Are you an employer who would like to allow their employees to pay health and other insurance premiums with pre-tax salary deductions? Then, yes, you need a POP document. What needs to go in this document? Is it required? Before looking at the answers to these questions, let’s understand POP a little better.
POP stands for “Premium-Only Plan” or a Cafeteria Plan. Despite its name, a Cafeteria Plan has nothing to do with lunchtime. Still, it is defined as a “written plan” under which all participants are employees, and those participants may choose two or more benefits consisting of qualified benefits and cash. The term “qualified benefits” here refers to those not included in the employee’s gross income, so tax-free. These qualified benefits include group health, dental, vision, term life, and accidental death insurance.
POP Plans are mutually beneficial to employers and their employees. These plans allow employees to agree to a “salary reduction voluntarily,” so the employer pays their premiums and writes them off as a business expense. The portion of the premium the employee is responsible for is deducted off the top before taxes are calculated, which produces savings anywhere from $.25 to $.40 on every dollar paid in insurance premiums. Employers’ payroll tax savings usually more than cover the costs associated with setting up and administering the plan.
To set up a POP plan, an employer must be by ERISA and provide the employee with a Section 125 POP document, essentially a rule book for the plan. This document must contain the following:
- A description of benefits offered by the plan
- Eligibility and participation rules
- Open enrollment rules
- How to enroll in benefits
- Plan name and number
- The pre-tax contribution limits
- Definition of the plan year
- How employee contributions can be made
- Explanation: the ONLY THE EMPLOYEE is eligible to participate
A summary (SPD) of the POP document is also required. The SPD must include clear language that all employees can understand. IRS regulations clearly state that pre-tax contributions and savings can only occur once the document and summary are distributed and signed by both the employee and employer.
If you need help creating your Section 125 POP document, let us guide you to compliance by calling (704) 333-3255 or sending us a message through our contact page.
