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FAQ: What is a Section 125 POP (premium-only-plan)

Written by: Josh Miner
December 23, 2020 at 10:57 AM

This post is a follow up to the previous post about cafeteria plans (i.e. Section 125 Plans). One of the most common (if not the most common) forms of Section 125 plans is a premium-only plan (aka "Section 125 POP", "POP plan", "Premium-only Cafeteria Plans").

A Section 125 premium-only-plan (POP), is a cafeteria plan which allows employees to pay their health insurance premiums with tax-free dollars. Traditionally, POP plans have been used in combination with employer-sponsored group health insurance plans. However, employees can also use POP plans to pay individual health insurance premiums with tax-free dollars.

Using a Section 125 POP to pay for insurance premiums benefits both employers and their employees.

How Section 125 premium-only-plans (POP) benefit employees

Employees save up to 40% on federal income taxes alone. Under a POP plan, the amount an employee pays for their premium is taken “pre-tax,” before FICA or income taxes are withheld.

How Section 125 premium-only-plans (POP) benefit employers

Employers benefit by reducing their tax liability. With a POP, employers do not have to pay FICA/FUTA taxes (~7.65%) on dollars that employees use toward the cost of their individual (or group) health insurance premiums.

State requirements for Section 125 premium-only-plans (POP)

If you offer a health plan, many states have laws that require employers to also have a cafeteria plan to allow employees to realize the tax savings immediately. It’s important to understand your states’ regulations as there can be considerable differences between the laws.

How much does it cost to administer section 125 POPs?

According to the National Conference of State Legislatures (NCSL), it costs approximately $100 per year per employee to set up and administer a Section 125 POP plan.

Conclusion

Section 125 plans are an easy way for employees up to 40% of the costs of insurance premiums. Employers who use these plans also save on FICA. An alternative to these plans are section 105 plans where employers reimburse employees for premiums they actually pay for, as opposed to pre-funding an account.

To learn more about section 105 plans, see: Section 105 plans made easy.

This post was originally published on August 17, 2009. It was last updated on December 23, 2020.

Topics: Section 125

Additional Resources

Trying to decide which HRA is best for you? Take our quiz to find out.
Find out which medical expenses you can get reimbursed with an HRA.

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