Under Section 125 of the IRS code, an employer may sponsor a plan for its employees which will allow them to pay for group health premiums, other qualified insurance premiums, unreimbursed medical costs, child and dependent care costs with tax-free dollars!

A Premium Only Plan (POP) allows for employees to pay their portion of the group insurance premium on a pre-tax basis and is a good start to saving taxes for you and your employees.  Implementing a Premium Only Plan is fairly easy.  Essentially, an employer needs to set up the plan with proper documentation, notify & educate employees, and perform non-discrimination testing.

There are restrictions by the IRS in who can sponsor and participate in a pre-tax 125 plan.

Any employer can sponsor a cafeteria plan for its employees, regardless of size.

Eligible employers include corporations (“Subchapter S” or “Subchapter C”), partnerships, non-profit organizations, government entities, limited liability companies (LLC), limited partnerships (LLP), and sole proprietorship.  Businesses that are under a controlled group may also sponsor a single plan for all of their employees.

Only employees of the sponsoring employer can participate in a cafeteria plan.  Examples of individuals that are NOT eligible to participate in a cafeteria plan include:

* Self-employed individuals (but they can sponsor a plan)
* Partners in a partnership (but the partnership can sponsor a plan)
* A more than 2% shareholder in a “Sub-chapter S” corporation
* An owner of a “Sub-chapter C” corporation can participate in the plan but is limited to only elect 25% of the total contributions in the plan.  For smaller companies this can be a very small amount.