ACA. COBRA. FSA. HSA. HRA. ICHRA. QSEHRA. PEO. PPO. HMO. We could go on, but we think the point is clear—if you’re shopping for employee benefits or for a group health insurance plan, you’ve likely run into a bunch of different terms, phrases, acronyms, and the like, none of which are likely clearly explained and some of which seem barely distinguishable from one another. This can create a power vacuum between you and the insurance carrier or your benefits broker, as understanding what all these different terms and acronyms mean can make a big difference when it comes to coverage and cost.
At Payday HCM, we’re very aware of the confusing nature of shopping for employee benefits and employer-sponsored health plans. We receive plenty of questions from our clients on what these terms mean, as well as whether or not some of these different offerings would be a better fit for their business. All told, these are complex questions to answer, mainly because determining what health plan is best for your business involves a number of factors and depends on understanding all of the options available. This includes Premium Only Plans (POPs), which may or may not be a good fit for your business.
So, in this article, we’ll be going over what a Premium Only Plan is and whether or not a POP is best for your business. We’ll start by covering the reasons why a business might seek out a Premium Only Plan before getting into the specifics of what a Premium Only Plan is. From there, we’ll discuss things like differences between POPs and other types of health benefits offerings, as well as differences in cost.
In this article, you will learn:
- Who Are Premium Only Plans (POPs) For?
- What Is a Premium Only Plan (POP)?
- How Do Premium Only Plans Work?
- How Much Do Premium Only Plans (POPs) Cost?
Who Are Premium Only Plans (POPs) For?
Before getting into the details on what Premium Only Plans are, we’ll first go over the typical circumstances that might lead a business to consider offering a Premium Only Plan.
Health Benefits for Small Businesses
For large enterprises, opting for a more traditional group health insurance plan is typically a no-brainer. There usually aren’t any cost barriers, and a good employer-sponsored health plan is a great way to attract top talent. For small businesses on a tighter budget and with fewer employees, the situation is much more complicated.
First up, there’s the question of cost. Traditional group health insurance plans can be pricey. This means many small businesses turn to alternative options that are more cost-effective while still offering similar benefits. This becomes an even bigger consideration for businesses with a small number of employees, where only two or three employees might need some kind of coverage.
Businesses Combatting Rising Health Benefits Costs
Of course, cost can be a contributing factor regardless of the size of your business. According to Mercer, the total health benefits cost per employee for businesses rose by six percent in 2025, accompanied by a 9.4 percent jump in prescription drug costs. This means that any business—whether small, mid-size, or large—might be looking for ways to not only help themselves combat rising costs, but their employees as well.
Speaking of costs for employees, just as the actual cost of offering health benefits rises for employers, the costs of benefits for the employees rise as well. Cost increases are a typical occurrence during the benefits renewal process, but depending on the increase amount, employers may be looking for alternative options, either to supplement their current health plan options or to replace them entirely.
What Is a Premium Only Plan (POP)?
So, then, the questions of cost and the size of the business bring us to Premium Only Plans. But what exactly are Premium Only Plans?
Understanding Premium Only Plans
A Premium Only Plan is a type of section 125 cafeteria plan that allows employees to pay for health insurance plan premiums using pre-tax dollars as opposed to post-tax contributions. In addition, employers do not need to withhold federal payroll taxes on Premium Only Plan contributions, creating savings for both the employer and employee.
But, wait, what does “section 125 cafeteria plan” mean? The term is a reference to section 125 pursuant to the Internal Revenue Code, which establishes a type of employee benefit plan, broadly referred to as a cafeteria plan, that allows employees to contribute to said plan using pre-tax dollars.
Premium Only Plans and Section 125 Cafeteria Plans
It’s important to note the distinction between Premium Only Plans and section 125 cafeteria plans, as they are not the same thing. Section 125 cafeteria plans encompass a broader range of employee benefits, with Premium Only Plans being just a type of section 125 cafeteria plan. Other qualified benefits under section 125 include:
- Accident and disability coverage
- Group-term life insurance
- Health savings accounts (HSAs)
- Flexible savings arrangements (FSAs)
- Dependent care assistance
- Adoption assistance
This means that, in addition to offering a Premium Only Plan that allows employees to deduct pre-tax dollars to cover group health insurance premiums, employers can also opt to offer these other types of benefits with the same pre-tax advantages.
How Do Premium Only Plans Work?
Now that we understand what Premium Only Plans are, as well as section 125 cafeteria plans in general, we can look more closely at how Premium Only Plans work and how to offer one.
How Do You Set Up a Premium Only Plan?
In order to properly set up a Premium Only Plan, you’ll be required to submit certain information to the IRS in order to verify your plan’s eligibility to qualify under section 125. This primary plan document should outline things like eligibility requirements, the scope of qualified benefits, any contribution limits, and any employer-specific obligations.
In addition to this, POPs will also be subject to a series of tests under section 125 in order to ensure the plan does not favor key individuals or certain highly compensated employees. These tests include:
- Eligibility test: tests whether the POP is offered broadly and fairly to all eligible employees.
- Contributions and benefits test: verifies that any contributions from highly compensated employees are proportionally equal to those of any other employees.
- Key employee concentration test: ensures key employees do not receive more than 25 percent of the pre-tax benefits from a POP.
These tests help to ensure that any Premium Only Plan, or any section 125 cafeteria plan, meets the IRS’s nondiscrimination standards.
How Do You Enroll in a Premium Only Plan?
Outside of the additional requirements needed to ensure your Premium Only Plan qualifies as a section 125 cafeteria plan, the process for employees to enroll in a Premium Only Plan will look pretty much the same as any other employer-sponsored health plan. This means employees will enroll during the typical open enrollment window or following a qualifying life event.
This means employers will need to create, or receive from their carrier or plan administrator, a summary plan description (SPD) that communicates the key details of the Premium Only Plan. The SPD should be distributed to employees within 90 days of their enrollment; employers must provide an updated SPD every five years.
How Much Do Premium Only Plans Cost?
Finally, the million-dollar question: with all this talk about potential cost-saving, how much do Premium Only Plans actually cost?
Premium Only Plan Cost for Employees
When it comes to benefits plans, it’s hard to say in the abstract how much any kind of plan might cost either for employees or employers without extracting information on the carrier, plan type, deductible amounts, and more. Even still, we can extrapolate how different plan types can save employers and employees in different ways.
As mentioned throughout the article, Premium Only Plans are paid for using pre-tax dollars. For employees, while this means you’re still paying for the premiums on your employer-sponsored plan, it’s done so on a pre-tax basis, meaning your total taxable income is lower, resulting in a potentially higher take-home pay (as opposed to paying the same premium post-tax).
Premium Only Plan Cost for Employers
Again, as we mentioned above, it’s hard to say exactly how much any kind of plan might cost without more specific information. Even still, Premium Only Plans do offer a lot of cost-saving potential for employers for many of the same reasons as employees—mainly the pre-tax benefits of a section 125 cafeteria plan.
In the abstract, employers who decide to go with a Premium Only Plan can expect to save the 7.65 percent per employee premium that would typically be deducted post-tax. This means that employers can use this percentage amount to estimate their potential savings, utilizing a specified premium amount and the number of theoretically enrolled employees.
Plan on Savings With a Premium Only Plan (POP)
When it comes to creating an employee benefits package, balancing cost and coverage is key. This is especially important when it comes to determining what kind of health benefits your business will offer your employees. As it stands, a traditional employer-sponsored health insurance plan, while typically solid as far as coverage goes, can be costly. For some businesses, the cost may put this option completely out of the question, leaving them wondering what alternatives might be available. With Premium Only Plans, employers can combine the more traditional benefits of group health insurance with tax-advantaged savings that help them and their employees keep health benefits costs low.
There are several factors to consider when it comes to designing an employee benefits package, including choosing a health benefits plan. For some businesses, a traditional employer-sponsored health plan is the way to go. For others, a Premium Only Plan or a reimbursement model may be the best choice. Regardless of what kind of health benefits your business decides to offer, cost will be one of the biggest factors when it comes to making this decision. Of course, it can be hard to determine exactly how much your health benefits plan might cost you, let alone your entire employee benefits package. Luckily, our article on what a meaningful benefits package costs can help you get the full scoop on just how much you should expect to pay for your benefits package.
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