What Is a Premium Only Plan (POP)?

A Premium Only Plan, or POP, is one of the simplest and most common forms of a Section 125 cafeteria plan. While many employers think of Section 125 plans as complex benefit structures with multiple accounts and elections, a POP strips the concept down to its most basic function: allowing employees to pay insurance premiums on a pre-tax basis.

In practical terms, a POP is the mechanism that lets an employee’s share of health insurance premiums come out of their paycheck before taxes are applied. Without a POP or another compliant Section 125 plan in place, those same premiums must be deducted after taxes, even if the employer offers health coverage.

How a POP Works

Under a Premium Only Plan, employees elect to have their portion of eligible insurance premiums deducted from pay on a pre-tax basis. Those deductions reduce taxable wages for federal income tax purposes and for payroll taxes such as Social Security and Medicare.

The key feature of a POP is its narrow focus. Unlike a full cafeteria plan, a POP generally does not include flexible spending accounts, dependent care assistance, or other benefit elections. It exists solely to facilitate pre-tax premium payments.

Because of this limited scope, POPs are often easier to administer and understand, which is why they are widely used by employers of all sizes.

What Benefits Are Typically Included

A POP usually covers employee-paid premiums for employer-sponsored insurance benefits. Most commonly, this includes medical, dental, and vision insurance. In some cases, other eligible insurance premiums may be included if they meet Section 125 requirements and are allowed under the plan document.

It is important to note that not all insurance premiums are eligible for pre-tax treatment, and voluntary benefits may or may not qualify depending on how they are structured. The POP document defines which premiums are included and how deductions are handled.

POPs and Section 125 Rules

Although a POP feels informal because it often runs quietly through payroll, it is still a Section 125 plan and must follow the same basic IRS rules. That means the plan must be established in writing, elections must be made properly, and the plan must operate according to its terms.

A common misconception is that pre-tax premium deductions are automatic whenever an employer offers insurance. In reality, the tax-favored treatment is only permitted because Section 125 allows employees to choose benefits instead of cash compensation. The POP is what formalizes that choice.

Failure to maintain a compliant POP can put the tax treatment of employee premiums at risk, even if the practice has been in place for years.

Why Employers Use Premium Only Plans

Employers often adopt POPs because they are simple, efficient, and deliver immediate value. Employees benefit from lower taxable income, which increases take-home pay. Employers benefit from reduced payroll taxes because pre-tax deductions lower taxable wages.

Just as important, a POP provides clarity. It creates a clear, documented framework for handling premium deductions, rather than relying on informal payroll practices that may not hold up under scrutiny.

POPs, ERISA, and Fiduciary Considerations

A Premium Only Plan itself is governed by tax law, not ERISA. However, the benefits paid through the POP, such as health, dental, and vision plans, are often ERISA-covered plans. As a result, POPs frequently sit at the intersection of tax compliance and fiduciary responsibility.

While the POP does not create fiduciary duties on its own, it supports benefit plans that do. That means employers should view POPs as part of the broader benefits infrastructure, not as a standalone payroll feature.

A Simple Tool That Still Requires Care

Because POPs are narrow in scope, they are sometimes treated as “set it and forget it” arrangements. That can be a mistake. Like any Section 125 plan, a POP must be reviewed periodically to ensure it still reflects current benefits, payroll practices, and regulatory requirements.

When properly documented and administered, a Premium Only Plan quietly does its job, delivering tax savings with minimal complexity. When overlooked, it can become a weak link in an otherwise well-designed benefits program.

References

1. Internal Revenue Service. (2023). Publication 15-B: Employer’s Tax Guide to Fringe Benefits (Cafeteria Plans). https://www.irs.gov/publications/p15b
   
2. Legal Information Institute. (n.d.). 26 U.S. Code § 125: Cafeteria plans. Cornell Law School. https://www.law.cornell.edu/uscode/text/26/125