With a Section 125 Premium Only Plan (POP), employees are charged via payroll withholding for their share of health benefits premiums. These withholdings are considered salary reductions for income, social security and medicare tax purposes. In other words, the POP allows employees to pay their share of health benefits premiums with pre-tax dollars, which can save them a substantial amount of taxes over the course of a year. At the same time, employer taxes are also reduced, since the salary reduction amounts are exempt from the employer’s share of social security and medicare taxes.
The most common compliance problems (all these can be fixed!):
- No Plan Document – the office manager can’t find the required documentation to have a valid Section 125 plan for pre-tax treatment.
- No Summary Plan Description – which must be given to all participating employees, even in the smallest groups.
- Different Group and Section 125 plan years.
- Offering benefits that aren’t included in the Plan Document.
- Plans that fail non-discrimination testing (e.g. favor highly-compensated individuals).
- “Constructive Receipt” – this is a fancy term for the case where employers offer employees extra salary or bonuses (“cash”) if employees choose not to participate in the company benefits (for example, if they’re covered via spouse’s employer) – this must be part of the Plan Document and non-discrimination testing.
- Sometimes we find that employers are treating individual employees on a “special” basis, that’s different than other similarly situated employees. The premium is simply paid by the employer and deducted as an employee benefit (Big OOPS).
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