Health Insurance

What Is a Section 125 POP (Premium-Only-Plan)?

If you’ve looked into providing employee benefits, you may have encountered the Section 125 plan. Also known as cafeteria plans, these plans allow employees to choose to either  

  • Get benefits such as health insurance or life insurance on a pre-tax basis, or
  • Receive a comparable—but taxable—benefit in cash.

A Section 125 POP (Premium-Only-Plan) is a type of cafeteria plan that allows your employees to pay for their insurance premiums with pre-tax dollars.

Section 125 POP

What are the benefits of a Section 125 POP?

Employer contributions to insurance premiums are always pre-tax. But many employers require their employees to shoulder at least part of the premiums, and employee contributions aren’t pre-taxunless there’s a Section 125 POP in place.

Being able to pay for premiums using pre-tax dollars obviously benefits your employees, but it’s also a win for you. Any amount that employees deduct pre-tax for their premiums is subtracted from their total wages, which in turn reduces the amount of employer payroll taxes that you have to pay.

A Section 125 POP can be applied to premiums for group insurance products that you offer your employees. That includes health, dental, vision, disability, up to $50,000 in term life coverage, and other supplemental coverage.

Keep in mind that the Section 125 plan itself is not insurance though—you still have to offer group insurance coverage separately.

How do I set up a Section 125 POP?

To establish a Section 125 POP, you need to put the details of your plan in writing and make sure everything in the plan applies uniformly to all participants.

You can write your own plan document, but it’s best to consult an expert, like your broker, who’s well-versed in all the compliance requirements surrounding Section 125 POPs. 

Your written Section 125 POP document must include:

  • A description of the benefits offered by the plan
  • Eligibility and participation rules
  • How to enroll in benefits under the plan
  • A note that elections can only be made during open enrollment (unless the plan allows for benefit election changes due to a change in status)
  • The pre-tax contributions limit 
  • Details on how employer contributions can be made
  • The plan year

The plan document must also say that only employees are eligible to participate in the plan. Employers, spouses, and dependents may not participate. The spouse and dependents of a participating employee can receive benefits through the plan, though. 

You’ll also need to write a summary plan description to give to your employees. The summary plan description is just what it sounds like—it summarizes all the details laid out in your plan document in easier-to-understand terms.

This article provides general information and shouldn’t be construed as legal, benefits, or HR advice. Benefits and insurance regulations may change over time and may vary by location and employer size. So, please consult a licensed broker or appropriately certified expert for advice specific to your business’s benefits options.