Ever-rising health care costs can have a severe, negative impact on a company’s bottom line, and on employees’ pocketbooks. If you could find a simple and straightforward way for both your company and your employees to save a few dollars on the cost of health care — without changing carriers or plan design — chances are you’d want to learn more about it. That’s exactly what Sec. 125 premium only plans (POPs) offer: a way for both a business and its employees to spend less on health care without giving up any of their current benefits or coverage.
A POP is a version of a Sec. 125 cafeteria plan. It allows employees to reduce their salary to pay for health care premiums with dollars that are not subject to taxes (federal income, FICA and, in most cases, state and any local income taxes). In doing this, a POP enables employees to get more mileage from the dollars they use to pay for their health care benefits. Because any pre-tax dollars are not subject to FICA taxes, an employer also realizes savings because it does not pay its share of this tax on any premiums run through a POP.
Let’s look at exactly what these savings can amount to, both for an employer and its employees. Suppose an employee’s monthly contribution for employee-only coverage under the company health plan is $200. If this employee is in the 20% tax bracket and lives in a state with a 3% income tax, along with the 7.65% FICA tax the POP results in 30.65% tax savings on the $2,400 annual contribution, or $735.60 in annual savings. An employee in the same tax situation whose contribution for family coverage is $300 monthly will save $1,103.40 annually. If these employees’ company had 10 employees with employee-only coverage and 20 employees with family coverage, for a total annual employee pre-tax contribution of $96,000, the employer would save its 7.65% FICA contribution on this amount, reducing its cost by $7,344.
Though a POP is a very simple version of a Sec. 125 plan, it is subject to the compliance rules for cafeteria plans. This includes, in part, the requirement for a written plan document and nondiscrimination testing. Regulations for Sec. 125 plans provide a simplified safe harbor nondiscrimination test for POPs, which basically deems a plan as nondiscriminatory based on eligibility to participate. Under this safe harbor, if all employees are offered the opportunity to elect to salary reduce the same amount or same percentage of the premium for employee-only or family coverage, the plan will not be considered discriminatory, even if a disproportionate percentage of highly compensated or key employees actually elect salary reduction.
Any employer can implement a POP, though certain individuals are not considered “employees” under the Sec. 125 rules and could not participate in the plan. These include self-employed individuals, partners, and more-than-2% shareholders of a Subchapter S corporation.
In addition to Health insurance, POPs also could be used to pay for Dental, Vision, any Supplemental Medical, and Group Term Life insurance that does not exceed $50,000 in face value. Long-Term Disability (LTD) insurance premiums can also be paid for with pre-tax dollars, but if they are, any disability benefits that are paid will be considered taxable income to the employee. For this reason, many employers choose to keep LTD on an after-tax basis, even if they run other types of premiums through a POP.
Plan documents and administrative services are readily available to quickly put in a POP. If your employees currently pay their health plan premiums with taxed dollars, we can help you look into the potential savings that a POP could bring to them — and to your benefits budget. Call us.