Premium Only Plan

A Section 125 Cafeteria Plan is a written plan that lets employees choose between taxable cash pay and certain qualified benefits, such as health premiums, a Health FSA, or a Dependent Care FSA, paid with pretax dollars. A Premium Only Plan (POP) is the simplest form: it only lets employees pay their share of insurance premiums pretax.

Yes. The IRS defines a cafeteria plan, including a Premium Only Plan, as a written plan that lets employees choose between cash and qualified benefits. Without a written plan, premium deductions can't be treated as pretax under Section 125.

Premiums paid through a Section 125 plan are generally excluded from federal income tax and from Social Security and Medicare (FICA) taxes, and from federal unemployment (FUTA) tax. Because FICA wages go down, the employer's share of FICA goes down too. State and local tax treatment can vary.

Accident and health coverage, such as employer-sponsored medical, dental, and vision premiums, can generally be offered under a cafeteria plan. Some benefits can't, including long-term care insurance and Archer MSAs.

Generally no. Elections stay in place for the plan year, and IRS rules allow mid-year changes only for certain permitted events, and only if the plan includes them. Your plan document lists which events apply.

Employees can, but sole proprietors, partners, and more-than-2% shareholders of an S corporation generally can't participate in a cafeteria plan. Their premiums are handled under different tax rules.