The Section 125 Premium Only Plan is part of the IRS Code that allows employees to purchase health insurance and other ancillary benefits tax free. The premium or HSA contribution is actually deducted before taxes are calculated. Employees save from 20% to 40% of their pre-tax premium or contribution deductions in just federal income taxes alone. Under a Premium Only Plan employees take home pay is increased which helps reduce the high cost of providing health coverage for family members. A Section 125 POP is also one of the few employee benefits that provides savings back to the employer. The POP does this by eliminating the 7.65% in employer matching Social Security and Medicare taxes and in some cases Federal and State unemployment taxes.
Nondiscrimination testing (NDT) is required for all plans to ensure that the plan does not favor highly compensated employees or key employees. Although the testing is not filed with any agency, the burden is on the employer to ensure that the plan will pass the testing requirements.