Minnesota Requires Small Businesses to Offer Section 125 POP Plans

August 18, 2009


Key Stat:  One out of every two small businesses does not offer health insurance to their employees.  Most employees of these companies pay 30-50% more than they need to for their individual health insurance policy because they pay their premium with post-tax dollars.

Yesterday, I wrote about Section 125 Premium-only-Plans (POP).  These plans allow employees to pay for their health insurance premiums tax-free. Traditionally, employers with group insurance plans offer a POP plan so that an employee can pay his or her portion of the group premium with tax-free dollars.  However, recent changes to federal law now allow employees to utilize Section 125 POPs to pay for their individual insurance premiums tax-free.  Subsequently, some states (e.g. Minnesota) are beginning to pass state laws mandating that employers offer Section 125 POP (for individual policies) to their employees. 

Beginning January 1, 2009, employees can use Section 125 POP plans to pay for their individual insurance premiums tax-free. 

Under IRC Section 1.125-1(m), employees are able to purchase individual health insurance policies with tax-free dollars.  This law-change presents a huge tax-savings opportunity for small businesses and their employees.  Now employees do not pay federal or state income tax on the amounts used to pay insurance premiums and the employee and employer do not pay FICA or FUTA (i.e. Medicare, Social Security, or unemployment insurance taxes) on these amounts.  The result is a reduction in the the cost of individual insurance policies by 30-50% depending on the tax-bracket.

Beginning July 1, 2009, a new Minnesota law requires that certain small employers offer Section 125 POP plans for individual policies.

Under Minnesota SF 3780, employers who have more than ten (10) full-time employees and who do not currently offer health benefits must establish and maintain a Section 125 plan to allow their employees to purchase individual health coverage with pre-tax dollars.  Remember, with Section 125 POP, employers do not pay FICA or FUTA (~7.65%) on any money an employee uses for their individual insurance payments.  Thus, employers can expect to save nearly eight cents ($0.08) for every dollar ($1.00) their employees spend on individual health insurance.

At Zane Benefits, we are finalizing a web-based POP administrative platform ("ZanePOP") for employers of all sizes.  ZanePOP's expected release date is 10/01/2009.  You can view details on our new solution here.  Please let us know what you think! 


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