The Section 125 Premium Only Plan (POP) allows for certain employee paid group insurance premiums to be paid with pre-tax dollars through payroll deduction.
The Premium Only Plan saves the employer by eliminating the matching 7.65% Social Security and Medicare tax on every dollar employees contribute through payroll deduction.
Employees save $20 to $40 on every $100 they contribute through payroll deduction in just federal income taxes. Qualified contributions include an employee's share of employer-sponsored health, dental, disability, accident and group-term life insurance. An employee's share of contributions to a health saving account (HSA) will also qualify for tax savings when paid through payroll deduction.
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| POP Plan Contents | Action Required |
| Three-ring Binder | Make the "Changes to Payroll" described in Premium Only Plan Procedures. Complete "Employer Tax Savings Worksheet" in Premium Only Plan Procedures. |
| Adoption Agreement & Plan Document | Read the Plan Document and sign the Adoption Agreement. |
| Certificate of Resolution | Read and sign the Certificate of Resolution and retain for your records. |
| Employee Brochure | Distribute Employee Brochures. |
| Summary Plan Description (SPD) | Photocopy and distribute a copy of the Summary Plan Description to each employee (all 5 pages). |
| Election Forms | Photocopy and distribute an Election Form to each eligible employee. Election Forms must be completed and signed prior to the beginning of the plan year. |
| Discrimination Tests | Read and perform tests. |
| Maintaining Your Plan and Quarterly Newsletters | Read. |
| Internal Revenue Code Section 125 | No action required. |
| "Your" Company: 20 participating Employees |
Without POP | With POP |
| Average Pre-Tax Contribution | $0 | $3,000 |
| Number Of Employees | x 20 | x 20 |
| Total Annual Pre-Tax Employee Contributions | $0 | $60,000 |
| FICA (Medicare & SS) | x 0.0765 | x 0.0765 |
| Total Annual Savings (est.) | $0 | $4,590 |
Annual social security tax is based on tax rate of 7.65%. Annual pre-tax payroll deductions are based on insurance premiums averaging $250 per month per employee.
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