December 5, 2023

What is a Pop Plan and how can it benefit your employees?

When it comes to employee benefits, savvy business owners and HR professionals are always looking for  ways to maximize value for their workforce while optimizing costs. Enter the Premium Only Plan (POP Plan), a component of Section 125 of the IRS Code that can significantly enhance your company’s benefits package. So, what is a POP Plan, and how can it benefit your employees?

What is a Pop Plan?

A Premium Only Plan (POP Plan) is an integral component of many employer-sponsored benefits packages. Operating under Section 125, of the Internal Revenue Code, also known as a Cafeteria Plan, the POP Plan allows employees to contribute a portion of their salary to an account before taxes are deducted. This means that premiums for qualified benefits, such as health, dental, and vision insurance, are paid pre-tax. For your employees, this equates to immediate tax savings by lowering their taxable income. As an employer, you also stand to gain financial advantages by reducing your payroll taxes. This ability to stretch both the employee’s and employer’s dollars further makes the POP Plan a popular choice in effective benefits strategies.

What is a Cafeteria Plan?

A Cafeteria Plan, also known as a Section 125 Plan, is an employee benefits program designed to take advantage of Section 125 of the Internal Revenue Code. It allows employees to choose from a variety of pre-tax benefit options, much like they might pick and choose their meal in a cafeteria, hence the name. This approach to benefits offers employees a flexible menu of options that they can tailor to fit their personal circumstances and financial goals. They can allocate a portion of their salary to a range of benefits before taxes are applied, reducing their taxable income and consequently, their tax liability. Plans may include health insurance, dental or vision care, health savings accounts (HSA), and flexible spending accounts (FSA), among others.

Different types of Cafeteria Plans offer various kinds of benefits for diverse needs. The three primary forms are Premium Only Plans (POPs), Flexible Spending Accounts (FSAs), and Full Flex Plans. POPs, as we have already discussed, allow employees to pay their health insurance premiums with pre-tax dollars. FSAs let employees contribute pre-tax funds to cover qualified medical expenses or dependent care expenses. These contributions are not subject to federal income tax, Social Security tax, or in most cases, state income taxes, which can lead to significant tax savings over the course of a year. Full Flex Plans give employees the greatest choice by allowing them to receive additional benefits, such as life insurance or vacation days, instead of direct cash compensation. The purpose of these plans is to provide a cost-effective way for employers to offer benefits tailored to the various needs of their employees while also enjoying the accompanying tax advantages that contribute to a more flexible and attractive compensation package.

What is the Purpose of a POP Plan?

The purpose of a POP Plan extends beyond just the tax advantages it presents. In essence, it is designed to enhance your total compensation package, aiding in both attracting and retaining talent by offering tangible financial benefits. By reducing employees’ taxable income, they see an increase in their take-home pay relative to their gross income. This increase can be particularly attractive to employees who may be budgeting for significant medical expenses or insurance premiums throughout the year. Additionally, it demonstrates an investment in your workforce’s wellbeing and financial health—a commitment that can bolster company loyalty and morale.

The most immediate benefit for employees enrolled in a POP Plan is the increase in take-home pay. By paying premiums pre-tax, employees effectively lower their taxable income, which can result in substantial tax savings over the year. For example, if an employee in the 22% federal tax bracket also pays state and local taxes amounting to 8%, using a POP Plan can yield a total tax saving rate of 30%. This translates into $30 saved for every $100 spent on health insurance premiums.

Moreover, because these plans are flexible, if an employee’s circumstances change during the plan year — say, they get married or welcome a new child — they are allowed to adjust their benefits accordingly. This adaptability makes POP Plans particularly appealing for employees with changing family situations.

Who Needs a POP Plan?

A POP Plan is most beneficial for two key groups within an organization: employees who frequently incur medical expenses and those actively seeking ways to optimize their financial resources through tax savings. In terms of businesses that stand to benefit most from introducing a POP Plan, any entity wishing to offer competitive benefits packages while managing costs effectively should consider implementing one. The plan serves as a lucrative incentive for prospective employees and adds value for current staff while simultaneously allowing employers to economize on payroll-related taxes. In industries where competition for skilled workers is high or where margins are tight, a POP Plan can be the difference-maker in optimizing human capital investments.

Cost Efficiency for Employers

Companies also stand to gain from implementing a POP Plan. By reducing employees’ taxable income, employers see a corresponding reduction in their own payroll tax burden. Fewer employer taxes on lower aggregate salaries can lead to significant savings, especially with sizable workforces. In fact, often the tax savings for the employer will offset the cost of establishing and administering the plan.

In addition to financial incentives, offering a POP Plan enhances a company’s competitive edge in talent attraction and retention by strengthening the overall benefits package. A robust benefit offering signals to current and prospective employees that their well-being is valued — an important consideration for those looking to secure loyalty and commitment.

Compliance and Administration Considerations

Setting up a POP Plan entails ensuring compliance with relevant regulations, which may be perceived as daunting by some employers. However, with the assistance of knowledgeable HR professionals or third-party administrators, the process can be made seamless.

The key obligations involve creating a plan document that outlines participation rules and maintaining required non-discrimination tests to ensure that benefits are available fairly across all employee groups. Employers must also ensure that contributions do not exceed limits established by the IRS.

It’s essential to communicate effectively with staff about how they can take advantage of the POP Plan; clear communication can include informational seminars or one-on-one meetings with HR representatives equipped to answer questions about the benefit.

How Do I Set Up a Pop Plan?

Setting up a POP Plan requires diligence and a keen understanding of IRS regulations. To begin with, you’ll need to create a written plan document outlining the specifics of your POP Plan, which will serve as the foundational agreement between you and your employees regarding their benefits. This paperwork should articulate the parameters of eligible contributions and the procedures governing the plan. It is paramount that you collaborate with professionals—like accountants or specialized HR personnel—to ensure your plan is compliant with tax laws and employee benefit regulations. Once established, you’ll need to routinely update the plan as tax laws and company offerings change. To simplify administration, consider utilizing HR software that integrates POP management tools or consult with third-party providers who specialize in setting up and maintaining these types of plans. Remember, thoughtful communication about how the plan works and its advantages is key to engender employee participation and realization of its full potential.

POP Plans, A Win-Win Scenario

Investing in a Premium Only Plan can yield advantages for both employers and employees alike. By understanding its benefits and ensuring proper implementation and administration, businesses can provide a more attractive benefits package while enjoying payroll tax savings.

Companies willing to navigate initial set-up complexities will find that offering a POP Plan solidifies their status as an employer of choice while providing invaluable support to their workforce’s financial stability through tax-efficient measures. For these reasons, embracing the POP Plan could be considered not just savvy business acumen but also an investment in human capital that enhances overall satisfaction and productivity levels among staff.

At Tesseon, our proficiency in payroll and compliance positions us as the ideal partner to guide your organization through establishing and managing Premium Only Plans (POP). Our dedicated team stays abreast of evolving regulations to ensure your POP is not only compliant with IRS rules but also seamlessly integrated into your existing payroll systems. We understand that each organization is unique, which is why we provide tailored solutions and ongoing support to maximize the benefits these plans offer to you and your employees. Partnering with Tesseon means opting for peace of mind and a strategic approach to enhancing your benefits program while maintaining fiscal responsibility.

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Disclaimer: The information provided on this blog page is for general informational purposes only and should not be considered as legal advice. It is advisable to seek professional legal counsel before taking any action based on the content of this page. We do not guarantee the accuracy or completeness of the information provided, and we will not be liable for any losses or damages arising from its use. Any reliance on the information provided is solely at your own risk. Consult a qualified attorney for personalized legal advice.

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