What are Section 125 plans?

• Section 125 plans, also referred to as cafeteria plans and premium-only plans (POPs), are named after the section of the Internal Revenue Code (IRC) that regulates such arrangements. These plans are a vehicle for employers to offer certain benefits to employees where employees can pay their share of insurance premiums with pre-tax dollars, leading to considerable tax savings for both employers and employees.

What types of benefits are considered Section 125 plans?

• Benefits typically offered within a Section 125 plan include group health plans, dental plans, vision plans, accidental death and dismemberment, disability coverage, and employer paid life insurance (no greater than $50,000).
• Flexible Spending Accounts (FSA) - allows employees to set aside money through pre-tax payroll deductions for qualified health care and dependent care expenses.
• Health Savings Accounts (HSA) - investment account available only to anyone covered by an IRS-qualified High Deductible Health Plan (HDHP).

What's required in order to stay compliant when offering Section 125 plans?

• Written Plan Documents, including a master plan document and an adoption agreement. The plan document outlines the legal and employer-specific aspects of the employer's benefits plan, including the benefits offered, eligibility criteria, contribution methods, and other legal notices. The plan documents must be revised and amended every 5 years, to include any relevant plan changes or regulatory updates.
• Summary Plan Description (SPD) is a simplified explanation in plain language of the primary plan document and adoption agreement that outlines the details of the cafeteria plan. All eligible employees must receive a copy of the SPD every year.
• Perform Non-Discrimination Testing to ensure employees at all levels enjoy the benefits offered, rather than just favoring certain highly compensated or key employees. Testing must be performed on an annual basis.

• If employers do not have a written plan document in place or if the written plan document does not comply with the content or timing requirements, employees' elections between taxable and non-taxable benefits will result in taxable income to the employees.

What is recommended in order to stay compliant with Section 125 plan document requirements?

• Prepare a Premium Only Plan (POP) Document, which includes the plan document, resolution to adopt, and an SPD. Please note that many of the benefits that may be provided through a Section 125 plan are also subject to ERISA requirements. ERISA includes its own set of requirements for a written plan document and SPDs, which are different from the Section 125 plan document requirements.
• Run a non-discrimination test, where the goal is to pass the eligibility test.