Premium Only Plan
One of the best ways to save taxes.
IRS-sanctioned Premium Only Plans were created by the Revenue Act of 1978 and are governed by Internal Revenue Code Section 125. With a Premium Only Plan:
- Employees don't pay FICA, federal, or where applicable, state or local taxes on money used to pay for their portion of employer-sponsored insurance premiums or contributions to their Health Savings Account (HSA).
- Employee's tax savings help defray the cost of insurance premiums.
- Employees can increase their take home pay.
- Your taxable payroll is reduced by the total amount of employee contributions for benefits. Lower taxable payroll means lower payroll taxes.
- You can allow employees to realize an increase in take-home pay and take credit for a terrific new benefit, while still saving money.
- You can increase your employees' share of insurance premiums without negatively affecting their take-home pay.
Any employer can sponsor a Premium Only Plan.
Regular corporations, partnerships, S corporations, Limited liability companies(LLCs), sole proprietors, professional corporations, and not-for-profits can all save money on payroll taxes by establishing a Premium Only Plan.
Who can participate?
While regulations prohibit a sole proprietor, partner, members of an LLC (in most cases), individuals owning more than 2% of an S corporation, or their spouse and dependents, from participating in the POP, they may still sponsor a plan and benefit from the savings on payroll taxes.
Begin saving taxes immediately.
You can start your Premium Only Plan at any time. Plus, you can have a short plan year for the first year so that future plan years coincide with either your fiscal year or the calendar year.
Employer Tax Savings Example
| Your Company - 20 Participants | Without POP | With POP |
| Average Pre-Tax Contribution | $0 | $3,000 |
| Number of Employees | x20 | x20 |
| Total Annual Pre-Tax Contributions | $0 | $60,000 |
| FICA (Medicare & Social Security) | x 0.0765 | x 0.0765 |
| Total Annual FICA Savings (Estimate) | $0 | $4,590 |
Employee Tax Savings Example
Employees save $20 to $40 on every $100 they contribute through payroll deduction in just federal income taxes.
| Your Employee | Without POP | With POP |
| Annual Salary | $32,000 | $32,000 |
| Annual pre-tax contribution | $0 | $3,000 |
| Taxable Income | $32,000 | $29,000 |
| Estimated Taxes | -$9,808 | -$8,888.50 |
| Annual aftr-tax contribution | -$3,000 | $0 |
| Net take-home pay | $19,192 | $20,111.50 |
| Increase in take-home pay | $919.50 |