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Wheee... just got an e-mail from someone who had adopted a Section 125 plan app. 20 years ago - it has never been amended or updated since then. Wanted to know "What happens" if they don't do anything? The truth is, I'm really not sure. I'm not even sure where to start to determine what "required" changes/amendments etc. would have been missed, and when. My assumption is that since there is no EPCRS equivalent for Section 125 plans, that for prior years, if any, that were "noncompliant" in terms of document language, the pre-tax deductions could be disallowed upon audit. Seems like all that can be done is to adopt updated document, and hope for the best for all prior years? Have them talk with legal/tax counsel re the possibility/advisability/risk of initiating some sort of settlement with IRS? Furthermore, do you know of any good source(s) for information to determine what updates were missed, and when? Thanks!! P.S. - as to the consequences of incorrect documents, I'm really asking if there is any guidance in addition to Prop. Reg. 1.125-1(c)(1) through (7)? And, what source(s) might one readily use to determine that dates and changes that may have been "required" for all those years - if such sources exist?

Hi All, This forum seems by far the most well educated on the subject of cafeteria plans. Would you read my letter to my employer and suggest changes or point out discrepancies? Right now my employer pays all health employee health insurance premiums, 50% of spouse and dependents, and remaining premium is paid after tax as a payroll deduction by the employee. I happen to live in the state with the highest premiums in the US, so these are significant costs for us. Why it’s in Company X's best interest to use a section 125 SIMPLE cafeteria plan to compete with benefits offered by larger organizations and optimize company cashflow. Section 125 of IRS code establishes an employer plan document which allows non-owner level employees earning less than 120,000 / year (special rules for those over that threshold) to pay for employer sponsored benefits in a way that is excluded from their gross income. Qualified benefits already being offered by Company X which would qualify for the cafeteria plan include: Employee paid group health insurance premiums Employee paid group term life insurance premiums (excluding coverage for spouse and dependents) AD&D employee paid insurance premiums (excluding coverage for spouse and dependents) It is highly desirable for employees to pay for these benefits on a pre-tax (or excludable) basis as it can reduce their costs by for example 32.65% (25% marginal income tax rate plus 7.65% payroll tax). It is also highly desirable for an employer to enact such a benefit plan as these are before payroll tax, and a 7.65% savings can be realized as well. Being able to offer these benefits on a pre-tax (or excludable) basis can also be used to increase participation and lower rates. Minimum employer contributions to the SIMPLE cafeteria plan are 2% of an employee’s compensation, which the employee can elect to either convert to cash or use towards employer sponsored benefits. Other qualified benefits which can be included in such a plan include: Healthcare Flexible Spending Account ($2600/year) Dependent Care Flexible Spending Account ($5000/year) Employer Sponsored 401(k) For example: Company X establishes a section 125 SIMPLE cafeteria plan paying 5% of an employee’s compensation. 25 employees at Company X qualify and are able to utilize 80% of the benefits offered, the average employee compensation is 70,000/year (66,500 pay, $3,500 cafeteria benefits/cash). This equals $70,000 in employee paid benefits. The employees would save $914.20 each and Company X will save $5,355 per year in payroll tax. I acknowledge this is a small sum, but if there’s room to grow the benefits utilized by Company X employees, at our current scale of employment I estimate Company X would save $1,000 per percentage point of benefit utilization (this can be either employee or employer contributions). Personally, I utilize 12% of my gross income towards employee paid health insurance premiums, so I could elect to contribute 10% towards these premiums and utilize 2% of employer contributions to save $3,183 per year in taxes on premiums while saving Company X $746 in payroll taxes. If 25 employees were to follow this same strategy at the 12% level, it would save Company X $18,650 in payroll taxes. Thank you!

We are an organization that offers health insurance to all of our employees, paying all or almost all of the employee only premium options and not contributing very much additional premium for family, children and spousal levels. We also provide $140 a month in HSA employer contribution to the employees who elect our HDP (HSA eligible plan). Essentially, we pass the cost savings of the lower premiums on to our employees through this contribution. The HSA plan is part of our Section 125 plan. We have one employee who can be much better off financially to obtain a HDP for his wife and himself on his own, directly from an insurance carrier (even considering his premiums will now be post tax). Our HSA administrator will not allow him to participate in our Section 125 HSA payroll deductions and therefore will not allow him to receive the $140 a month in employer HSA contributions. They claim this is because they have no way of confirming his actual eligibility regarding participation in an HSA account. Our question is whether or not we can make a $140 contribution directly to his HSA account and what the ramifications of that would be. We know that Employer Contributions without a Section 125 Plan are allowable (assuming comparability rules are met, etc.). Having said that, we wonder if, by having a HSA as part of a Section 125 Plan, we are precluded from also have HSA Contributions that do not relate to the Section 125 Plan. We would make this opportunity available to all employees (all who participate in a different HDP plan would be able to receive the contribution) and in the same monthly amount as those inside the Section 125 Plan (both sides would receive the $140). It seems silly to force the employee to pick an employee plan with us and an individual spouse plan with the insurance company just so that he can get our $140 a month, something that will happen in this case and cost our company a lot more money. Any thoughts would be appreciated.

The LLC is being taxed as a partnership. The majority owner's son is also an employee. Is the son allowed to participate in the cafeteria plan? From what I have read the LLC would need to be taxed as a C-Corp in order for owners to participate. Since this one is being taxed as a partnership the owner cannot participate. But do the code 318 owner attribution rules apply in this case and disallow the son from participating? Or would the son be allowed to participate and just be counted as a key employee?

Under Section 1.125-4(e) a mid year change is permitted when an employee or spouse "Becomes entitled to coverage (i.e. becomes enrolled)" in Medicare Part A or Part B. If an employee does not actually enroll in Medicare when first eligible, does the actual enrollment in a mid-year in a later year (say beyond age 70) qualify as a change permitting him to drop health care under the employer plan? Premiums are paid pre-tax under the cafeteria plan. I am wondering what the purpose of the parenthetical in the regs is and will it help this employee who has now decided he wants to enroll in Medicare, but he won't be covered in time for start of the plan year.