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.
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.
| 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
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.
| "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.
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