One effective way for an employer to provide certain benefits tax-free to its employees, such as health, dental or vision insurance, is through a Cafeteria Plan, as defined under Section 125 of the Internal Revenue Code. The only way for an employer to have a Cafeteria Plan is by preparing a written plan document which meets the requirements of Code Section 125. Failure to have a written document, or failure to operate a Cafeteria Plan in accordance with the terms of Code Section 125, disqualifies the plan as a Cafeteria Plan and results in gross income to the participants. In other words, any participant in the plan will lose the tax favorable status of the benefits that he or should would have otherwise received.
As a comparison, think about an employer who offers a tax-preferred retirement account, such as a 401(k). In order to have a 401(k), the employer must have a written plan document that explains information about the plan. For example, who is eligible, when can contributions be changed, what happens after employment is terminated, can loans be taken from the plan, etc. A similar, but different type of plan document is required when it comes to providing tax-free benefits for health, dental, vision, life, disability and other qualified group insurance products.
Premium Only Plans (POP) can generally be defined as a type of Cafeteria Plan where the only pre-tax benefits available to participants are for those of insurance premiums. If the Cafeteria Plan also provides for other pre-tax benefits, such as a Health Care FSA or Dependent Care FSA, additional plan documents are required.
Because Code Section 125 is complex, it generally requires a third party who is familiar with the tax code to prepare a plan document which meets the Cafeteria Plan requirements. Premium Only Plans are inexpensive and easy to setup and the benefits of pre-tax savings for the employee generally offsets and costs to setup the plan.
For more information and how to setup a Premium Only Plan for $79 (one time fee) - cafeteriaplandirect.com
Small Business blog