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Small Business Employee Benefits and HR Blog

Section 125 Premium Only Plan Rules & Regulations

premium only plan rulesIRS code Section 125 allows an employer to set up a Premium Only Plan (POP), where an employee's insurance premium contributions can be deducted from his or her payroll on a pre-tax basis.

There are many advantages of setting up a Premium Only Plan for employees.

By implementing a POP plan, an employer is allowing employees to pay their portion of the employer health insurance premiums with pre-tax dollars, saving employees up to 40% on income taxes alone. 

Overview of Premium Only Plan Rules & Regulations

  1. The following organizations are eligible to set up a Premium Only Plan for W-2 employees: 

    • C Corp, 

    • S Corp,

    • Partners,

    • LLCs,

    • Sole Proprietorships, and 

    • Non-Profits.

  2. The employer must set up a Plan Document and Summary Plan Description (SPD) before the effective date of the Section 125 POP plan. These documents explain the rules of the plan. The plan document should be signed and kept on file.

  3. With a Section 125 POP plan, each eligible employee is given the option to elect into a Salary Reduction Agreement with the employer, in which he or she agrees to the amount of pre-tax salary to be witheld from wages for health care coverage.

  4. Employers offering a POP plan should perform annual nondiscrimination testing to demonstrate that they are not discriminating in favor of certain employees. These tests should be kept on file and can be made subject to audit.

  5. The employee is only eligible to enroll: (A) During an annual open enrollment period specified in the plan document; (B) Within a specified period of time following date of hire; (C) The date an employee first becomes eligible under the plan document; and (D) Under other special circumstances outlined in the plan document.

  6. Once in place, changes to the salary reduction agreement can only be made at the beginning of the plan year. Generally, the only exceptions are "change in status" events, which cannot be made retroactively, and include changes in:

    • marital status

    • number of dependents 

    • employment status

    • eligibility requirements

    • residence

    • adoption proceedings

    • cost or coverage

    • other laws or court orders 

What questions do you have about Section 125 Premium Only Plans? Leave a comment. We'll help answer.

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