Score Big Wins for Employees With Premium Only Plans

A Premium Only Plan (POP) is a type of Section 125 cafeteria plan that allows employees to pay for their portion of employer-sponsored insurance premiums—like health, dental, vision, disability and life insurance—using pre-tax dollars. These pre-tax contributions reduce employees' taxable income, which can increase take-home pay. Employers benefit from reduced payroll tax liabilities, including Social Security and Medicare taxes.

POP plans are limited to premium payments only and do not cover qualified medical expenses like FSAs or HSAs, though those can be offered separately. Eligible employees must make elections during an enrollment period or following qualifying events and the plan must follow IRS rules and include a written Summary Plan Description (SPD). This option is commonly used by small businesses looking to offer tax-advantaged group health insurance benefits without significant administrative burden.

Premium Only Plans (POPs) offer pre-tax benefits, but they also come with limitations. They are restricted to specific types of qualified benefits, like group health insurance, dental, vision and group term life insurance. Employers cannot include reimbursement for out-of-pocket expenses and the plan requires formal documentation to comply with Section 125 of the Internal Revenue Code. This includes maintaining a Summary Plan Description (SPD) and conducting nondiscrimination testing—tasks that require time and attention as part of benefits administration.

POPs also come with restrictions for certain business types. For example, S corporation shareholders who own more than 2% of the business cannot receive pre-tax benefits through a POP. There are also limits on mid-year election changes unless they meet IRS-defined qualifying events. If the plan fails to follow the rules, the tax-exempt status can be lost, turning non-taxable benefits into taxable income for employees and increasing payroll tax liabilities for the employer.

Section 125 refers to a part of the Internal Revenue Code (IRS) that allows employers to offer employee benefits on a pre-tax basis. It’s the legal framework that makes various types of cafeteria plans possible, including Premium Only Plans (POPs), flexible spending accounts (FSAs) and dependent care assistance plans (DCAPs). These plans give employees the option to reduce taxable income by paying for qualified benefits like health insurance premiums, vision insurance, or disability insurance with pre-tax dollars.

A Premium Only Plan is one specific type of Section 125 benefit plan. It is limited to premium payments for group insurance plans such as a health plan, dental, or group term life insurance. It does not include reimbursement features for out-of-pocket medical expenses or dependent care. So while all POPs fall under Section 125, not all Section 125 plans are POPs. POPs are typically the simplest form and are often used by small to mid-sized businesses looking to offer basic pre-tax employee benefits.

Yes, cafeteria plans still exist and are widely used by employers to offer pre-tax employee benefits. Authorized under Section 125 of the Internal Revenue Code, these benefit plans allow employees to choose from a menu of qualified options—including health benefits, vision insurance, group term life insurance and disability insurance. Employees can select the benefits that best fit their needs while reducing taxable income through pre-tax contributions.

Cafeteria plans include various formats such as Premium Only Plans (POPs), flexible spending accounts (FSAs) and dependent care assistance programs (DCAPs). Employers must maintain formal plan documents and follow compliance rules, especially for discrimination testing and eligibility. These plans remain a key tool for providing customizable employee benefits while managing costs and tax liabilities.