A Premium-Only Plan is the simplest Section 125 cafeteria plan, letting employees pay health insurance premiums with pre-tax dollars to reduce taxable wages and FICA for both parties.
Why a Premium-Only Plan matters for employers
A Premium-Only Plan is the entry-level cafeteria plan under Section 125 of the Internal Revenue Code. It allows employees to elect to pay their share of employer-sponsored health, dental, and vision insurance premiums with pre-tax dollars instead of after-tax dollars.
The tax savings from a POP benefit both the employee and the employer. When premiums are paid pre-tax through a POP, they reduce the employee's taxable wages for federal income tax, Social Security, and Medicare. The reduction in Social Security and Medicare wages saves the employer the matching 7.65% FICA on those amounts as well.
For a simple example: if an employee earns $50,000 and pays $4,800 in annual health premiums, a POP reduces taxable wages to $45,200. The employer saves 7.65% of $4,800, or approximately $367 per employee per year, just in FICA matching - with no change to the employee's actual coverage.
A POP requires a written plan document and must meet Section 125 non-discrimination rules, which prohibit highly compensated employees and key employees from disproportionately benefiting from the plan. Annual non-discrimination testing may be required.
Setting up a POP is typically low-cost or free through most benefits administrators. It is one of the most cost-effective payroll actions an employer can take. Employers without a POP are effectively overpaying FICA taxes on benefit premiums their employees are already paying.
How BEG administers Premium-Only Plans for clients
BEG Managed Payroll coordinates POP deductions, ensures premiums are coded correctly as pre-tax in payroll, and tracks FICA savings for clients as part of fully managed payroll at $25-$45 per employee per month. Learn about BEG Managed Payroll.
Frequently asked questions
Does a Premium-Only Plan cost anything to set up?
A POP requires a written plan document, but setup costs are minimal - typically $0-$300 through a benefits administrator or payroll provider. The FICA savings typically recoup any setup cost within the first month.
What benefits can be included in a Premium-Only Plan?
A POP covers employer-sponsored health, dental, and vision premiums. For FSA contributions and dependent care accounts, a more comprehensive Section 125 cafeteria plan is needed.
Are POP non-discrimination rules difficult to meet?
For most small to mid-sized employers, non-discrimination testing is straightforward. Issues arise primarily when highly compensated employees take a much larger proportion of benefits than rank-and-file employees, which is uncommon in typical POP designs.
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About the author
Anthony Moretti is VP of Sales at Business Executive Group, where he builds BEG's managed payroll and HR service verticals for employers across Dallas-Fort Worth and nationwide. He writes the BEG Payroll Glossary to give employers plain-English answers on payroll and compliance.
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