The Section 125 Premium Only Plan is part of the IRS Code that allows employees to purchase health insurance and other ancillary benefits tax free.

How Employees Benefit

The premium or HSA contribution is actually deducted before taxes are calculated. Employees save from 20% to 40% of their pre-tax premium or contribution deductions in just federal income taxes alone. Under a Premium Only Plan employees take home pay is increased which helps reduce the high cost of providing health coverage for family members.

Premium Only Plan Employee savings example

Estimated Eligible Expenses Without POP With POP
Annual Salary $25,000 $25,000
Annual Before-Tax Contributions* $0 -$3,000
Taxable Income $25,000 $22,000
Estimated Taxes (30.65%)** -$7,663 -$6,743
Annual After-Tax Contributions -$3,000 $0
Net Take-Home Pay $14,337 $15,257
Percent of Premiums Offset With Tax Savings 30.65%

* Based on a monthly premium of $250

** Based on an average 20% federal, 7.65% FICA and 3% state tax rates

How Employers Benefit

A Section 125 POP is one of the few employee benefits that provides savings back to the employer. The POP does this by eliminating the 7.65% in employer matching Social Security and Medicare taxes and in some cases Federal and State unemployment taxes. .

Employer Savings Example

"Your" Company:
20 participating Employees
Without POP With POP
Average Pre-Tax Contribution $0 $3,000
Number Of Employees x 20 x 20
Total Annual Pre-Tax Employee Contributions $0 $60,000
FICA (Medicare & SS) x 0.0765 x 0.0765
Total Annual Savings (est.) $0 $4,590

Annual social security tax is based on tax rate of 7.65%. Annual pre-tax payroll deductions are based on insurance premiums averaging $250 per month per employee.