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Tools to improve the financial health of your employees.
Premium Conversion Plan - Table of Contents
What is a Premium Conversion Plan?
A Premium Conversion Plan (sometimes called a Premium Only or "POP" Plan)
allows employees to pay their share of the cost of qualified benefits
with tax-free income. Authorized by Section 125 of the Internal Revenue
Code,the employees' payroll deductions are taken before taxes are
calculated. Depending on jurisdiction, some employees can save as much
as 40%
Employers save too. The employees no longer pay FICA taxes on the income
they use for premiums. The employer saves by avoiding the payment of
matching FICA contributions. The savings equals as much as 7.65% of
the total amount of employee-paid premiums. You may also save on FUTA
taxes. In most cases, these savings will more than pay the costs associated
with this program.
Premiums for medical insurance, dental insurance, vision insurance,
disability insurance, employee term life insurance, and some cancer
and dread disease policies are eligible. Click here to view the
special restrictions.
What tax savings can be expected?
Employees do not have to pay federal income tax, FICA taxes or in most
cases, state or local income taxes on qualified insurance premiums.
At a minimum, employees should save 21.65%. This is based on the 14%
federal income tax rate and a FICA tax rate of 7.65%. Middle income
taxpayers generally save at least 34.65%, based on the 27% tax bracket
and the 7.65% FICA tax. Employees subject to state and local income
may save even more.
Employers do not have to make matching FICA contributions on the portion
of employees' income used for qualified premiums. The savings is
typically 7.65% of total employee-paid premiums.
Please use our simple calculator to estimate your potential savings.
There are a few requirements you should be aware of before committing
to the installation of any Internal Revenue Code Section 125 program
such as the Premium Conversion Plan.
Generally, owners and their family members may not participate. But
the employees may, and as the employer, you will save on matching FICA
contributions. Owners may participate if the company is a "C" corporation
but only to the extent that total owner (and the owner's family) contributions
do not exceed 25% of the total contributions.
Your employees must pay part of the cost of qualified insurance
coverage. This program will produce no tax savings if the employer pays 100% of the costs.
Your payroll system or payroll vendor must be able to process a Section 125 pre-tax deduction.
Premium Conversion Plans from BenefitsWorkshop are only $300 per year.
If your employees are paying a combined total of at least $4,000 in
qualified insurance premiums, the employer's FICA tax savings will more than cover
the cost ($4,000 times .0765% equals $306). If the employees pay more
than $4,000 in a given year, you should realize a net savings. With the cost of health
insurance today, that is not difficult to do. And the greater the employee
contributions for qualified benefits, the more you will save.
Your employees will also save on taxes, usually between 22% and 40%
depending on their personal tax status. On that same $4,000, they
could save between $900 and $1,600, depending on their tax bracket. All for $200.
If you haven't already, try our simple calculator to
estimate the savings you can expect based on your actual situation and
then decide? This is one program that can produce a tangible net savings while
providing your employees with a highly-appreciated benefit.
What is involved in setting up a plan?
To set up a Premium Conversion Plan, you simply:
What is involved in managing a plan?
Managing a Premium Conversion Plan is very simple. In fact, once the plan
is installed it requires almost no effort and may actually reduce your
internal benefit administration costs.
That is essentially all that is involved and BenefitsWorkshop can guide
you every step of the way. Our comprehensive instructions and materials
will make this one of the easiest programs you have ever implemented...and
probably the most cost-effective. We are also a quick e-mail away with the
answer to any questions that you can't find on our site.
To subscribe to BenefitsWorkshop's Premium Conversion Plan, click the "Continue" button and follow the instructions. If you still have questions, please check the Frequently Asked Questions (FAQs) below.
Frequently Asked Questions (FAQs)
To view some of the most frequently asked questions regarding Premium Conversion Plans, click the
"Continue" button.
After-tax Deduction - A payroll deduction which takes place after payroll taxes are calculated.
Cafeteria Plan - Another name for a Section 125 plan, commonly used to describe
the most flexible programs with many benefit options.
Election - An employee's decision(s) regarding participation in a Section 125 plan.
Family Status Changes - Events which are defined by Section 125 of the Internal Revenue Code and
which allow affected employees alter their benefit choices in a manner consistent with the event. This term is now
obsolete. The word "family" has been dropped from this term because some qualifying events are not related to an employee's family situation.
FICA - This acronym refers to Social Security and Medicare payroll taxes required by the
Federal Insurance Contribution Act.
Flexible Spending Account - Typically, an employee-funded tax-free account which can be used to
pay for medical, dental and vision expenses which are not covered by other insurance. This would
include deductibles, copayments and other medically necessary costs.
Form 5500 - An information return the IRS requires all employers with Section 125 plans to file within seven (7) months after the end of each plan year.
Nondiscrimination - The operation of a plan in a manner that does not provide preferential treatment
to owners, officers, highly compensated or key employees.
Plan Documents - A document required by Section 125 of the Internal Revenue Code
which defines plan parameters such as available benefits, eligibility requirements, plan year,
and other attributes of the program.
Plan Year - A period of time, usually twelve months, during which participating employees may pay for qualified expenses with tax-free income. Decisions to participate must occur before the plan year begins. Once the plan year starts, no changes are permitted unless a qualifying event occurs (see
POP Plan - Another name for a Premium Conversion Plan. The "POP" stands for
Premium Only Plan.
Premium Conversion Plan - A benefit funding mechanism authorized and regulated by
Section 125 of the Internal Revenue Code which allows employees to pay their share of
qualified benefits with tax-free income.
Pre-tax Deduction - A payroll deduction which is taken before taxes are calculated.
This effectively lowers taxable income. State and local income taxes may still apply
in some jurisdictions. (Same as Tax-free Deduction)
Qualified Benefits - The types of insurance which can be offered on a tax-free basis include
Employee Group Term Life Insurance (see Section 79) and Accident & Sickness Plans (see Section 105/106).
Section 79 - The portion of the Internal Revenue Code which regulates the tax treatment of
Employee Group Term Life Insurance. Only the first $50,000 of term life insurance covering an employee
under a group policy may be tax-free. This includes any employer-paid coverage.
Sections 105 and 106 - The portion of the Internal Revenue Code which regulates the tax
treatment of insurance covering losses due to accidents or sickness. This includes medical insurance,
dental insurance, vision insurance, disability insurance (loss of income due to accident of sickness),
a Health Care Flexible Spending Account, and some cancer and dread disease coverage.
Section 125 - The portion of the Internal Revenue Code which allows employees to
pay their share of the cost qualified benefits with tax-free income.
Section 125 Plan - A benefit plan that takes advantage of Section 125 to reduce costs.
Short Plan Year - An abbreviated plan year (less than 12 months) which permits the synchronization of the Section 125 plan year with the coverage period of the other benefits. If the medical plan renews in January and you want to install a Section 125 plan in July, the first "short" plan year can be for a six month period and then run twelve months (January through December) for subsequent years. This allows all elections to occur at the same time each year.
Status Changes - Events which are defined by Section 125 of the Internal Revenue Code and which
allow affected employees alter their benefit choices in a manner consistent with the event.
Tax-free Deduction - A payroll deduction which is taken before taxes are calculated.
This effectively lowers taxable income. State and local income taxes may still apply
in some jurisdictions. (Same as Pre-tax Deduction)
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