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Wraps vs POPs (2/3): What's a POP doc, and who needs one?

Updated: Apr 12, 2023

The IRS Section 125 rules apply to every employer that lets employees pay for benefits with pre-tax dollars. These rules say that employers who allow pre-tax payment of benefits must have a written document (called a POP- Premium Only Plan, Salary reduction plan, premium only plan, premium conversion plan, premium payment plan, Section 125 cafeteria plan). Failure to adopt a POP plan document prior to the plan's effective date or failure to operate in compliance with the document or the regulations can result in disqualification of the entire plan's favorable tax status. In other words, all benefits and premiums could become taxable to the employer and employee, including past years where there was no plan document in place.

Under a salary reduction premium only plan, or POP for short, employees choose to either reduce their salary to purchase health insurance on a pre-tax basis, or to receive their full salary in cash and not take group insurance benefits under the cafeteria plan. Thus, employees choose between a qualified benefit (health, dental, vision insurance) and cash (unreduced salary). The proposed IRS regulations recognize that salary reduction (or perhaps more correctly, the option not to elect benefits but to receive regular pay) may serve as the “cash” option in a cafeteria plan.

At a high level, the 125 regulations say that the POP must contain the following information:

  • Specific description of each of the benefits available under the POP (e.g.- pre-tax payment for certain employer-provided health coverage, health FSA, Dependent Care FSA and an HSA).

  • Periods of coverage and plan year

  • Any opt-out or cash in lieu benefits

  • Participation rules

  • Election procedures and permissible election change events (ie- "qualifying life events" as usually called)

  • Source of salary reduction (from taxable compensation, sick pay, PTO, severance pay, etc.)

  • Any employer contributions

  • Any maximum contributions, grace periods, carryover provisions (with an FSA or Dependent care FSA, generally)

Most employers will use the assistance of a vendor or TPA to prepare a POP. However, the plan sponsor must keep in mind that the TPA is merely acting on behalf of the plan sponsor in preparing this document. The TPA has no independent responsibility for preparing or maintaining the plan document (beyond its contractual arrangement with the plan sponsor). The plan sponsor remains responsible for the terms included within the plan document.

As a result, employer plan sponsors should regularly review their POP document to ensure that it continues to meet the requirements and is kept up to date.

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