A Premium Only Plan is the cafeteria plan equivalent of a starter pack. The IRS rules under Section 125 allow employers to offer pre-tax treatment of employee health insurance premiums with minimal compliance overhead, and the POP is the legal structure that makes it work. Without a POP, employee premium contributions come out of after-tax pay, which means the employee gets no tax benefit and the employer pays full FICA on the contribution. With a POP, both sides save. The administrative cost is small. The annual savings for an employee in a 25 percent bracket on $300 in monthly premium contributions runs around $900.
What a POP Actually Does A Premium Only Plan creates the legal framework under IRS Section 125 that lets employees pay their share of qualified group health insurance premiums on a pre-tax basis. The contribution comes out of gross pay before federal income tax, Social Security tax, and Medicare tax are calculated, which reduces the employee's taxable income and the employer's matching payroll tax obligation in the same step.
POPs are the simplest cafeteria plan structure. Unlike a full cafeteria plan with FSAs, dependent care accounts, and other elections, a POP only handles premium pre-tax treatment. That narrow scope is why POPs are often a no-brainer for employers offering group health coverage; the compliance overhead is minimal and the savings are real.
Setting Up a Premium Only Plan Three documents are required. First, a written plan document that sets out the plan terms, eligibility, election rules, and benefit details. Second, a Summary Plan Description (SPD) distributed to participants. Third, employee election forms (or electronic enrollment records) capturing each participant's choice to pay premiums pre-tax versus after-tax.
Most employers buy a POP plan document template from a TPA, broker, or benefits platform for $100 to $500 per year. The same vendor usually provides the SPD and handles the annual nondiscrimination testing. Setup is typically a single afternoon of work; ongoing maintenance is mostly the annual renewal and any plan-design changes that follow open enrollment.
Do Employees Need to Re-Elect Each Year? Most POPs use evergreen elections, meaning the prior year's election carries forward unless the employee actively changes it during open enrollment. Some plans require affirmative re-election each year, which generates more administrative work but ensures employees confirm their choice. Either approach is allowed under Section 125, but the plan document has to specify which one applies.
POP Compliance Requirements That Trip Employers Up Section 125 requires annual nondiscrimination testing to confirm the plan doesn't disproportionately benefit highly compensated employees. POPs have a simplified testing standard (the safe harbor test for premium-only plans), and most plans pass without issue, but the testing still has to be performed and documented annually.
The plan document must be in place before any employee elects pre-tax premium treatment. Retroactive plan documents do not work. The IRS has invalidated pre-tax treatment in plans where the document was not in place during the plan year, requiring the employer to re-characterize premium deductions as after-tax and issue corrected W-2s. Most TPAs will have the document in place before the plan year starts, but verifying the date is part of routine compliance hygiene.
Getting the Most Out of a Premium Only Plan The economic case for a POP is strong enough that almost any employer offering group health coverage should have one. The administrative cost is a few hundred dollars per year. The combined employer FICA savings on pre-tax premiums often runs into thousands of dollars annually for small employers and into hundreds of thousands for larger ones. The employee savings (federal income tax, Social Security, Medicare, and most state taxes on premium dollars) typically run hundreds to thousands per employee per year.
Pair the POP with clear open enrollment communications so employees understand what the pre-tax treatment is worth in real dollars. Most employees see only the premium amount on their paystub and never compute the tax savings. A simple enrollment guide showing pre-tax versus after-tax paycheck math makes the value visible. The IRS publishes the Section 125 rules in Publication 15-B and in Treasury regulations under Section 125. Employers without a POP today are leaving free money on the table for both the company and employees, and the setup cost is recovered on the first quarter of operation. Pair the POP with broader pre-tax benefits like a 401(k) and HSA to build a more complete pre-tax compensation picture.
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