Section 125 Premium Only Plan

Employers nationwide are learning how to offset high insurance premium increases by reducing payroll tax liabilities with Section 125 Premium Only Plans.

One of the most underused employee benefits for small businesses today is the Section 125 Premium Only Plan.

These plans simply allow employees to withhold a portion of their salary on a pre-tax basis to cover the cost of qualifying insurance premiums, medical expenses and dependent care expenses. Because Section 125 Cafeteria Plan benefits are free from federal and state income tax, an employee’s taxable income is reduced which increases take-home pay. And because the Section 125 Cafeteria Plan reduces employee gross income for purposes of income tax, the employer also enjoys a reduction in their payroll tax liability by eliminating matching FICA taxes of 7.65%.

Employers don’t realize they can offset a good portion of the premium increases with reduced payroll tax liabilities. Seems simple; it really is. The reason more employers don’t take advantage of Section 125 Cafeteria Plans is because employers think they’re too difficult to setup or administer, many CPAs don’t offer them, and most insurance agents don’t make enough commission on a Section 125 Cafeteria Plan to bother taking the time to explain the concept.

Pre-tax health insurance premium deductions, also known as a Premium Only Plan (POP).

POP plans allow employees to elect to withhold a portion of their pre-tax salary to pay for their premium contribution for most employer-sponsored health insurance plans. The plan offers a simple way to obtain favorable tax treatment for benefits already offered. A POP plan is the simplest type of Section 125 plan and requires little maintenance once it’s been set up through payroll. Section 125 POP plans reduce employer payroll tax liabilities.

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