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Small Business Employee Benefits and HR Blog

FAQ: What is a Section 125 POP (Premium-Only-Plan)?

This post is a follow up to my 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", etc.).Premium Only Plan

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, these POP plans have been used in combination with employer-sponsored group health insurance plans. However, beginning January 1st, 2009, employees can now use POP plans to pay individual health insurance premiums with tax-free dollars.

Using Section 125 POP to pay for insurance premiums benefits both small business owners 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, an employee's take-home pay is increased, effectively reducing the cost of purchase adequate health insurance.

How Section 125 Premium-Only-Plans (POP) Benefit Employers:

Employers benefit by reducing their tax liability.  With 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.

States Pass Laws Requiring Employers to Offer Section 125 Premium-only-Plans (POP) to Employees.

Most states are considering passing laws effectively mandating that employer offer Section 125 POP plans to their employees.  The following states have already passed similar legislation.


State Law/Program Description
Connecticut SB 1484 Requires any employer providing health insurance benefits paid partly through payroll deductions to offer a cafeteria plan, effective October 1st, 2007.
Florida S. 2535 Requires an employer who chooses to participate in the Cover Florida Health Care Access Program to offer a Section 125 plan
Indiana Tax Credit Program Requires that an employer offer a Section 125 plan to be eligible for certain tax credits.  
Iowa HF 2539 Requires the Commissioner of Insurance to "assist employers with twenty-five or fewer employees with (voluntarily) implementing" Section 125 POP plans.
Kansas SB 81 Requires all insurers to offer POP plans.
Maryland Working Families and Small Business Health Coverage Act Requires employers (with 1-9 employees) who participate in a subsidized plan to offer Section 125 plans.
Massachusetts Chapter 58 of the Acts of 2008, section 48 Requires all employers with >10 employees to offer a POP Plan.
Minnesota SF 3780 Requires all employers with >10 employees (who do not offer health insurance) to offer a Section 125 Plan for individual policies.
Missouri HB 818 Requires all employer providing health insurance benefits to offer a Section 125 plan.
Rhode Island SB 448 Requires employer with >24 employees to offer a Section 125 POP.
Tennessee S 333 & G 3360 Requires employers (who offer Section 125 plans) to automatically pay insurance premiums through a Section 125 plan.
Washington SB 5930 Requires employers who participate in the state's Health Insurance Partnership program to offer premium-only cafeteria plans.

           SRC: NCSL Website

How Do Employers Administer POP Plans?

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.   The Comprehensive Guide to the Small Business HRA

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