What Are Premium Only Plans or “EPOP”?
A Premium Only Plan (POP), also known as a “Premium Conversion Plan” or a “Cafeteria Plan”, allows employee contributions to employer-sponsored benefit plans to be made with pre-tax dollars, automatically increasing take-home pay while reducing the employer’s payroll tax liability. POPs are an effective way for a small businesses to customize employee benefits for maximum tax savings and appeal. These plans are designed to benefit all eligible employees and not just owners or highly compensated employees. These plans are generally not suitable to one person businesses, and may have limited appeal for businesses without salaried employees.
Qualified Premiums Include:
- Employee Group Term Life (up to $50,000)
- Voluntary Benefits
- Supplemental Medical or “Gap” programs
Employees can save roughly 20 – 40% of their insurance premiums by pre-taxing Federal, FICA, and, in most cases, state taxes.
Employers save the matching Social Security and Medicare taxes, and sometimes Federal and State unemployment taxes. Depending on the state, employers may also be eligible for worker’s compensation savings.
Employee benefits purchased on a pre-tax basis reduce the employer wage base for purposes of calculating payroll taxes. Employers can realize direct bottom-line savings from the reduced employer FICA taxes, FUTA taxes, and disability and workers’ compensation insurance premiums (varies state by state).
When employees purchase benefits on a pre-tax basis, their compensation is reduced for purposes of calculating wages subject to Federal and FICA (Social Security & Medicare) taxes. Based on 2007 tax rates, potential savings can range from 17.65% to 35.65% depending on an employee’s individual tax bracket, and, in most states, employees can also save on their state income tax.
A Premium Only Plan allows employees to pre-tax their contribution toward certain types of insurance including their employer provided health coverage, group benefits such as dental and group term life, and employee voluntary benefits such as accident, supplemental health, disability, and cancer coverage.