The good news is that health insurance costs are moderating. The Kaiser Family Foundation found in its recent 2014 Employer Health Benefits Survey that family coverage premiums increased just 3% in 2014 over 2013. Single coverage premiums increased just 2%.
The costs are still significant, however. The study found that in 2014, average annual premiums for employer-sponsored health insurance are $6,025 for single coverage and $16,834 for family coverage. Covered workers contribute an average 18% of the premium for single coverage and 29% of the premium for family coverage, the same percentages as in 2013. Only 14% of covered workers in employer plans pay no contribution for single coverage, while an even smaller 5% of workers pay no contribution toward family coverage.
Many employers are saving on health insurance-related costs for themselves and their employees by establishing a Premium Only Plan (“POP”) pursuant to Section 125 of the Internal Revenue Code. This permits employees to pay their portion of insurance premiums on a pre-tax rather than an after-tax basis. The POP also reduces an employer’s taxable payroll by reducing its employees’ taxable income. Through this relatively simple change in the payroll process, both the employer and the employee pay less in taxes.
An employer with total annual health related payroll deductions of $100,000 for all employees would save $13,650 in taxes (based on FICA tax rate of 7.65% and combined federal and state unemployment tax rate of 6%). An employee making the average annual premium contribution of $1,081 for single coverage would save $333 annually (based on 20% federal, 7.65% FICA, 3.07% PA state and .07% PA unemployment tax rates). An employee making the average $4,823 for family coverage would have $1,485 in tax savings.
A POP can be started at any time. A short plan year is permissible for the first year so future plan years can coincide with either the employer’s fiscal year or the calendar year. While regulations prohibit a sole proprietor, partner, members of an LLC (in most cases), individuals owning more than 2% of an S corporation, or their spouse and dependents, from participating in the POP, those entities may still sponsor a plan and benefit from the savings on payroll taxes.
The insurance benefits that may be offered under a POP include individual and dependent family medical insurance, dental or vision insurance, disability insurance, hospital indemnity or cancer insurance, or group term life insurance.
There are no IRS filing requirements applicable to a POP. However, privacy regulations applicable under the Health Insurance Portability and Accountability Act (“HIPAA”) are applicable to a POP to the same extent they apply to the particular self-insured or fully insured group health plan to which they are related.
Setting up a POP is a relatively straightforward process. The employer must first adopt a written Plan Document for the POP. As a general rule, the employer must offer the plan to all employees, subject to certain permissible exclusions. Communication to eligible employees about the terms of the plan must include a Summary Plan Description which describes the plan. Eligible employees wishing to participate in the plan must sign a salary reduction form authorizing the employer to deduct the employee’s share of premiums from his or her pre-tax income. Following establishment of the plan, employers must monitor it to ensure it does not discriminate in favor of highly compensated employees.
An employer can establish a POP on its own or with legal assistance. Many employers contract with a benefits services provider to set up and monitor its POP.