California Employer Resource · Cost & Compliance
🧾 Section 125 Premium Only Plans: What They Are and Do You Need One?
If your payroll provider has ever mentioned a “POP plan” or “cafeteria plan,” this is what they meant — and it’s one of the easiest ways to save money on a group plan you’re already paying for.
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Looking for the full employer rulebook — the 50-employee mandate, penalties, and tax credits? See the full guide →
❓ What is a Section 125 Premium Only Plan?The Basics
A Section 125 Premium Only Plan (POP) is an IRS-recognized arrangement that lets employees pay their share of group health, dental, and vision premiums with pre-tax payroll dollars instead of after-tax dollars. It doesn’t change your group health plan at all — it only changes how the employee’s portion of the premium is deducted from their paycheck.Source: 26 U.S.C. §125; see OnPay — What Is a Section 125 Premium-Only Plan? ↗
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🛡️ Talk Compliance Support: Know Where Your Plan Stands💵 How much does it actually save?Savings
Employees typically keep an extra 20–40% of every dollar they redirect pre-tax, because that money skips federal income tax, Social Security, and Medicare tax. Employers save too — payroll tax and unemployment tax are calculated on a smaller taxable wage base once premiums come out pre-tax, at no added cost beyond setting up the plan document itself.
📋 What does it actually take to set one up?Setup
A written plan document naming the eligible benefits, the plan year, and the election rules; a notice to employees explaining how and when they can enroll or change elections; and passing IRS nondiscrimination testing so the plan doesn’t disproportionately favor highly compensated employees. Most payroll providers or your broker can set this up directly — it isn’t something you’re expected to draft yourself. Worth raising next time you benchmark your plan at renewal →
🚫 Is it required, and who can’t use one?Who’s Excluded
It’s optional — nothing requires you to offer pre-tax premium deductions — but nearly every employer with a group plan sets one up because the savings are essentially free. A few people can’t participate even if the business has one: sole proprietors, partners, and S-corp shareholders who own more than 2% of the company. Worth knowing if you’re a small owner-only group — see how that plays out →