Premium Only Plans (POP)
If your organization is spending a lot each month to provide health care coverage for your employees, it may be time to consider a Premium Only Plan, POP.
How does a POP plan work?
This option is a win-win solution for your business as well as for your employees. When you offer a POP, you pay less in payroll taxes and will pay the insurance premiums of your employees on a pre-tax basis. This solution benefits employees because their taxable income is lessened, resulting in less income tax that must be paid. Your company will also save on costly insurance premiums and benefit from lower costs for providing health care coverage.
What benefit plans can be paid pre-tax through a POP?
Health insurance
- Dental insurance
- Vision insurance
- Health Savings Account contributions
- Group term life*
- Accidental death and dismemberment insurance
- Cancer insurance*
- Disability insurance*
*Plans limits may apply
When you implement a Premium Only Plan, the savings can be quite significant. Here are examples of savings scenarios for both the employer and employee.
It’s important to remember that implementing a POP plan will require a change in the way you calculate payroll checks. Here are some common questions related to how POP plans affect payroll:
Q: Will my payroll system change?
A: Your payroll check writing can be handled with manual or computerized payroll systems. The primary feature required by your computer system or payroll service is that it has the capability to handle nontaxable deductions.
Q: How will the POP change information on Forms 941 and 940?
A: The amounts on the forms included as wages, tips, other taxable compensation, and social security wages will now be the gross salary, “after POP.”
Q: We currently have a 401k plan that is funded by employee payroll deductions. Are the salary reduction features the same?
A: Yes, however, there is one difference. POP reduces gross salary for FICA purposes. Social Security wages cannot be reduced by 401k payroll deductions.
Q: How does the POP reduction to gross salary affect contributions to our qualified pension, profit sharing or 401k plan?
A: You must check the definition of gross salary (compensation) in your specific qualified plan document. It is legal to include or exclude the POP reduction in the definition of compensation.
Q: How does the POP affect state income taxes?
A: Some states (i.e., New Jersey) may not recognize the salary reductions for Cafeteria Plans and taxes may be required – check with your accountant.
Q: How are deductions for local payroll taxes handled under the POP?
A: Some localities allow the POP deduction in computing the paycheck while other localities do not. You will need to contact your local department of revenue for a determination.
Q: How will POP affect state unemployment taxes?
A: Each state treats the POP differently. You must check with your state unemployment division for clarification.
Administering your Premium Only Plan
Ensure you stay in compliance when implementing a POP plan with isolved. Governed by Section 125 of the IRS tax code, employers with POP plans are required to have a current Summary Plan Description (SPD) available to all plan participants and a current POP Plan Document. Learn more here.