In this month’s Compliance Corner, we’ll cover a document that employers are required to have in place when paying for employer-sponsored health coverage using pre-tax funds under Section 125 of the IRS Code: the Premium Only Plan (POP). It is sometimes referred to as a Cafeteria Plan or Section 125 Plan, but these are broader definitions that can also refer to other types of plans.
Whenever funds are withheld from employee paychecks, there is an extra layer of scrutiny on the employer’s handling to ensure that they’re used in the manner approved by the employee. It also states the employer will comply with certain nondiscrimination and eligibility rules for offering coverage. In return, the employer and their employees secure the right to certain tax advantages.
Who is NOT eligible to participate in the Premium Only Plan?
Employers should be aware that self-employed persons cannot participate in POP plans. Self-employed, for these purposes, includes sole proprietors, partners in partnerships, members of LLCs, and more-than-2-percent shareholders of S-corporations. Furthermore, neither the spouse of more-than-2-percent shareholders, nor the children, parents, or grandparents of more-than-2-percent shareholders can participate in an S-corporation’s cafeteria plan. In these instances, the owners and their family members of the business may be able to take a tax deduction outside of the cafeteria plan on their personal taxes for pre-tax benefits.
Which health benefits can be paid for with pre-tax dollars?
Under the IRS code, by paying their portion of health premiums using pre-tax funds, both employers and employees save on their taxes. Payroll taxes, federal taxes, and some state taxes are not applied to funds used to pay for certain health benefits.
These are the primary benefits that employers offer with pre-tax dollars:
- Medical, dental, and vision
- Life insurance up to $50,000
- Health savings accounts (HSAs)
- Flexible spending accounts (FSAs)
- Health reimbursement arrangements (HRAs)
- Gap or supplemental health plans
- Short-term or long-term Disability
NOTE: Disability income (short-term or long-term disability) can be paid with pre-tax dollars; however, the benefits are then taxable. Meaning, if someone has a claim, they’ll get a reduced income plus being cut back further to pay taxes.
What are employer obligations under a Premium Only Plan?
In order to enjoy the tax advantages and offer them to employees, employers agree to the following:
- Establish and provide for an annual open enrollment period for employees to add, change, or end their coverage for health benefits.
- Allow new hires to enroll within a specified waiting period, no longer than 90 days.
- Allow employees to change their coverage due to a qualifying event within 30 days of the event. The list of allowable events include changes to: marital status, number of dependents, employment, entitlement to Medicare or Medicaid, location/residence, or legal judgments or orders. Newer qualifying events include: gaining access to a subsidy for individual coverage or if the cost of coverage causes a financial hardship. One note—the plan has discretion on which of these qualifying events to permit and must apply them fairly to all employees. In addition, the election changes must be consistent with the change in status.
- Perform Discrimination Testing. There’s a safe harbor for Premium Only Plans if they meet the eligibility tests. These are: (1) offering coverage to all, similarly situated employees with (2) no delayed entry and (3) that classification of employees doesn’t discriminate in favor of highly compensated individuals.
How often does the POP need to be updated?
Although it’s typical for plan design changes to be made periodically each year, a plan’s POP document only needs to be updated if the employer makes one of the following changes:
- Change of insurer or administrator
- Change of renewal date for any of the plans
- Addition of benefits that need to be included
- Termination of a benefit
- Modification of the waiting period or eligibility rules
- New language required by law
If none of the above changes are made, a POP document (also called “POP doc”) can be good for up to 5 years.
How to distribute your POP
There is no requirement to provide a copy of your POP to employees but the content of the POP document should also be reflected in the employer’s Summary Plan Description (SPD), which is required to be distributed to employees.
What are the implications if we don’t have a POP document?
Failure to have the written Premium Only Plan document could result in legal disqualification of the POP Plan resulting in back tax assessments with significant tax penalties for the employer and its employees.
What to expect from ARC Benefit Solutions
For clients who need it, ARC Benefit Solutions can prepare a POP document for $200. We also can prepare a client’s Wrap Summary Plan Description for $300. Contact your ARC representative if you’re interested in having this document prepared for your business.
Customers can always opt to have a document prepared by another vendor or attorney. We are happy to recommend reputable alternatives upon request.