The US Congress created Code section 125 to make benefits programs more affordable for employees. Section 125 is part of the IRS Code that allows employees to convert a taxable cash benefit (salary) into non-taxable benefits. The Premium Only Plan is the building block of the Section 125 code. It allows employees to purchase health insurance and other ancillary benefits tax-free.
How the employee benefits
The premium or HSA contribution is deducted before taxes are calculated, employees save from 20% to 40% of their pre-tax premium or contribution deductions in just federal income taxes alone!
Under a POP, an employee’s take-home pay is increased, which helps reduce the high cost of providing health coverage for family members.
How the employer benefits
A Section 125 POP is one of the few employee benefits that provides savings back to the employer. It does this by eliminating the 7.65% in employer matching for Social Security and Medicare taxes and, in some cases, Federal and State unemployment taxes.
Employers should keep in mind that if they are allowing health insurance and ancillary benefits to be paid on a pre-tax basis, a written Plan Document is required to maintain compliance. Non-Discrimination Testing is also required by the IRS and should be completed on a yearly basis.
The Section 125 program is a tremendous opportunity for a company to enhance its benefits package!
To learn more about Premium Only Plans or if you would like Catapult to create your POP Plan Documents and run Non-Discrimination Testing, please contact us at martha.barker@letscatapult.org!
By Martha Barker, CFC, Catapult Benefits Services Manager
