October 17, 2023 By Bob Viñal

Premium-Only Plans (POP Plans): A Smart Strategy for Businesses


Offering a comprehensive group healthcare plan is one of the best ways a business can demonstrate that they value their employees. But for both employers and employees, the cost of health insurance premiums can feel burdensome. With smart tax planning and consideration of everyone’s needs, it doesn’t have to be that way. 

Premium-Only Plans (POP Plans) represent a beneficial and tax-saving strategy that businesses can implement to assist their employees in paying for their health insurance premiums and other eligible benefits in a tax-efficient manner. This approach can significantly benefit both employees and employers by maximizing tax advantages and fostering a healthier work environment.

What Are Premium-Only Plans (POP Plans)?

A Premium-Only Plan (POP) is a tax-favored benefit plan under Section 125 of the Internal Revenue Code. It allows employees to use pre-tax dollars from their paychecks to cover certain insurance premiums and qualified benefit expenses. Essentially, employees can pay for their share of health insurance premiums before taxes are withheld, reducing their taxable income and increasing their take-home pay.

How Do POP Plans Work?

In a POP Plan, employees contribute a portion of their salary to cover insurance premiums and other eligible benefits, such as dental or vision insurance, using pre-tax dollars. These pre-tax contributions lower the employee's taxable income, resulting in a reduction in federal and state income taxes as well as FICA (Federal Insurance Contributions Act) taxes.

Employers facilitate the process by deducting the agreed-upon premium amounts from employees' paychecks before taxes are calculated. The deducted amount is then directed to the respective insurance providers to cover the premiums for the chosen insurance plans. Employers also benefit from reduced payroll taxes since taxable income for both employees and the company is decreased.

Why Would Some Businesses Benefit from Using this Strategy?

1. Cost Savings. Implementing a POP Plan can result in significant cost savings for both employees and employers. Employees can reduce their tax liability by contributing pre-tax dollars toward premiums and eligible benefits. Employers, on the other hand, experience reduced payroll taxes, making it a win-win situation.

2. Employee Attraction and Retention. Offering a POP Plan demonstrates an employer's commitment to employee well-being and financial security. This can enhance employee satisfaction, attract top talent, and encourage retention within the organization, ultimately contributing to a positive work culture.

3. Tax Advantages. Utilizing pre-tax contributions through a POP Plan lowers the overall tax burden for both employees and employers. Employees enjoy higher take-home pay due to reduced tax liabilities, while employers benefit from reduced payroll taxes and potential employer contributions to the plan.

4. Improved Benefit Options. By offering a POP Plan, employers can expand the range of benefits available to employees without significantly increasing costs. This can lead to a more comprehensive benefits package, promoting employee health and well-being.

By taking advantage of this tax-saving approach, businesses can demonstrate their commitment to employee satisfaction, financial stability, and overall success. Contact us at Bay Area Health Insurance to learn more about Premium-Only plans, and together we will determine if this type of benefit is right for your business. 

About Author

Bob Viñal

Bob Viñal has been working in the insurance industry for more than 30 years, handling everything from plan design to claims and rating structures.

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