What is a Premium Only Plan (POP)?
The base-model analogy
If a full cafeteria plan is the car with every option package — FSAs, dependent care accounts, benefit menus — a POP is the base model. Same chassis (a written Section 125 plan), one feature (pre-tax premiums), a fraction of the complexity. And for a lot of small businesses, the base model is genuinely all they need: if you offer health insurance and your employees pay any part of the premium, a POP is usually the cheapest tax win available.
What actually changes on payday
Without a POP, an employee's $200 monthly premium share comes out of their paycheck after taxes are figured. With a POP, that $200 comes out before — so their taxable income drops by $200/month. In this example, someone in a combined 25% bracket could keep roughly $50/month that used to go to taxes. The premium is the same; the order of operations changed.
The employer side: payroll taxes like FICA are figured on wages after the pre-tax deduction, so the business typically pays payroll tax on a smaller number. No guarantees on what that's worth — it depends on headcount and how many employees participate — but it's the reason POPs usually pay for their own paperwork.
What a POP requires (the honest checklist)
| Requirement | What it means |
|---|---|
| A written plan document | The IRS requires the plan to exist on paper before the pre-tax deductions start — a payroll setting alone is not a plan |
| Employee elections | Employees choose (usually at open enrollment) to pay premiums pre-tax; the choice generally locks in for the plan year |
| Nondiscrimination rules | The plan can't be tilted toward owners and top earners; POPs have a simplified safe-harbor path most small plans can meet |
| An employer-sponsored plan | A POP runs through your group insurance — it's not a way to pre-tax employees' individual outside policies |
POP or full cafeteria plan?
Start with what your people are asking for. If the answer is just “make my premium cheaper,” a POP does it with minimal moving parts. If employees also want to set aside money for medical bills or daycare, that's FSA territory — the full plan. (The upgrade path exists; nobody is stuck at the base model forever.) One thing employees will notice either way: their W-2 grows a curious little note in Box 14 — we decoded it in what “Cafe 125” means on your W-2.
Thinking a POP might fit your business?
We help businesses set up pre-tax benefit plans — and explain them so employees actually use them.
See how Section 125 setup works