Health insurance is one of the biggest employee benefits many businesses provide—but it can also increase payroll costs. Fortunately, there are strategies that may help employers reduce payroll taxes while allowing employees to pay their health insurance premiums more efficiently. Understanding how a Section 125 Premium Only Plan works can help California businesses maximize tax savings while remaining compliant with IRS requirements.
Skyline Benefit is an independent health insurance broker helping California employers build smarter employee benefits packages. Beyond helping businesses choose the right group health insurance, we also help employers understand benefit strategies—such as Section 125 Premium Only Plans—that may reduce payroll taxes and improve employee value.
What Is a Section 125 Premium Only Plan?
A Section 125 Premium Only Plan (POP) allows employees to pay eligible health insurance premiums with pre-tax dollars through payroll deductions.
Instead of paying premiums after taxes have already been withheld, employees contribute before federal income taxes and certain payroll taxes are calculated.
This simple adjustment can create tax savings for both employees and employers while supporting IRS Section 125 compliance.
How Can a Premium Only Plan Reduce Payroll Taxes?
One of the biggest advantages of a Premium Only Plan is that pre-tax payroll deductions reduce taxable wages.
Because employees contribute to eligible health insurance premiums before taxes are calculated, employers may also reduce the amount of payroll taxes they pay, including FICA taxes.
For many businesses, these savings can add up over time, particularly as the number of enrolled employees grows.
How Do Employees Benefit?
A Section 125 Premium Only Plan doesn’t just help employers.
Employees may also benefit by:
- Paying health insurance premiums with pre-tax dollars
- Reducing taxable income
- Increasing take-home pay
- Lowering overall payroll tax deductions
According to the HealthEquity Premium Only Plan overview, paying premiums on a pre-tax basis can help employees keep more of their paycheck while simplifying payroll deductions.
Which Health Insurance Plans Can Be Included?
A Premium Only Plan can generally be used with many employer-sponsored health benefits.
Depending on your employee benefits package, eligible plans may include:
- Group medical insurance
- PPO plans
- HMO plans
- Dental insurance
- Vision insurance
- Certain employer-sponsored life insurance benefits
This flexibility allows employers to integrate pre-tax premium payments into their existing benefits program.
Why Is IRS Section 125 Compliance Important?
Offering pre-tax payroll deductions requires proper plan administration.
Without a compliant Section 125 Premium Only Plan, employers may face payroll and tax compliance issues if pre-tax deductions are handled incorrectly.
Having the appropriate documentation and plan administration in place helps support IRS compliance while allowing employees to receive available tax advantages.
Is a Section 125 Premium Only Plan Right for Your Business?
Many small and mid-sized businesses choose a Premium Only Plan because it offers benefits for both employers and employees.
It may be worth considering if your business:
- Offers employer-sponsored health insurance
- Wants to reduce payroll tax expenses
- Wants employees to pay premiums with pre-tax dollars
- Is looking to improve its employee benefits package
If you’re unsure whether a Premium Only Plan fits your business, Skyline Benefit can help you understand how it works alongside your group health insurance strategy.
Need Help Setting Up a Section 125 Premium Only Plan?
Skyline Benefit is here to help California employers understand Section 125 Premium Only Plan options, compare group health insurance solutions, and build employee benefits packages that support both tax efficiency and long-term business growth. Whether you’re offering health insurance for the first time or reviewing your current benefits, our experienced team is here to help.
Call us at: (714) 888-5112