IRS Section 125 POP | Premium Only Plans | Cafeteria Plans
This blog post is a follow-up to the previous one about cafeteria plans. Common Section 125 plans are premium-only (aka “Section 125 POP” or “POP plan”), and this blog examines what that means.
Section 125 insurance policies allow employees to choose from a list of services and pay for them with pre-tax dollars. These types of policies were traditionally used in combination with employer-sponsored group health plans but are now being replaced by Health Insurance Exchange (HIX) or Personal Responsibility Arrangement (PRA). Nonetheless, employees can use POP policies to pay individual health care premiums with no taxes taken out.
Section 125 is a financial tool that one can use to pay for both their employer-provided and individual health insurance premiums.
Section 125 – Cafeteria Plans – Purpose
- IRC Section 105 Medical Reimbursement Plans
- Flexible Spending Account (FSA) Contribution Limits 2020
- IRS HSA Contribution Limits 2021
- Medical Premiums – Pre-Tax Vs. After-Tax
- Consumer Directed Health Plans (CDHPs)
How Section 125 premium-only-plans (POP) benefits employees:
Employees can save up to 40% on federal income taxes by subscribing to a section 125 premium-only plan. Under a Premium-Only Plan, the amount an employee pays for their premium is taken “pre-tax” before Federal Insurance Contributions Act (FICA). Alternatively, Federal Government withholds the income tax.
How Section 125 premium-only-plans (POP) benefit employers:
Employers benefit from reducing their tax liability with a Section 125 POP plan. With these types of plans, employers are not responsible for paying federal payroll taxes (FICA/FUTA) on employees’ payments of their individual or group health insurance premiums.
What does this mean? The employer will not have payroll taxes taken out of their payments into the employees’ individual or group health care premiums because they pay those directly through the plan instead. A cafeteria plan that allows employees to save on their taxes is also required by many states when offering these plans. However, there can be significant differences between different states in how these plans are structured.
This can greatly benefit small businesses with low-to-medium salary employees who are currently uninsured. These small business owners now have access through the Affordable Care Act. IRC Code Section 125 enables employers to have more control over how their employees’ healthcare premiums are paid. Putting it straightly, through IRC Section 125, employers now have an opportunity to save money on payroll taxes. The employer will not need to deal with any of the tax implications related to employee health care benefits when offering this type of plan. It is because they would manage all aspects of coverage individually (including payment).
A health insurance marketplace or Exchange can help you determine whether a POP plan is right for your business. You may want to use an online benefits calculator and find out if the savings from a POP are worth it, in addition to checking with your accountant and state regulatory agency.
State requirements for Section 125 premium-only-plans (POP):
Many states require employers to include a cafeteria plan that allows employees to save on their taxes if you offer health benefits. Your business needs to be aware of your particular state’s regulations related to Section 125 since there can be significant differences among different states.
How much does it cost to administer section 125 POPs?
According to the National Conference of State Legislatures, it costs about $100 per year to establish and maintain a Section 125 premium-only plan for an employee.
Section 125 insurance plans are a benefit available to employees. An employer pays up to 40% of the costs, and the employee is reimbursed for ongoing premiums. Section 105 insurance plans work differently, where employers reimburse employees after they’ve paid their own policy premiums.