What is a premium only plan (or POP)?
A “premium only plan” (or “POP”) is one of the two basic types of cafeteria plans. A POP allows employees to pay their share of insurance premiums on a pre-tax basis, ordinarily pursuant to an annual election by the employee. Paying insurance premiums on a pre-tax basis reduces the employee’s income for regular income and social security tax purposes, and the employer’s social security tax liability.

Although the tax rules governing a POP can be complex, adopting and maintaining a POP is usually quite simple. The employer must adopt a written cafeteria plan document that contains POP provisions, and comply with those provisions.

What is a flexible spending account?
A “flexible spending account” (or “FSA”) is the second basic type of cafeteria plan. An FSA allows an employee to set aside a portion of his or her pay each pay period in order to fund an account that can be used to pay for the employee’s out-of-pocket health care and dependent care expenses. Because the amounts set aside are excluded from the employee’s income for income and social security tax purposes, FSAs can save both employees and employers on taxes. Ordinarily, an FSA is added to a cafeteria plan that already contains a POP, though an FSA can be maintained as a stand-alone feature of a cafeteria plan.

An FSA is more complicated to maintain and administer than a POP. An employee must predict how much he or she should elect to contribute to his or her FSA annually, claims must be processed and paid, and nondiscrimination tests must be performed to ensure compliance with the tax rules.

How Can Echelon Help?
Echelon can provide primary assistance to employers on the set-up and maintenance of all types of cafeteria plans, including document preparation, nondiscrimination testing and, in appropriate cases, plan administration.

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