Premium Conversion or Premium Only Plan (POP)
A Section 125 Premium Only Plan (POP) is a cafeteria plan which allows employees to pay for their insurance premiums with tax free money. POP plans can be used to:
- Recruit and retain employees
- Increase flexibility to design employee benefits for diverse employee needs
- In some states, save on state unemployment insurance and workers' compensation taxes, depending on state law
- Help to control the costs of rising premium increases
- Promote employee awareness of the cost and value of employer benefits
How POPs Work
POP plans allow employees to pay for their health insurance premiums with tax free dollars through payroll deductions. Funds withheld for health insurance premiums are not included in the employees' gross income, as long Section 125 requirements are met.
Before the beginning of the plan year, participating employees make a 12 month election for how much money they want withheld for the POP and agree to have the funds deducted from their pay. The election remains the same unless there is a qualifying event(s), for example addition of a dependent.
The employee's pay check reflects tax savings, less any taxable wages by the employee having more take home pay.
The employer pays both the employer and employee premium shares, using the employee's withheld funds and any employer contributions. The combined funds are used to pay for the premiums and the employee has insurance coverage.
The employee receives tax savings and the employer saves on Federal Insurance Contributions Act (FICA) taxes and Federal Unemployment Tax FUTA taxes.
Employers can elect to give employees a choice between plan coverage and cash, however, if they do, there are tax consequences for those employees who elect to choose cash or after tax funds.
Rules for Highly Compensated Participants
Cafeteria Rules are prohibited from discriminating in favor of highly compensated participants which means:
- An officer
- Highly compensated (determined by income in the preceding year by the IRS: $115,000 for 2012, 2013, and 2014)
- A Shareholder owning more than 5 percent of the voting power or value of all classes of stock of the employer
- A spouse or dependent of a highly compensated participant
If the plan does not meet the requirements regarding highly compensated individuals, the premiums withheld are subject to tax liabilities.
Safe harbors were established by the Internal Revenue Service (IRS) regulations in 2007 for POP cafeteria plans, where plans offer an election between cash and payment of the employee share of the premiums for employer provided insurance plans as the only benefit of the plan. As long all employees can participate and can elect the same salary reductions for the same benefits, the safe harbor is satisfied. Prior to the safe harbor, highly compensated and key participants could not exceed certain percentages of the aggregate of non-taxable benefits provided for all employees through a cafeteria plan.
This content is being provided as an informational tool. It is believed to be accurate at the time of posting and is subject to change. It is recommended that plans consult with their own experts or counsel to review all applicable federal and state legal requirements that may apply to their group health plan. By providing this information, Meritain Health is not exercising discretionary authority or assuming a plan fiduciary role, nor is Meritain Health providing legal advice.