Are you an employer that offers health insurance post-tax, wondering how you can restructure your benefits plan to better help your employees?
Sponsoring a cafeteria plan may be your answer. A cafeteria plan allows for pre-tax salary deductions for health and other types of benefits. But don’t worry. While cafeteria plans can incorporate several benefit components, it can also be as simple as a premium only plan (POP).
What is a premium only plan?
The simplest form of cafeteria plan is a POP. The sole objective of a POP is to permit employees to pay their share of the premiums for certain health and welfare benefits with pre-tax salary reductions, rather than paying for these benefits with post-tax dollars.
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In addition to the tax benefits to employees who will have less taxable gross income under a POP, employers also benefit by saving payroll taxes on the employee salary reductions.
Here are three things you should know about these plans.
1. Cash-out provision
POPs can include a cash-out provision for employees electing not to receive coverage under the plan. For example, an employer might decide to pay 80 percent of the premium for employee only coverage and allow employees the choice to either pay the remainder for the medical coverage or receive a fixed amount in cash if the employees choose not to elect the medical coverage.
While the cafeteria plan has the tax advantages discussed above, the plan is still subject to the legal requirements in Section 125 of the Internal Revenue Code, including plan documentation.
In addition, a POP is subject to nondiscrimination testing requirements, although a safe harbor applies to POPs that allow them to automatically satisfy several component parts under standard discrimination testing.
However, adding any other component–including a health flexible spending account (FSA) or dependent care account–will cause the plan to no longer qualify as a POP and enjoy the safe harbor for nondiscrimination testing.
3. ERISA implications
A POP is not itself an ERISA plan, but the health and welfare benefits being paid for through the POP are covered by ERISA. So, ERISA reporting and disclosure requirements will apply to any ERISA covered benefit (ex. group medical, dental, STD, LTD, etc.) offered through a POP.
Those ERISA requirements include summary plan descriptions (SPDs) disclosures to participants, written plan documentation and, for certain plans, Form 5500 filings.
Did you know? PrimePay offers POP for free when you sign up for one of our pre-tax plans.