Do you need a 125 - Premium Only Plan - POP?

The name “Section 125 Plan”  POP, derives from Title 26, Section 125 of the United States tax code. This law outlines the rules employers must follow when establishing a cafeteria plan. It defines the term cafeteria plan and describes the types of benefits such a policy may include. The law prohibits programs that discriminate against lower-paid workers by favoring those who have high compensation. If you are found to be discriminatory, the benefits it provides to highly-paid workers will be taxed.

Cafeteria 125 plans, POP is an employee benefit that allows employees to pay for their portion of insurance premiums with pretax dollars saving on federal, state, and Social Security taxes. The plan enables pretax offerings on benefits.

The 125 plan or POP Plan includes health, dental, accidental death and dismemberment, and even voluntary benefits. Volunteer benefits include examples such as cancer, accident, and other benefits. IRS tax laws require a 125 Premium Only Plan (POP) or a Flexible Spending Account (FSA) to pay medical, dental, and other eligible insurance premiums on a pretax basis.

Not only do employees keep more money in their pockets, you, as the employer, will save money, lower your taxes paid towards the employee’s Social Security match. HR Service Inc. POP Solutions, combined with our Premium Only Plan, is so convenient. You can easily create your plan documents and summary plan description using our web-based tool and easily make any needed updates. Additionally, we keep your document current when there are changes in the IRS requirements. We provide everything you need for a formal plan document. Best of all, it only takes a few minutes to create. 

Also, we offer a tool to complete year-end non-discrimination testing that is required each year. Our staff is ready to assist you with anything. If you have any questions about how a Section 125 plan will benefit you and your employees, or what you need to submit, please contact us. 

With Our Service, You can create your 125 Premium Only Plan documents online

How much does a Premium Only Plan cost?

Typically a plan document and necessary forms will cost anywhere from $100-$600 through an attorney or tax advisor. Many payroll providers charge set-up fees as much as $600, but once you have the document, you will be required to update as new legislation is available. Our services are entirely affordable, and we guarantee to be less expensive than an attorney or payroll provider. 

What is included?

 As part of our service you are provided with:

    1. The Plan Document
    2. The Summary Plan Description
    3. Default Enrollment Notice Forms
    4. Non-discrimination Testing Software
    5. Compliance Updates – Any time there is a change to the law that requires your plan document to be changed, we will update the document online and let you know when it is ready for you to download and print your updated record.


In a few easy steps, your documents will be complete. Processing time is done in minutes. We offer a one-stop document management location.


Login anytime to update and receive new documents for distribution or audits.


All Documents are kept up-to-date with legal requirements. We will always notify you of changes.

Cafeteria Plan State LawsThere are considerable differences among the laws and plans.  Individual state laws are detailed in the table below.

 STATELAW; DESCRIPTIONRequired & Optional Features
ConnecticutOn July 10, 2007 Connecticut enacted legislation (SB 1484) mandating cafeteria plans. The Connecticut law requires any employer providing health insurance benefits paid partly through payroll deductions to offer a cafeteria plan, effective October 1, 2007. To simplify employer paperwork, there are no filing requirements under this mandate.”Any employer that provides health insurance benefits to its employees for which any portion of the premiums are deducted from the employees’ pay shall offer such employees the opportunity to have such portion excluded from their gross income for state or federal income tax purposes, except as required under Section 125 of the Internal Revenue Code of 1986…”  (Public Act 185July 2007, now Conn. Gen. Stat. Section 38a-1041(f) ).Required for some employers w/ health insurance
FloridaCreates the Cover Florida Health Care Access Program, which requires that employers who (voluntarily) choose to participate in the Access Program enroll by complying with the procedures which must include, “compliance with federal tax requirements for the establishment of a cafeteria plan, pursuant to section 125, including designation of the employer’s plan as a premium payment plan, FSA [Flexible Savings Account] or both.”  Also revises the eligibility requirements for participation in the Medikids program or the Fla. Healthy Kids program.(S. 2534 signed into law 5/21/2008, now Fla. Stat §408.910(4)(c) ).Optional for employers
IndianaCreates a tax credit to encourage employers to establish a fully insured health plan in combination with a 125 plan.  The state will provide the lesser of $50 per employee or $2,500 for 2 years if the employer offers such a plan. Applies to all Indiana firms that do not have a Section 125 plan. (Effective 01/2008, Mathematica Fact Sheet 7/18/08)Optional for employers
IowaRequires the Commissioner of Insurance to  “assist employers with twenty-five or fewer employees with (voluntarily) implementing and administering” Section 125 plans including medical expense reimbursement accounts; also requires cafeteria plan features on the division’s internet site. (HF 2539, signed into law May 13, 2008, now Iowa Code §505.31)Requires that the Iowa Choice Insurance Exchange Act “shall study the ramifications of requiring each employer with more than ten employees in the state to adopt and maintain a cafeteria plan that satisfies section 125.” Amended to Create a Health Care Coverage Commission.  (S 389, signed into law by governor as Chapter 118, 5/19/2009)Optional for employers
KansasRequires all insurers to offer premium-only Cafeteria Plans, while language stating that employers “shall” offer plans was amended to “may offer.”  (SB 81, signed into law as Chapter No. 2008-164, 6/9/2008)Establishes the Small Employer Cafeteria Plan Development Program Fund  for FY2008, and appropriated $150,000. (SB 357, signed into law as Chapter No. 2007-201, 7/13/07)Optional for employersRequired for insurers
MarylandCreates the Working Families and Small Business Health Coverage Act. This is a voluntary plan with a specialized scope – offering subsidies to the smallest businesses, with one to nine employees. Those that join must offer a cafeteria plan.  Employers are under no obligation to apply for or participate in the small business subsidies and any employer with ten or more employees is ineligible. (SB 6, signed November 2007, effective Sept. 2008)Optional for employers w/ 1-9 employees.

Massachusetts in 2006 became the first state to require that all employers with 11 or more workers offer at least a “premium only” cafeteria plan. That requirement took effect on July 1, 2007 and is “one of the primary employer responsibilities” within a larger near-universal health plan, also requiring at least $295 annually in employer payments toward health costs and an individual mandate for residents to enroll in an insurance plan.  The law also includes state subsidized coverage and Medicaid expansions. [3]  (Chapter 58 of the Acts of 2006, section 48; Mass. Gen. Laws Ch. 151F, §2)LAW REPEALED – Massachusetts Section 125 Cafeteria Plans (956 CMR 4.00)

      • ·Statutory repeal background:
      • Guidance issued by the US Dept. of Labor and the IRS stated that, starting in 2014, employers can no longer offer Section 125 plans to employees to purchase non-group health insurance without an employer contribution
      • This language appeared incompatible with the provisions of Mass. 956 CMR 4.00, which requires employers to offer Section 125 plans under which an employee can purchase health insurance without any employer contribution. As such, the statute (Ch. 151F) was repealed in an FY2014 Supplemental Budget, (Ch. 52 of the Acts of 2014)

Article:  “How Have Employers Responded To Health Reform In Massachusetts? Employees’ Views At The End Of One Year.”  Health Affairs, online 10/28/08. [8 pages Adobe PDF PDF]

Required for employers w/ 11+ employees; also employer $ contribution
MinnesotaRequires all employers with 11 or more employees who do not offer health insurance to establish a Section 125 plan.  It does not require employers to offer insurance coverage or contribute to it.  Includes an “opt out” provision.   The Commissioner of Employment and Economic Development will make available grants of up to $350 to certain small employers that establish Section 125 Plans to offset the cost of establishing the plans.  (SF 3780, signed into law 5/29/08 as Chapter 358, section 10; Cite as: Minn. Stat. §62U.07)  | MN Agency linkRequired for employers w/ 11+ employees
MissouriEnacted legislation mandating cafeteria plans. The law applies to all employers with insured plans, effective Jan. 1, 2008. Self-insured plans are exempted. In both Connecticut and Missouri it is a pre-requisite that the employer have a health plan in place prior to being required to set up cafeteria plans.[4]  Both the Missouri and Connecticut laws require that employers establish cafeteria plans only if employees pay any part of premiums. Thus, if the employer pays the full cost of the insurance, the employer is not required to set up a cafeteria plan.  (HB 818, June 2007)Required for employers  w/ insured plans
Rhode IslandRI became the first state to base a health insurance reform plan primarily on required use of Section 125 cafeteria plans (for employers with 25 or more workers). Unlike Massachusetts, the RI law makes clear that employers do not have to “pay for or otherwise contribute to, the cost of any health insurance purchased through the cafeteria plan.”   The law took effect “upon passage,” but is set for implementation July 1, 2009. (S 448, signed into law 7/2009, now R.I. Gen. Laws §27-70-1 through 3)Required for employers w/ 25+ employees
TennesseeThese laws require that “any employer who has implemented a cafeteria plan (pursuant to this section) shall arrange for its employees’ health insurance premiums and dental insurance premiums to be automatically paid through the cafeteria plan beginning January 1, 2008.”  (S 333; signed into law as Chapter 184, 5/18/2007 & H 3360; signed into law as Chapter 674 4/1/2008)Optional for employers
UtahEstablishes the Utah Health Insurance Exchange, allowing  small employers with up to 50 workers buy a choice of policies.  An employer that chooses to establish a defined contribution arrangement to provide a health benefit plan for its employees is required to provide for a pre-tax contribution including a Section 125 cafeteria plan.  (S 188, 2009 Law) Optional for employers
WashingtonEnacts a voluntary Health Insurance Partnership for small business employers in which all participating employers are required to offer “125 plans.” The state-run partnership in turn is required to “provide Cafeteria Plan technical assistance” to small employers, defined as those with one to 50 employees.  Larger firms are not affected. (SB 5930, 2007 law)NOTE: Parts of SB 5930 have been delayed by passage of a 2009 law, H 2082.Optional for employers

Other uses and references to Cafeteria Plans

MaineMaine’s comprehensive health reform, Dirigo Health, included the following authorization for the state program, although it did not require employers to use Section 125 accounts:  “Dirigo Health may administer or contract to administer Section 125 plans for employers and employees participating in Dirigo Health, including medical expense reimbursement accounts and dependent care reimbursement accounts.”(2005 law, Chapter 400, Pt. C, §8 (AMD).)Optional for agencyand employers

Beyond these 13 states, at least 10 others considered Cafeteria Plans as stand-alone bills or as a part of broader reform. Three widely publicized California reforms requiring Cafeteria Plans passed both chambers but did not become law.  SRC:

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