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Definition: Premium Only Plan
A Premium Only Plan is a mechanism wherein an employee can convert his taxable salary into non taxable benefits for his/ her use. These plans help some employers who may not want to offer entire Flexible Spending Accounts (FSA) to all their employees, but may still want some tax benefit for some employees. The premium only plan is an important part of code section 125 of the US Congress Cafeteria Plan. This section was made to ensure better benefits for employees and more flexible options to employers.
The Premium Only Plan allows for certain premiums to be paid with taxable salary amounts. The premiums allowable include the following:
If Riya earns a pre tax salary of $3000 per month, if she sets aside $300 per month as a part of the premium only plan, she will save 300*35% = $105 on taxes per month which translates into annual savings of $1260.