Understanding Section 125 Premium Only Plan: Benefits for Employers and Employees

 A Section 125 Premium Only Plan is a tax-saving benefit that allows employees to pay for their health insurance premiums with pre-tax dollars. This type of plan, governed by Section 125 of the Internal Revenue Code, helps both employers and employees reduce taxable income and save money on healthcare costs.

What is a Section 125 Premium Only Plan?

A Premium Only Plan  is a simple cafeteria plan that lets employees deduct health insurance premiums from their paycheck before taxes are applied. This reduces their taxable income, leading to lower payroll taxes for both employees and employers. The plan is easy to set up and is commonly used by small and mid-sized businesses to offer tax-advantaged benefits.

Key Benefits of a Section 125

For Employees:

  • Tax Savings: Employees pay for health insurance premiums with pre-tax dollars, reducing their overall tax burden.
  • Increased Take-Home Pay: Lower taxable income means employees keep more of their earnings.
  • Affordable Healthcare: Reducing tax liability makes health insurance more affordable.

For Employers:

  • Lower Payroll Taxes: Employers save on Social Security (FICA) and Medicare taxes because employee taxable wages are reduced.
  • Easy to Implement: Premium Only Plan are cost-effective and simple to administer.
  • Employee Retention: Offering a tax-advantaged benefit improves employee satisfaction and retention.

How Does a Section 125 Premium Only Plan Work?

  • Employer Sets Up the Plan: The employer establishes a Section 125 Premium Only Plan following IRS guidelines.
  • Employees Enroll: Employees agree to have their health insurance premiums deducted pre-tax from their paycheck.
  • Payroll Adjustments: The employer processes payroll with the adjusted, lower taxable wages.
  • Tax Savings Applied: Employees pay less in federal, state, and FICA taxes, while employers reduce payroll tax liabilities.

Who Can Offer a Section 125 Premium Only Plan?

Most private businesses, non-profits, and government agencies can offer a Section 125 Premium Only Plan. However, sole proprietors, partners, and LLC members cannot participate since they are not considered employees under IRS rules.

Final Thoughts

A Section 125 Premium Only Plan is an excellent way for businesses to provide cost-effective health benefits while reducing tax liabilities for both employers and employees. It’s a simple yet powerful tool for making health insurance more affordable and improving workplace benefits.


For more info visit here:- POP plan document

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