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Enhance Benefits With Less Money

POPs can help employers add benefits without adding costs.

By Kirk Okumura

A successful advisor who works with employee benefits says, “I need to have an idea to make your business better. If I don’t have an idea, I don’t deserve your business.” Ideas don’t have to be complicated. In fact, simpler is better. Let’s explore the simple idea of using a Section 125 premium-only plan (POP) in conjunction with a voluntary benefit plan to help clients add more benefits with little cost.

Employers are always looking for ways to enhance their employee benefits package. However, they want to do so with as little cost as possible. Voluntary benefit plans enable an employer to add benefits that cost them only the administrative expenses of managing the payroll deductions from the employees’ pay because the employee is paying the full premium. However, a benefit is only perceived as such if the employees want it and can afford it—a challenge for many employees who are on a tight budget. Fortunately, that is where a POP may be able to help.

POPs may be the answer
A POP is the simplest type of Section 125 cafeteria plan. It enables an employee to pay for eligible insurance premiums using pretax dollars. That means a reduction in federal income taxes, FICA payroll taxes, and, where applicable, state income taxes. Eligible products include medical, accidental death and dismemberment, dental and vision insurance. They also include disability income and life insurance but with some caveats.

For DI insurance, when the premiums are paid with pretax dollars, the corresponding benefits are taxable. For life insurance, the constraint is not on the taxation of benefits but on how much of the premium can be paid pretax. Only the premium corresponding to the first $50,000 of life insurance can be paid with pretax dollars. If the employer has a group term life insurance plan, chances are the voluntary life insurance premiums cannot be paid with pretax dollars. With these limitations, you will probably want to avoid using a POP with these two types of insurance.

The employer is able to enhance employee morale and spend little in the process.

A simple example can illustrate the power of POPs to create a benefit using dollars from tax savings. Take Joe in the parts department of a local car dealership. Joe grosses $2,500 per month. Assume that he and his wife earn comparable incomes and pay 30 percent in combined federal and state income taxes. Joe’s combined income tax and FICA tax rate is 37.65 percent. Let’s say Joe contributes $200 per month toward his medical insurance. In this situation, Joe’s cost savings of $75 per month could pay for an additional voluntary benefit. In the process, the employer saves around $15 in FICA taxes and may also not have to pay unemployment tax or Workers’ Compensation tax, depending on state laws. See Figure 1.

Advantages and disadvantages
For the employee, the only disadvantage would be a small reduction in Social Security benefits, since one portion of the FICA tax funds Social Security benefits. For the employer, a written plan would need to be created. In addition, there are some additional tax reporting and Department of Labor filings to complete annually.

The advantage is that for the employee, the change would result in a greater amount of take-home pay and/or additional benefits, such as life insurance. The employer is able to enhance employee morale and spend little in the process.

Talking about POPs
The POP concept works best when you are working with an employer who has a health plan in place but is not utilizing a POP. By making the employee contributions pretax, you will be able to create enough of a tax savings to offer ancillary benefits with no or little additional out-of-pocket outlay. Furthermore, for the employer, the tax savings of the payroll taxes can also be used to help ease some of the administration costs of initiating a voluntary benefit plan.

If you are dealing with an employer who does not utilize a POP, you can broach the topic with a simple opener such as, “If I could show you a way to add a benefit for your employees with little cost to you, would you be interested?” Chances are, the business owner will want to hear what ideas you have.

Kirk Okumura is an LUTC author and editor. Contact him at kirk.okumura@TheAmericanCollege.edu .

Figure 1: HOW A POP IMPACTS EMPLOYEE PAY

Take-Home Pay Without a POP

   
Monthly salary  
$2,500
Federal/state income tax at 30%
$ 750
FICA at 7.65%
$ 191
Total deductions

– $ 941

 

Gross take-home pay
$1,559
Less deduction for medical ins.
– $ 200
 

Net take-home pay
$1,359
 
Take Home Pay With a POP
Monthly salary
$2,500
Less deduction for medical ins.
– $ 200
 

Reduced salary
$2,300
Federal/state income tax—30%
$ 690
 FICA at 7.65%
$ 176
Total deductions
– $ 866
 

Net take-home pay  
$1,434
   
Employee Tax Savings  
$ 75
Employer Tax Savings (FICA)  
$ 15

 


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