Wednesday, June 05, 2019

POP Goes the Premium

I attended an interesting Continuing Education class yesterday on Understanding Tax Implications of voluntary group products (like dental and vision, etc). One question that came up was about the wisdom/pitfalls of running these premiums through one's POP plan, and we'll explore that in another post.

But it reminded me about this post from my gig; it's an explanation of what a Premium Only Plan is and why it can be a valuable extra benefit:

Because of wage controls put in place during the Second World War, many of us get our health insurance benefits through our employers. As times have changed, and the cost of these benefits has risen, most employers who continue to offer group insurance coverage have required employees to foot more and more of the premium burden.

Typically, this involves deducting the employees' share from their paychecks. So, along with FICA and FUTA and the like, one also sees a deduction for health insurance coverage.

The employer's share of the premiums are generally tax deductible to the company, which reduces its net cost. An employee's share can also be tax deductible, but there are some hoops through which the employer and the employee must jump. Employers contract with Third Part Administrators (TPA's) to set up so-called "POP" plans (for "Premium Only Plans"), which are allowed under Section 125 of the Internal Revenue Code. POP plans are relatively simple, straightforward documents that enable employee premiums to be deducted pre-tax; that is, from gross wages rather than after-tax.

There are a number of immediate benefits to this process, and a few drawbacks. The primary advantage is that deducting premiums pre-tax effectively lowers the employee's net taxable income, saving tax dollars. This also lowers the employer's tax liability, so it's a win-win. The employee ends up with a few more spendable dollars as well as health insurance coverage.

There are also two potentially significant drawbacks:

First, by reducing taxable income, the employee is also reducing his (or her) Social Security income. That is, a lower gross wage can result, over time, in a lower Social Security benefit at retirement time. Most people aren't aware of this, and those that are may not be very concerned: after all, retirement may be many years away, and a higher paycheck today is an immediate pay-off.

The second challenge is that once an employee elects to participate in a POP plan, he's generally locked into it for the rest of the year. So if his circumstances change, it may be difficult or even impossible to opt out of the plan in the middle of the year. For example, if Bill signs up for his company's group coverage in January, and then decides in March that he'd really like to drop it because it doesn't fit his needs, he probably won't be able to opt out of the POP plan until the end of the year.

On the other hand, if he (for example) gets married and elects to switch to his spouse's plan, that's a "qualifying event" and he can make that change mid-year.

This "lock-in" provision takes on new urgency with the Affordable Care Act (ACA). While most POP plans run from January through December ("calendar year plans"), many others are set up on a non-calendar year basis. Many employees currently covered under their employer's group plan may elect to cancel that coverage in favor of one of the new Exchange-based individual medical plans. If their employer has a non-calendar year POP plan, they may not be able to make that change in January.

There's good news, though: the IRS has stated that employers with non-calendar year based POP plans may amend them to allow employees to drop off of (or join!) these "cafeteria" plans effective January 1, 2014. The employer has to determine whether or not to allow this change, but it seems reasonable to presume that most (if not all) of them will.
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