Section 125 Audits

[Guest Kristine]

Has your company ever had a Section 125 Audit? How in depth was it? Did the IRS conduct the audit? What other facts can you tell me about Section 125 audits?

[Guest b2kates]

only one client, grew out of payroll audit.

[Guest Kristine]

I guess I mean as a TPA.

[LRDG]

1 client received an IRS notice for $95k in penalties assesed primarily due to failure to file 5500's for 5 prior plan yrs., a period that pre-dated our administration contract. I contacted IRS officials on behalf of the client and worked out an agreement that penalties and sanctions would be reversed if 5500s' for prior years were filed retro-actively. The IRS was reasonable and accomodating, allowed the current/most recent -year-version of the forms to be used, in lie of providing the appropriate forms and instructions for prior years

(pre-printed year on forms), as there had been a number of changes to the form and instructions.

I 'pleaded' administrative/contractural error on the part of the prior administrator, ignorance on behalf of the client, they were unaware of the prior administrator's failed to file, or that there were filing requirement for that matter. The client as most eager to correct the 'oversight', a mis-understanding about responsibility for filing 5500s. After the forms were filed IRS waived $95k sanctions and penalties for failure to file. (BTW, the prior administrator was no longer in business.)

There was an interesting situation with IRS and another client. The client was one of the top law firms in the state. My contact rep. with the client was a young attorney and partner in the firm, and the son of one of my company's board of directors. The client was in the midst of an IRS payroll audit. IRS officials conducting the audit were alarmed to see pre-tax payroll deductions for eligible premiums and FSAs. The client explained the Sec. 125 plan, provided the plan doc., did everything possible to document the plan, to no avail.

I got 'the call', talked with the lead auditor, faxed copies of Sec. 125 from the federal register and provided the audit team with a link to an IRS web-site. The auditors gathered their notes, client's payroll data, and abruptly announced the conclusion of the 'site' audit, and were not heard from again.

[jmor99]

I think what Kristine is looking for is--Have any of you (as TPAs) been audited? I don't know of any, but I certainly know of a lot that should be, from what we've seen on takeovers.

[LRDG]

Kristine, until late 90's-early 2000, IRS did not have an audit division qualified to audit Sec. 125 plans. That is no longer true. A team of sec. 125 auditiors have been assembled, trained and is, according to IRS, auditing plans.

The 2 audit examples in my previous post pre-date the existence of the Sec. 125 audit division. I'm aware of 2 cases that made head lines for Sec. 125 violations and IRS penalties assessed, both pre-dated the existing Sec. 125 audit division.

In one instance the plan sponsor was required to pay back taxes (payroll taxes) for all employee participants, in addition to penalties and sanctions for allowing retro-active elections, a violation of constructive receipt provision.

I'm unaware of any audit activity since the Sec. 125 audit division announcement was made.

It has been debated that one of the problems that exists for IRS is that Sec. 125 Regulations and guidelines were published and continue to exist in temporary form, with incomplete or some what contridictory information. While IRS makes it clear that temporary regs will be relied on for purposes of making determinations and assessing penalties for violations, it's unclear what will happen in court, in front of a judge, if a case is ever litigated.

[Moe Howard]

I have had several employer clients, during the past decade, whose sec 125 plan was examined by the IRS. All were medical plans. Two were self-insured and one was fully insured.

One of the self-insured exams was triggered by a poorly prepared 5500, the other was triggerd by a participant complaint to the IRS. The fully-insured plan exam arose after one of the shareholder's Form 1040 was examined by IRS (The employer is an S-Corp and the shareholders were allowed to have pretax medical withholdings withheld from their W-2 wages .... which is a no no).

The IRS spent about a week on each exam. The IRS closely eye-balled the plan document, participant election forms, policy, and employee handouts and notices.

The IRS found quite a few violations (mainly poor record keeping by employer and failure to keep employees informed of changes to plan benefits). So actually, it was more an examination of the benefit plans ... than just the pre-tax aspect).

I was able to succesfully convince the IRS that the plan's shortcomings were the fault of the insurance company and TPA. (TPAs are Ok, but be careful of insurance agents. I have found that insurance agents can really screw things up when they get involved in advising clients about employee benefit plans).

[GBurns]

Moe,

It is usually very difficult to eat your cake and still have it too.

If "the plan's shortcomings were the fault of the insurance company and TPA", how can you then say that "TPAs are Ok" ?

In your example cited, the only people who did not "really screw things up" seem to have been the insurance agents.

I do not defend insurance agents, I am only confused by your post.

[Moe Howard]

Gburns, are you familiar with the legal term "agent" ? Are you aware that a principal can be held responsible for the acts of its agent? I'm sure you realize that an insurance agent is an agent for an insurance company.

Insurance companies can be held accountable by a policy holder for damages caused by some of the false and misleading information that the insurance company's agent provides to the policy holder.

When an insurance agent is asked questions , by a employer policy holder, about something the agent knows nothing about (ie: Sec 125 document, Sec 125 election forms, and required communication to participants of a group medical plan) the agent should respond by saying "I don't know, but I'll have someone from the insurance company call you about your questions".

I have found that most ins agents try to answer any and all questions asked of them. This, in my opinion, is the fault of the insurance company (poor training of its agents) and greed on the part of the agent (the agent wants to appear wise and knowledgeable to the policy holder, so the policy holder will continue to do business with the agent and thus the agent will continue to receive commissions).

Anyway, everyone screws up from time to time. TPA's usually screw up because employers don't furnish proper info to the TPA in a timely manner (of course I would never tell the IRS that, if blaming a TPA gets my client off the hook with the IRS). Insurance companies usually screw up as a result of their poorly trained , greedy agents.

In my example, only the self-insured plans had a TPA. And only the fully insured plan delt with an insurance company & agent.

(Sorry if I worded any of the above in a discouteous manner)