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 after-tax contribution |
-$3,000 |
$0 |
Net take-home pay |
$19,192 |
$20,111.50 |
Increase in take-home pay |
$919.50 |
POP Compliance Solution
American Benefits Group is pleased to announce we are now offering a new annual Premium Only Plan (POP) compliance solution. We have created an annual subscription for your POP which includes your Plan Document and annual restatements of your Plan Document (as needed).
The subscription also includes assistance in running your annual nondiscrimination testing for your POP. The cost for the POP subscription is $395 / per year. If you would like to sign up for our Premium Only Plan annual subscription please complete and return the information form.
Please review the Compliance Survey.
Nondiscrimination Testing
If you have a Premium Only Plan (POP), the IRS requires you to submit to non-discrimination testing once a year.
The reason for nondiscrimination testing is to prevent highly compensated employees from taking advantage of the benefits that these plans provide for employers and employees alike. Such advantages, consist of an increase in take home pay because the dollars spent are pre-tax and a 7.65% savings annually on employers matching FICA tax.
Nondiscrimination testing is a big factor in way of compliance. If employers do not adequately follow all the steps necessary for nondiscrimination testing, or they fall out of compliance with federally mandated regulations while using these plans, all discriminatory benefits are included in the gross pay of highly compensated employees. This also means that employers can no longer take advantage of the 7.65% tax break on their annual employer matching FICA tax. In other words, if an employer fails to comply with IRS regulations and testing procedures, any and all benefits that were received from that employer's FSA or POP plan must be re-paid.
Overall, the greatest concern when filing nondiscrimination testing is that your company is in compliance with all regulations before you begin. As stated above, the initial reason for nondiscrimination testing is to avoid the abuse of these benefits by highly compensated employees.
Visit our Nondiscrimination Testing page for more information.
Simple Cafeteria Plan
A simple cafeteria plan is a type of cafeteria plan that allows small employers (those with 100 or fewer employees) to bypass annual nondiscrimination testing. Here are the key points about simple cafeteria plans:
- Employer Size: To qualify for a simple cafeteria plan, the employer must have 100 or fewer employees during either of the previous two years.
- Employee Eligibility and Participation: Generally, all employees with at least 1,000 hours of service during the preceding plan year must be allowed to participate in the simple cafeteria plan.
- Employer Contributions: Employers can contribute to the plan, but there are specific rules regarding the amount and type of contributions.
In summary, a simple cafeteria plan provides a streamlined way for small businesses to offer benefits without the burden of annual nondiscrimination testing.
If you’re a small employer considering benefits for your employees, exploring simple cafeteria plans could be beneficial.
FAQs
No, a 2 percent S-Corp shareholder is not considered an employee and would therefore not be permitted to make pre-tax contributions under a cafeteria plan. The same would apply to a sole proprietor and partners in a partnership.
An LLC's health plans may create special issues with respect to LLC member participation. This is because LLCs may be treated as either a partnership or a corporation (depending on how the LLC has elected to be treated), and for tax purposes the IRC treats partnerships and corporations differently. No IRS guidance specifically addresses the status of LLC members for purposes of health plan participation, including participation in a medical or cafeteria plan. But the general rules of Section 125 would likely apply as described below.
LLC Structured as a Partnership
Pretax premium payroll deductions are subject to IRC Section 125. Under Section 125, as a general rule only employees are eligible to participate in the cafeteria plan. Partners in a partnership are considered self-employed individuals, not employees. Thus, for LLCs that are taxed as partnerships, members of the LLC generally cannot participate in a cafeteria plan. This means that the LLC members would not be eligible to benefit from the tax advantages of paying premiums on a pre-tax basis. But those LLC members may still be eligible to participate (on an after-tax basis) in the medical policy/plan as an eligible person, depending on the definition of eligibility under the plan.
If, however, the plan is offered on a post-tax basis outside of a cafeteria plan, or on a non-contributory basis (where the employer pays all of the premiums), then the owner may participate in the group health plan. In addition, if they are self-employed as LLC members, the members may be able to take a deduction on their federal income tax returns; this would really be a taxation issue best addressed by an accountant or tax counsel.
LLC Structured as a C Corporation Where LLC Members Are Considered Employees Because They Are Receiving W-2 Reportable Wages
If the LLC has elected to be taxed as a C Corporation, then the LLC member may be considered an employee eligible to participate in the cafeteria plan. That said, the salary reduction under the cafeteria plan may only be from the individual's compensation as an employee.
Employers: Benefit Offering or Plan