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Premium Conversion Plan - Table of Contents

What is a Premium Conversion Plan?
What tax savings can be expected?
What are the prerequisites?
What is the cost?
What is involved in setting up a plan?
What is involved in managing a plan?
How do I sign up?
Frequently Asked Questions (FAQs)
Glossary


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 equals 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 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.

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.

Your payroll system or payroll vendor must be able to process a Section 125 pre-tax deduction.

What is the cost?

Premium Conversion Plans from BenefitsWorkshop are only $300 per year. 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 in a given year, 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 $200.

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.

What is involved in setting up a plan?

To set up a Premium Conversion Plan, you simply:

  • Select an enrollment method.
  • Select the corresponding announcement letter.
  • Customize the announcement letter for your situation.
  • Distribute the announcement letters.
  • Collect forms as necessary depending on enrollment method.
  • Convert payroll deductions to tax-free.
  • Complete and execute a plan document within 90 days of the effective date.
BenefitsWorkshop provides you with detailed instructions to guide you through this process. Help can also be found in the Frequently Asked Questions (FAQs) or via e-mail, every step of the way.

What is involved in managing a plan?

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.

  • Make sure the plan complies with nondiscrimination rules
  • Collect and remit employer and employee premiums to vendors (same procedure you currently follow).
  • Enroll newly eligible employees in Premium Conversion Plan when enrolling other benefits.
  • Permit benefit changes only when qualifying events occur.
  • Complete an IRS Form 5500 each year.

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 e-mail away with the answer to any questions that you can't find on our site.

How do I sign up?

To subscribe to BenefitsWorkshop's Premium Conversion Plan, click the "Continue" button and follow the instructions. If you still have questions, please check the Frequently Asked Questions (FAQs) below.


Frequently Asked Questions (FAQs)

To view some of the most frequently asked questions regarding Premium Conversion Plans, click the "Continue" button.



Glossary

After-tax Deduction - A payroll deduction which takes place after payroll taxes are calculated.

Cafeteria Plan - Another name for a Section 125 plan, commonly used to describe the most flexible programs with many benefit options.

Election - An employee's decision(s) regarding participation in a Section 125 plan.

Family Status Changes - Events which are defined by Section 125 of the Internal Revenue Code and which allow affected employees alter their benefit choices in a manner consistent with the event. This term is now obsolete. The word "family" has been dropped from this term because some qualifying events are not related to an employee's family situation.

FICA - This acronym refers to Social Security and Medicare payroll taxes required by the Federal Insurance Contribution Act.

Flexible Spending Account - Typically, an employee-funded tax-free account which can be used to pay for medical, dental and vision expenses which are not covered by other insurance. This would include deductibles, copayments and other medically necessary costs.

Form 5500 - An information return the IRS requires all employers with Section 125 plans to file within seven (7) months after the end of each plan year.

Nondiscrimination - The operation of a plan in a manner that does not provide preferential treatment to owners, officers, highly compensated or key employees.

Plan Documents - A document required by Section 125 of the Internal Revenue Code which defines plan parameters such as available benefits, eligibility requirements, plan year, and other attributes of the program.

Plan Year - A period of time, usually twelve months, during which participating employees may pay for qualified expenses with tax-free income. Decisions to participate must occur before the plan year begins. Once the plan year starts, no changes are permitted unless a qualifying event occurs (see

POP Plan - Another name for a Premium Conversion Plan. The "POP" stands for Premium Only Plan.

Premium Conversion Plan - A benefit funding mechanism authorized and regulated by Section 125 of the Internal Revenue Code which allows employees to pay their share of qualified benefits with tax-free income.

Pre-tax Deduction - A payroll deduction which is taken before taxes are calculated. This effectively lowers taxable income. State and local income taxes may still apply in some jurisdictions. (Same as Tax-free Deduction)

Qualified Benefits - The types of insurance which can be offered on a tax-free basis include Employee Group Term Life Insurance (see Section 79) and Accident & Sickness Plans (see Section 105/106).

Section 79 - The portion of the Internal Revenue Code which regulates the tax treatment of Employee Group Term Life Insurance. Only the first $50,000 of term life insurance covering an employee under a group policy may be tax-free. This includes any employer-paid coverage.

Sections 105 and 106 - The portion of the Internal Revenue Code which regulates the tax treatment of insurance covering losses due to accidents or sickness. This includes medical insurance, dental insurance, vision insurance, disability insurance (loss of income due to accident of sickness), a Health Care Flexible Spending Account, and some cancer and dread disease coverage.

Section 125 - The portion of the Internal Revenue Code which allows employees to pay their share of the cost qualified benefits with tax-free income.

Section 125 Plan - A benefit plan that takes advantage of Section 125 to reduce costs.

Short Plan Year - An abbreviated plan year (less than 12 months) which permits the synchronization of the Section 125 plan year with the coverage period of the other benefits. If the medical plan renews in January and you want to install a Section 125 plan in July, the first "short" plan year can be for a six month period and then run twelve months (January through December) for subsequent years. This allows all elections to occur at the same time each year.

Status Changes - Events which are defined by Section 125 of the Internal Revenue Code and which allow affected employees alter their benefit choices in a manner consistent with the event.

Tax-free Deduction - A payroll deduction which is taken before taxes are calculated. This effectively lowers taxable income. State and local income taxes may still apply in some jurisdictions. (Same as Pre-tax Deduction)


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