The Investment Scientist

Tax-Saving Small Business Health Benefit

Posted on: April 6, 2011

As a small business owner, you are caught in a conundrum. On the one hand, you need to offer good health benefits to your employees to attract and keep talent; on the other hand, you can’t afford to lose an arm and a leg doing so.

There is a simple option that enables you to kill two birds with one stone—Section 125 Premium Only Plan (POP).

What’s in it for the employees?

With a POP, your employees are charged via payroll withholding for their share of health insurance premiums. Their withholdings are considered salary reductions for federal income tax, social security, and medicare tax purposes. In other words, the POP allows your employees to pay their health insurance with pretax dollars, which could save them a substantial amount in taxes.

What’s in it for the boss?

At the same time, your company’s taxes are also reduced. The salary reduction amounts are exempt from the employer’s share of social security and medicare taxes.

Governing law

A POP is considered a “cafeteria benefit plan,” governed by Section 125 of the Internal Revenue Code. To setup a POP, your business needs to have a written plan and an employee enrollment procedure. The POP also cannot discriminate in favor of highly compensated employees or key employees.


With some professional help, it is very easy to setup a POP that saves taxes for your business and delivers tangible benefits to your employees, thus giving you a leg up in the competitive labor market.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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