Give Employees a Raise with a Section 125 Premium Only Plan (POP)
Updated: Mar 4
Workplace benefits can help any size company stay competitive in attracting and retaining qualified workers, right down to the smallest employer. Employee benefits are even more important when there's a labor shortage. Did you know that there's a "secret" benefit that will put dollar back into your employees paycheck?
What is a Cafeteria Plan (IRS code) section 125?
A Cafeteria Plan is an (IRS code) Section 125 regulated plan that offers employees a choice between receiving their compensation in cash or as part of an employee benefit. The most common type of Cafeteria Plan is a premium-only plan (POP).
A POP allows employees to pay their health insurance premiums with pre-tax dollars. As the name implies, health insurance premiums are the only expenses allowed in a POP.
Pre-tax insurance premiums saves real dollars!
Employees can usually save from 20% to 40% on federal income taxes alone for every premium dollar they spend pretax based on their tax bracket. Employers benefit by reducing their tax liability. With a POP, employers do not have to pay FICA/FUTA taxes (~7.65%) on dollars that employees use toward the cost of their health insurance premiums.
For example, an employee who spends $200 a month in pretax dollars for benefits and this employee's household is in a 30% tax bracket. About 30% of the $200 or $60 would have gone to federal, state, and local income taxes and FICA. That employee will have $60 more in their paycheck because the $200 was not taxed!
The employer also saves on taxes. Let's take that same employee who spends $200 a month pretax for health insurance premiums. The employer will save about $15 every month—the 7.65 percent of the employee's wages that the employer would otherwise pay for Social Security and Medicare.
A POP is a win-win for everyone!
Employers should encourage employees to take advantage of POP savings. Employees will appreciate more money in their paychecks and more employees taking advantage of POP means more taxes saved for the employer.
Any employer with employees who are subject to U.S. income taxes is eligible to sponsor a cafeteria plan. Employers can be C corporations, S corporations, LLCs, partnerships, governmental entities, or sole proprietorships. However, non-employees cannot participate in a cafeteria plan; this exclusion applies to partners in a partnership, members of an LLC, and individuals who own more than 2 percent of an S corporation.
Learn how your company can qualify to set up a Section 125 Premium Only Plan (POP) at no cost! Contact us today to set up your FREE consultation!
About the Author
Judy Bezler is a seasoned independent insurance professional specializing in personal insurance solutions for individuals, families, 1099-contractors, the self-employed, and small businesses.