Do You Have a 125 Plan Document?

If you’re not familiar with the term, a Section 125 plan is the plan that allows employees to pay for their share of medical and dental premium out of their paycheck on a pre-tax basis. Flexible Spending Accounts and Dependent Care Accounts are also part of the Section 125 plan.

Did you know that in order to offer pre-tax payment, an employer must have the proper plan documentation in place? You need to have an official document drawn up that sets up the Section 125 plan and all of its parts. The plan must be kept on file, updated yearly, and must be signed!

One of the big up and coming areas for IRS audit is the Section 125 plan. Frequently, employers are getting requests from the auditors to fax or send in the signature page from their 125 plan document. If this happens to you, don’t just grab your unsigned document and sign it (or backdate it for that matter). As I mentioned earlier, Section 125 plans can go through annual revisions and it is east for an auditor to know what the most recent version of the document language you have.

It pays to have a professional keeping up your document for you. Have you made changes to your benefit plans that now require a Section 125 plan wording change? Your broker should be reminding you about keeping the document up to date as you make benefit plan changes. A quality Section 125 plan administrator will send you any needed annual legislative wording updates. They should send you an annual questionnaire to get updated benefit information.

I’ve often seen offers from carriers, especially worksite plan marketers like AFLAC, for “free” 125 plans. Make sure that these “free plans” provide you with a signature ready plan document and annual updates. Most of the time I’ve found it is better to hire an administrator to do these documents instead. Most often the FICA savings from pre-tax premiums will cover the cost of creating and maintaining the Section 125 plan. Even if you have to pay a little extra to your Section 125 plan administrator for the document and annual changes, isn’t that less expensive than tax penalties?