Premium Only Plan (POP)

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What is premium only plan (POP)?

A Premium Only Plan (POP) is a type of benefit plan that allows employers to set up a salary reduction agreement with their employees, under which employees can have a portion of their gross salary withheld and deposited into a pre-tax account, which can be used to pay for certain qualified benefit expenses.

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Image showing the meaning of Premium Only Plan (POP)

POP plans are typically used to pay for group term life insurance, accidental death and dismemberment insurance, and long-term disability insurance. The money that employees contribute to POP plans is not subject to federal income tax, Social Security tax, or Medicare tax. This can result in significant tax savings for both employees and employers, but it is important to note that POP plans are subject to certain rules and regulations and not all expenses are eligible for reimbursement.

What are the main reasons for an employer to establish premium only plan (POP)?

Premium Only Plan (POP) is established to help employers and employees with the cost of benefits by allowing a portion of employees’ gross salary to be withheld and deposited into a pre-tax account that can be used to pay for certain qualified benefit expenses.

The main reasons for an employer to establish a POP are:

  1. Cost Savings: POP plans can result in significant tax savings for both employees and employers, as the money that employees contribute to POP plans is not subject to federal income tax, Social Security tax, or Medicare tax.
  2. Employee Benefits: POP plans allow employees to pay for certain qualified benefit expenses with pre-tax dollars, which can help to reduce the overall cost of benefits and make them more affordable for employees.
  3. Compliance with Laws: POP plans can help employers comply with certain laws and regulations, such as the Affordable Care Act (ACA) and the Employee Retirement Income Security Act (ERISA).
  4. Attracting and Retaining Employees: Offering a POP plan can be an attractive benefit for employees, which can help employers to attract and retain top talent.
  5. Simplify the Process: POP plans can simplify the process of paying for benefits by allowing employees to pay for certain qualified benefit expenses with pre-tax dollars through salary reduction agreements.

What is the process of setting up a premium only plan (POP)?

The process of setting up a Premium Only Plan (POP) typically involves the following steps:

  1. Determine Eligibility: Employers must determine if they are eligible to establish a POP plan, which typically requires that the employer offer a group term life insurance plan, accidental death and dismemberment insurance plan, or long-term disability insurance plan to their employees.
  2. Review the Plan Documents: Employers must review the plan documents, including the Summary Plan Description (SPD) and the POP plan document, to ensure that the plan is in compliance with all relevant laws and regulations.
  3. Obtain Employee Consent: Employers must obtain employee consent to the salary reduction agreement, which allows the employee’s pre-tax salary to be used to pay for certain qualified benefit expenses.
  4. Establish the Trust: Employers must establish a trust or custodial account, which will hold the employee contributions and pay out the benefits as they are incurred.
  5. Administrator the Plan: Employers must administer the plan, including issuing benefit payments, tracking employee contributions, and complying with all relevant laws and regulations.
  6. File the required Forms: Employers must file the required forms with the Internal Revenue Service (IRS), including Form 5500 and Form W-2.
  7. Monitor the Plan Performance: Employers must monitor the plan performance, ensuring that it is operating in compliance with all relevant laws and regulations, and make any necessary changes to the plan.

Frequently asked questions

A Premium Only Plan (POP) is a Section 125 cafeteria plan that lets employees pay their share of group insurance premiums, such as health, dental, and vision coverage, using pre-tax dollars through a salary reduction agreement. This reduces the employee’s taxable income and lowers the employer’s payroll tax liability simultaneously.

POP plans typically cover group health insurance premiums, dental and vision insurance, group term life insurance up to $50,000, accidental death and dismemberment insurance, and long-term disability insurance. They do not cover out-of-pocket medical expenses or HSA/FSA contributions, which require a more comprehensive Section 125 cafeteria plan.

Employers reduce their share of FICA taxes on the amount employees redirect to pre-tax premiums. For every $1,000 employees contribute through a POP plan, the employer saves approximately $76.50 in payroll taxes. The plan is relatively low-cost to administer and can significantly offset the rising cost of offering group insurance benefits.

A valid POP plan requires a written plan document, an annual plan year, and nondiscrimination testing to ensure highly compensated employees do not disproportionately benefit. The IRS requires the written document to be in place before the plan year begins. Failure to maintain proper documentation can result in all premium contributions being treated as taxable income.

Generally, employees cannot change their POP election outside of the annual open enrollment period. Exceptions apply for qualifying life events such as marriage, divorce, birth or adoption of a child, loss of other coverage, or a change in employment status. HR should document all mid-year changes and verify they qualify under IRS Section 125 change-in-status rules.