If your employees pay a portion of their group insurance premiums, you may be able to reduce your payroll taxes, and give workers a little extra in their checks each and every payroll, by setting up premium only plan (POP) through payroll deductions for their share of insurance premiums. The Section 125 POP program is a tremendous opportunity for the church to enhance the employee’s benefits package.

Section 125 is part of the IRS Code that allows employees to convert a taxable cash benefit (salary) into non-taxable benefits. Under a Section 125 program, the employee can elect to pay for qualified premiums before any taxes are deducted from their paychecks.  Employees save FICA or SECA and federal income tax on their insurance deductions with every paycheck. Also, in most states, employees can save the state income tax on these deductions.

The church must set up a Plan Document and Summary Plan Description (SPD) before the effective date of the Section 125 POP plan. These documents explain the rules of the plan. The plan document should be signed and kept on file.

The process of setting up and maintain a plan is very simple if you choose to seek the assistance of a professional.  If you’re one of those churches who are blissfully unaware of or are intentionally choosing to ignore Section 125 POP Plan compliance requirements, beware. You may be in for some serious consequences. Section 125 Premium POP Plans can be started at any time of the year.

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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

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