advantages include: giving current and future employees an attractive benefit that can help recruit and retain talent, and satisfying an employer mandate to offer health insurance while also enabling employees to purchase a health plan that might better suit their needs.

POP benefits for employees and participants

First and foremost, employees and plan participants benefit by saving money on income taxes and the overall cost of medical care. Because of these cost savings, participants might be able to purchase a more comprehensive health plan that better fits their needs. Which means they not only save money on the income taxes they would have otherwise paid for the premiums, but they could potentially save on medical treatment down the road by having better health insurance.

Employees can use their POP to pay for group and individual:

  • Medical insurance

  • Dental insurance

  • Vision insurance

  • Disability insurance

  • Term Life Insurance

How to remain compliant with your plan

Since Section 125 Premium-Only Plans are regulated by the IRS and must follow ERISA rules, there are some hoops employers must jump through in order to remain compliant and maintain their plan’s tax-advantaged status.

  • Master Plan Document and Adoption Agreement. These give the legal and benefits details of the plan and include: the benefits offered, who’s eligible to participate, the manner of contributions, other legal notices. This must be updated at least every 5 years to reflect any plan or regulatory changes.

  • Summary Plan Description. This is a simplified version of the master plan document and adoption agreement meant to inform employees as to the benefits they’re being offered and how to access them.

  • Must perform annual discrimination tests to ensure the POP doesn’t disproportionately favor highly compensated or key employees. Highly compensated employees are defined as: officers of the company, shareholders owning more than 5% of the voting power or shares, anyone who earns more than $130,000/year and is in the top-paid 20% of employees. Key employees are defined as: officers of the company who earn more than $185,000/year or an employee who owns 5% or more of the business or owns 1% or more of the company while earning an annual pay of more than $150,000. The designation of “highly compensated” and “key” extends to the spouse, children and other dependents of the participating employee.

The ERISA non-discrimination rules state that the POP can’t favor highly compensated or key employees as to:

  • Eligibility

  • Benefits contribution

  • Nontaxable benefits provided to key employees may not exceed 25% of the nontaxable benefits provided for all employees.

If your POP fails the discrimination tests the highly paid or key employees participating will lose the pretax treatment of their contributions and will have to pay income taxes on the total value of the benefits they could have elected to receive. Employees who aren’t highly compensated or “key” won’t be affected.

ERISA rules can be complicated for employers to navigate so they should consult with an experienced benefits attorney before putting their POP together.

How to save on FICA taxes with a Premium-Only Plan

Saving on FICA taxes with a POP is simple – encourage your employees to contribute! Employees tend to like participating in benefits they understand, so if you’re introducing a new POP, make sure you clearly communicate with your workers. Make sure they know what benefits they’re being offered, how to access them and how they can save money. Then provide the resources to answer any questions they have.

Get your health savings up and running with Lively

Premium-Only-Plans can be a great way for employers to help employees reduce the cost of medical care and other types of insurance and they can be paired with Flexible Spending Accounts (FSAs) to provide employees even further savings. But they’re not compatible with Health Savings Accounts (HSAs). If you’re looking for HSA-compliant health plans, check out Lively's guide to High Deductible Health Plans (HDHPs). It’ll give you all the information you need to get the plan you want.

Lauren Hargrave

Lauren Hargrave

Lauren Hargrave is a writer from San Francisco who focuses on technology, finance and wellness. She follows comedians like most people follow bands and believes an outdoor sweat session can cure almost any bad mood. She’s also been writing her first novel for so long, her mom doesn’t ask about it anymore.

piggy bank on pink background


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Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.



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