{"id":4348,"date":"2024-06-21T11:36:00","date_gmt":"2024-06-21T15:36:00","guid":{"rendered":"https:\/\/primepay.com\/blog\/section-125-premium-only-plans\/"},"modified":"2025-02-10T11:41:30","modified_gmt":"2025-02-10T16:41:30","slug":"section-125-premium-only-plans","status":"publish","type":"post","link":"https:\/\/primepay.com\/blog\/section-125-premium-only-plans\/","title":{"rendered":"Section 125 Premium Only Plans (POP): What Employers Should Know"},"content":{"rendered":"\n<p><span style=\"font-weight: 400;\">When creating a competitive benefits package, HR leaders usually look to their company\u2019s specific offerings. That\u2019s a strong strategy but it isn\u2019t the only way to retain your people and attract new talent.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">You should also consider the actual <\/span><i><span style=\"font-weight: 400;\">structure<\/span><\/i><span style=\"font-weight: 400;\"> of your benefits plan \u2013 specifically, whether a cafeteria plan that allows for pre-tax salary deductions for health and other benefits is beneficial for your employees and organization. While <\/span><a href=\"https:\/\/primepay.com\/learn\/payroll\/components-of-a-cafeteria-plan\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">cafeteria plans<\/span><\/a><span style=\"font-weight: 400;\"> can incorporate several benefit components, they can also be as simple as a premium only plan (POP).<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"jump-link-one\"><span style=\"font-weight: 400;\">What is a Premium Only Plan?<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">A premium only plan (POP) falls within the Internal Revenue Code\u2019s Section 125, which lets employees use some of their earnings before taxes to pay for group insurance and other pre-tax contributions. It\u2019s the simplest form of a cafeteria plan and a smart way for employers and employees to save on taxes.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Beyond the umbrella term of health insurance premiums, POPs can encompass various insurance products (including group term life insurance, disability insurance, and even dietary supplements), provided they align with the cafeteria plan\u2019s rules. <\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"jump-link-two\"><span style=\"font-weight: 400;\">Why You Should Offer a 125 Plan<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">Imagine your ideal benefits plan. Does it involve saving everyone money, empowering employees to be their best selves, or elevating your company\u2019s competitive edge?<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">If you answered any (or all), you\u2019re in luck. A POP is a win-win scenario where employees gain access to a cafeteria plan without bearing the full brunt of associated costs, and employers amplify their benefits offerings.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Moreover, integrating a 125 cafeteria plan nurtures your workforce and signals that you\u2019re committed to fostering a supportive and financially savvy work environment. Offering a POP allows you to:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span style=\"font-weight: 400;\">Save everyone on pre-tax deductions: Employers realize 7.65% in FICA tax savings, and employees average 25% tax savings.\u00a0<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">Invest in your team\u2019s financial well-being.<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">Set the stage for attracting the <\/span><a href=\"https:\/\/www.ramseysolutions.com\/business\/the-2022-smartdollar-employee-benefits-study\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">80% of candidates<\/span><\/a><span style=\"font-weight: 400;\"> who believe financial wellness is an integral part of a comprehensive <\/span><a href=\"\/blog\/how-to-set-up-a-small-business-employee-benefit-program\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">benefits package<\/span><\/a><span style=\"font-weight: 400;\">.\u00a0<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">Provide a menu of benefits that employees can tailor to their unique needs, enhancing their satisfaction and loyalty.\u00a0<\/span><\/li>\n<\/ul>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1058\" src=\"https:\/\/primepay.com\/wp-content\/uploads\/PrimePay-Employee-Benefits-Summary-with-FSA.jpg\" alt=\"PrimePay Employee Benefits Summary with FSA\" class=\"wp-image-4164\" title=\"\" srcset=\"https:\/\/primepay.com\/wp-content\/uploads\/PrimePay-Employee-Benefits-Summary-with-FSA.jpg 1920w, https:\/\/primepay.com\/wp-content\/uploads\/PrimePay-Employee-Benefits-Summary-with-FSA-768x423.jpg 768w, https:\/\/primepay.com\/wp-content\/uploads\/PrimePay-Employee-Benefits-Summary-with-FSA-1536x846.jpg 1536w\" sizes=\"auto, (max-width: 1920px) 100vw, 1920px\" \/><\/figure>\n<\/div>\n\n\n<p><\/p>\n\n\n\n<p class=\"has-text-align-center\"><i><span style=\"font-weight: 400;\">Allowing employees to <\/span><\/i><a href=\"\/software\/hr\/benefits-administration\/\" target=\"_blank\" rel=\"noopener\"><i><span style=\"font-weight: 400;\">select benefits<\/span><\/i><\/a><i><span style=\"font-weight: 400;\"> on their own time and for their unique needs adds value to the employee experience and ensures people will choose the plans and pre-tax savings that are right for them.<\/span><\/i><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"jump-link-three\"><span style=\"font-weight: 400;\">Maximizing Tax Savings with Cafeteria Plans<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">A 125 plan should be a part of your strategic financial planning, as it offers businesses and their employees a wealth of potential tax savings (pun intended). By skillfully navigating payroll taxes, a POP plan strengthens the financial defenses of both parties against unnecessary tax liabilities.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Whether it&#8217;s a <\/span><span style=\"font-weight: 400;\">health savings account<\/span><span style=\"font-weight: 400;\">, a flexible spending account, or even Archer medical savings accounts, pre-tax contributions made to these vehicles under a Cafeteria Plan can significantly reduce the tax burden.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">Employer Benefits: Reducing Overhead with POP<\/span><\/h3>\n\n\n\n<p><span style=\"font-weight: 400;\">The POP plan is a practical approach to managing overhead costs for employers. By embracing this plan, you can effectively shrink your taxable payroll. The result? Substantial savings, especially for many employers within the professional services sector.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">For example, let\u2019s say small company Jerry\u2019s Jungle Gyms offers a premium only plan. A possible scenario may look like the following:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span style=\"font-weight: 400;\">Each of the 20 employees chooses to contribute $3,000 pre-tax to their group health insurance through the POP.\u00a0<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">The collective reduction in taxable income can lead to an estimated annual tax windfall of $4,590, which provides a tangible impact of nontaxable benefits on Jerry\u2019s company balance sheet.<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">Thus, Jerry&#8217;s offering of POP becomes a gesture of goodwill and a strategic move to retain talent and reduce costs.<\/span><\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">How Employees Save Money with POP<\/span><\/h3>\n\n\n\n<p><span style=\"font-weight: 400;\">Employees also find themselves in a favorable financial position using pre-tax dollars to pay for qualified medical expenses. By reducing their income taxes through pre-tax deductions, they witness a welcome boost in their take-home pay \u2013 a direct result of their lowered tax liabilities.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Consider employee Susan, who earns an annual salary of $60,000. By participating in the POP and reducing her taxable income to $57,000, Susan could see her take-home pay rise by approximately $1,725. This example illustrates the tangible benefits of the premium-only plan, where saving money isn&#8217;t just a catchphrase but an actual outcome of strategic financial planning.<\/span><\/p>\n\n\n\n<p class=\"has-info-light-trans-20-background-color has-background\"><span class=\"callout\"><b>Tip:<\/b><span style=\"font-weight: 400;\"> Focus on employees&#8217; <\/span><a href=\"https:\/\/www.guardianlife.com\/financial-literacy-for-employees\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">financial literacy<\/span><\/a><span style=\"font-weight: 400;\">. Because over <\/span><a href=\"https:\/\/www.schwab.com\/resource-center\/insights\/content\/americans-want-financial-literacy-now\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">60% of people<\/span><\/a><span style=\"font-weight: 400;\"> say improving financial literacy is their top educational priority, you\u2019ll empower your employees to use your benefit offerings confidently and signal to top talent that you\u2019re invested in their future.<\/span><\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"jump-link-four\"><span style=\"font-weight: 400;\">Avoiding Common Pitfalls of POP Implementation<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">While the benefits of a POP are clear, it\u2019s essential to note potential drawbacks.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Employers must be vigilant in complying with the intricacies of Section 125 plans, ensuring that their POP plan is secured by formal written documentation and adheres to the stringent nondiscrimination rules.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">The \u2018use-it-or-lose-it\u2019 rule is another aspect that demands attention, particularly with <\/span><a href=\"\/blog\/fsa-contribution-limits\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">Flexible Spending Accounts<\/span><\/a><span style=\"font-weight: 400;\"> (FSAs), a feature that employers can implement in their Cafeteria Plan. Employers must convey the importance of this rule to employees effectively and the constraints on altering Cafeteria Plan elections mid-year, which are only permissible during qualifying life events.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"has-info-light-trans-20-background-color has-background\"><span class=\"callout\"><b>Tip:<\/b><span style=\"font-weight: 400;\"> HR must use clear and repeated communication regarding benefits and financial resources. PWC found that only <\/span><a href=\"https:\/\/www.pwc.com\/us\/en\/services\/consulting\/business-transformation\/library\/employee-financial-wellness-survey.html\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">68% of employees<\/span><\/a><span style=\"font-weight: 400;\"> report using the financial wellness services their employer provides, indicating that most benefit reminders only happen during administration season instead of throughout the year.&nbsp;<\/span><\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">The Role of a Third-Party Administrator in Managing a Cafeteria Plan<\/span><\/h3>\n\n\n\n<p><span style=\"font-weight: 400;\">We\u2019re not going to lie: Navigating benefits and employee questions can be time-consuming and confusing, which is why the expertise of a <\/span><a href=\"\/managed-services\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">third-party administrator<\/span><\/a><span style=\"font-weight: 400;\"> is invaluable. Many third-party administrators guide employers and help them:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span style=\"font-weight: 400;\">Create plan documents that comply with nondiscrimination rules and other regulations.<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">Communicate the intricacies of the Cafeteria Plan to their employees.<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">Educate participants on maximizing benefits.\u00a0<\/span><\/li>\n\n\n\n<li><span style=\"font-weight: 400;\">Conduct regular compliance reviews to ensure the plan remains up-to-date with any changes in legislation or IRS guidelines.\u00a0<\/span><\/li>\n<\/ul>\n\n\n\n<p><span style=\"font-weight: 400;\">Furthermore, some third-party administrators and\/or benefits advisors can offer valuable insights into optimizing the plan&#8217;s structure to better align with your company&#8217;s overall benefits strategy. They can recommend adjustments that enhance the plan&#8217;s effectiveness and employee satisfaction by analyzing participation data and employee feedback. This continuous improvement cycle ensures that the POP remains a valuable asset in your company&#8217;s benefits portfolio.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"jump-link-five\"><span style=\"font-weight: 400;\">Eligibility and Participation Rules for POP<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">While companies of various structures \u2013 from S corporations to non-profits \u2013 can sponsor a Cafeteria Plan, not all individuals within these entities are eligible to reap the benefits. For instance, owners, shareholders, and their families may find themselves on the outside looking in when it comes to participation.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">S corporation shareholders with over a 2% stake encounter unique restrictions under a Cafeteria Plan These individuals and their immediate family members are barred from participating\u2014a rule extending to the intricate web of relationships, including spouses, children, and grandparents. This limitation underscores the need for S corporations to carefully consider the implications of their ownership structure on their ability to participate in a Cafeteria Plan.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400;\">Keep an eye on these eligibility nuances to maintain a fair and compliant plan with IRS regulations.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400;\">Maximize Pre-Tax Savings with a Cafeteria Plan<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400;\">It\u2019s clear that Cafeteria Plans offer a compelling blend of tax savings, employee satisfaction, and compliance considerations. Whether you\u2019re an HR leader looking for new ways to retain top talent or a business owner weighing the benefits of implementing a Cafeteria Plan, the takeaway is undeniable: they help build a thriving, financially healthy work environment for everyone involved. <\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>When creating a competitive benefits package, HR leaders usually look to their company\u2019s specific offerings. That\u2019s a strong strategy but it isn\u2019t the only way to retain your people and attract new talent.&nbsp; You should also consider the actual structure of your benefits plan \u2013 specifically, whether a cafeteria plan that allows for pre-tax salary [&hellip;]<\/p>\n","protected":false},"author":5,"featured_media":4350,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","footnotes":""},"categories":[13],"tags":[],"class_list":["post-4348","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-benefits-compliance"],"acf":[],"_links":{"self":[{"href":"https:\/\/primepay.com\/wp-json\/wp\/v2\/posts\/4348","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/primepay.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/primepay.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/primepay.com\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/primepay.com\/wp-json\/wp\/v2\/comments?post=4348"}],"version-history":[{"count":2,"href":"https:\/\/primepay.com\/wp-json\/wp\/v2\/posts\/4348\/revisions"}],"predecessor-version":[{"id":8411,"href":"https:\/\/primepay.com\/wp-json\/wp\/v2\/posts\/4348\/revisions\/8411"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/primepay.com\/wp-json\/wp\/v2\/media\/4350"}],"wp:attachment":[{"href":"https:\/\/primepay.com\/wp-json\/wp\/v2\/media?parent=4348"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/primepay.com\/wp-json\/wp\/v2\/categories?post=4348"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/primepay.com\/wp-json\/wp\/v2\/tags?post=4348"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}