Setting up a POP Plan

Prepare the Plan Documents, Subject to Attorney Review

The plan document must meet specific legal requirements under the Internal Revenue Code (the Code), so the employer should make sure that the plan document is prepared or reviewed by an attorney. The employer can satisfy the Code’s requirements for a POP with a single plan document. The employer should already have separate plan documents for the insurance plans covered under the POP.

Adopt the Plan Through Board Resolution, etc.

The employer must adopt the plan before its effective date. Adoption of a plan generally requires the same kind of documentation that an entity uses for other major business actions. As a corporation, the employer should adopt the plan by a valid board resolution.

Distribute the Communication Documents to Employees, etc.

The employer needs to tell its employees what the POP does and help them to understand their options. This can be done through a cafeteria plan summary and election form. The employer should also confirm that employees have already received summary plan descriptions (SPDs) for all of the insurance benefits that they can choose under the POP.

Obtain Elections From Employees

Before the plan’s effective date, employees should complete and submit elections reflecting whether they want to pay for their share of insurance costs with pre-tax dollars. The elections should specifically authorize payroll to make those pre-tax deductions.

Instruct Payroll to Deduct Premiums Pre-Tax

Upon receiving the signed election forms, the employer should enter the elections into the payroll system. This requires telling the person who prepares payroll (either internal staff or the outside vendor, if any) to start deducting the employees’ shares of their insurance premiums on a pre-tax basis. The result is that income tax withholding and FICA withholding will be based on each employee’s reduced wages (gross pay, less the pre-tax deductions).

Pay-Adjusted Salaries

Employees’ pay stubs covering the first pay period will look different than they did before. Their salaries will still be reduced to reflect payment for insurance costs. However, the stubs will reflect less taxable wages and more take-home pay than if employees had used their salaries to pay for coverage with after-tax dollars.

Provide Insurance Coverage

With the POP, the employer provides the same insurance coverage (e.g., health or dental) that it did before. The underlying benefits have not changed, just the way they are financed.