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What is a Premium Conversion Plan?
A Premium Conversion Plan (sometimes called a Premium Only or "POP" Plan) allows employees to pay their share of the cost of qualified benefits with tax-free income. Authorized by Section 125 of the Internal Revenue Code, the employees' payroll deductions are taken before taxes are calculated. Depending on jurisdiction, some employees can save as much as 40% Employers save too. The employees no longer pay FICA taxes on the income they use for premiums. The employer saves by avoiding the payment of matching FICA contributions. The savings equal as much as 7.65% of the total amount of employee-paid premiums. You may also save on FUTA taxes. In most cases, these savings will more than pay the costs associated with this program. Premiums for medical insurance, dental insurance, vision insurance, disability insurance, employee term life insurance, and some cancer and dread disease policies are eligible. Click here to view the special restrictions. What tax savings can be expected?
Employees do not have to pay federal income tax, FICA taxes, or in most
cases, state or local income taxes on qualified insurance premiums.
At a minimum, employees should save 21.65%. This is based on the 14%
federal income tax rate and a FICA tax rate of 7.65%. Middle income
taxpayers generally save at least 34.65%, based on the 27% tax bracket
and the 7.65% FICA tax. Employees subject to state and local income
taxes may save even more.
Employers do not have to make matching FICA contributions on the portion
of employees' income used for qualified premiums. The savings is
typically 7.65% of total employee-paid premiums.
Please use our simple calculator to estimate your potential savings.
What are the prerequisites?
There are a few requirements you should be aware of before committing
to the installation of any Internal Revenue Code Section 125 program
such as the Premium Conversion Plan.
Generally, owners and their family members may not participate. But
the employees may, and as the employer, you will save on matching FICA
contributions. Owners may participate if the company is a "C" corporation
but only to the extent that total owner (and the owner's family) contributions
do not exceed 25% of the total contributions.
Also, your employees must pay part of the cost of qualified insurance
coverage. This program will produce no tax savings if the employer pays 100% of the costs.
In addition, your payroll system or payroll vendor must be able to process a Section 125 pre-tax deduction.
What is the cost?
The retail cost of the Premium Conversion Plans from the Arison BenefitsWorkshop is only
$300 per year, but you may qualify for a discount. Contact your Arison sales person to
find out.
If your employees are paying a combined total of at least $4,000 in
qualified insurance premiums, the employer's FICA tax savings will more than cover
the cost ($4,000 times .0765% equals $306). If the employees pay more
than $4,000, you should realize a net savings. With the cost of health
insurance today, that is not difficult to do. And the greater the employee
contributions for qualified benefits, the more you will save.
Your employees will also save on taxes, usually between 22% and 40%
depending on their personal tax status. On that same $4,000, they
could save between $900 and $1,600, depending on their tax bracket. All for $300.
If you haven't already, try our simple calculator to
estimate the savings you can expect based on your actual situation and
then decide? This is one program that can produce a tangible net savings while
providing your employees with a highly-appreciated benefit.
To set up a Premium Conversion Plan, you simply:
Managing a Premium Conversion Plan is very simple. In fact, once the plan
is installed it requires almost no effort and may actually reduce your
internal benefit administration costs.
That is essentially all that is involved, and BenefitsWorkshop can guide
you every step of the way. Our comprehensive instructions and materials
will make this one of the easiest programs you have ever implemented...and
probably the most cost-effective. We are also a quick phone call or e-mail away with the
answer to any questions that you can't find on our site.
To subscribe to BenefitsWorkshop's Premium Conversion Plan, click on the link and follow the instructions.
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