The premium-only plan is a great product for building a loyal base of small-business customers.
Employers set up POPs using Section 125 of the Internal Revenue Code.
Section 125 is best known for laying out the rules for “cafeteria plans”plans that enable employees to use pre-tax earnings to pay for medical expenses, child care and other eligible expenses.
A POP is a kind of barebones cafeteria plan, organized so that contributions go solely toward paying premiums for health insurance, vision insurance, dental insurance, short-term disability insurance, long-term disability insurance, and up to $50,000 of group term life insurance.
The main advantage of using a POP is a reduction in taxes for the employer and the employees.
Instead of asking employees to pay for insurance with income that has already been taxed, the employer deducts premiums for the coverage on a pre-tax basis, thereby reducing the total taxable payroll.
Employers can reduce the cost of FICA taxes and other payroll taxes by an average of about 10%.
Paying with pre-tax dollars also reduces costs for the employees. The employees tax savings add up quickly: they can easily save an average of 30% on state, federal and FICA taxes.
Employees are the first to benefit from a POP program.