- What is a “Section 125 Plan” or “cafeteria plan?”
- What is a Premium-Only-Plan (POP)?
- What are the benefits to employers of setting up a POP?
- What are the benefits to employees of setting up a POP?
- How much can I save with a POP?
- Who can participate in a POP?
- Who can set up a POP?
- What types of insurance can be purchased with a POP?
- Can an employer set up a POP and not offer or help pay for health insurance?
- How does an employer set up a POP?
- How much does it cost to set up a POP?
- What else should I keep in mind?
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1. What is a “Section 125 Plan” or “cafeteria plan”? |
| Section 125 plans are also known as cafeteria plans. The name refers to Section 125 of the Internal Revenue Tax Code. These plans allow employees to choose between receiving cash (in the form of earnings) and paying for health insurance and other qualified benefits with pre-tax earnings. The employee makes an election to reduce his earnings by the dollar amount of the health insurance cost, so income taxes and FICA taxes are not paid on the salary reduction amount.
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2. What is a Premium-Only-Plan (POP)? |
| A Premium-Only-Plan (POP) is a type of cafeteria plan that allows employees to pay for health insurance premiums with pre-tax dollars. POPs can only be used to pay for accident or health care insurance coverage, including medical, dental, and vision. They cannot be used to pay for any other medical expenses. Other types of qualified benefits can be paid for using pre-tax dollars if an employer sets up a Flexible Spending Account (FSA), another type of cafeteria plan.
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3. What are the benefits to employers of setting up a POP? |
| Employers benefit by paying less in taxes since they do not pay taxes on the pre-tax earnings used to pay for health insurance.
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4. What are the benefits to employees of setting up a POP? |
Employees save money on income taxes and FICA taxes since they do not have to pay these taxes on pre-tax earnings used to buy health insurance. Employees can use these savings to reduce the cost of buying health insurance.
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5. How much can I save with a POP? |
| To find out how much you and your employees can save when you set up a Section 125 plan, use our Section 125 Plan Calculator, located here.
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6. Who can participate in a POP? |
| Only employees who work for you can use a POP. Workers who have income and payroll taxes withheld by you are generally considered employees. Sole proprietors, self-employed individuals, partners, and directors of corporations are not considered employees under the tax code, and they cannot participate in a POP.
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7. Who can set up a POP? |
| Only employers can set up a POP. Employees cannot establish these plans themselves. A sole proprietor may sponsor a Section 125 plan for his/her employees, but he/she may not participate in this plan since a sole proprietor is not considered an employee under the tax code.
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8. What types of insurance can be purchased with a POP? |
| Accident and health insurance premiums can be paid for under a POP. Insurance and benefits that cannot be paid for using a POP include: group term life insurance over $50,000, short and long-term care insurance, fringe benefits, education assistance, scholarships, employer-provided meals and lodging, and dependent life insurance.
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9. Can an employer set up a POP and not offer or help pay for health insurance? |
| Yes. There is no requirement for an employer to offer health insurance or contribute to the cost of health insurance under a POP plan.
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10. How does an employer set up a POP? |
| You can either write this plan yourself, using a self-administration kit provided by payroll processing and other companies, or you can hire a company to write the plan for you. It is recommended that your POP be reviewed by your tax advisor.
The written POP should include the elements below. (This list is not intended to be an exhaustive explanation of the requirements for a POP, and should be used only as a guide.)
- A description of the benefits available through the plan;
- The POP’s rules of participation, and, specifically, a statement that all participants in the plan are employees;
- Description of how employees can participate in the plan or choose not to, as well as how and why they can change their participation status;
- Details on how employers can contribute, if they want to;
- Specific dates defining the plan year of the plan.
Once a plan is in place:
- Sign and date your written plan no later than the effective date of the plan.
- Share the written plan with all eligible employees no later than the effective date of the plan. Participation in the POP is voluntary. Those employees who want use pretax earnings to buy health insurance must agree to a salary reduction, so that you can withhold the appropriate amount of health insurance premium costs.
- Retain copies of the written plan and the employees’ election documents. The POP does not need to be filed with the Internal Revenue Service or New York State.
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11. How much does it cost to set up a POP? |
| There is no Internal Revenue Service (IRS) fee to establish a POP, but companies such as benefits administrators typically charge employers a one-time fee ranging from $100-$500 to set up and administer the POP. Changes to the POP can be made through these companies and sometimes carry additional fees.
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12. What else should I keep in mind? |
| Ensure that your POP does not discriminate among your employees. For example, the tax code requires that one or a few employees with higher salaries (highly-compensated employees) and part-owners (key employees) cannot benefit more from the POP than other workers. Specific “percentage” tests, or nondiscrimination tests, can be applied to check if this requirement is met, and a POP administrator can provide this service. Employers typically work with their payroll processing company or tax consultants to ensure the POP meets these and other IRS rules. For more information, read the IRS rules on Cafeteria plans located here: http://edocket.access.gpo.gov/2007/pdf/E7-14827.pdf
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