Walked into a small mess no election or plan document

[Guest ANON-MD]

I am at a company right now that switched Payroll providers about 2 years ago. The old payroll company had provided a POP plan document and testing to meet Sect 125 compliance, but I can't see where anyone was ever required to enroll in the POP (no enrollment forms have been found in any personnel folder). For the last 2 years, I don't believe there has been any testing for the POP (although I am certain they would have passed testing as all employees are eligible from day 1), there wass no updated plan document for the POP, and still no employees have ever elected to particpate in POP....just an assumption that when they signed up for the eligible benefits that the employee premium would be deducted from the paycheck on a pretax basis.

Any suggestions on how to clean this up and any idea on how significant the company's exposure is?

I have already gotten a plan document from the payroll provider, have contracted with them to do our testing, and will have new employees enroll officially in the POP?

What do I do about the missed testing? What do I do for employees who never signed up for the POP? Technically, I can't retroactively enroll them under section 125.

Any help or suggestions are appreciated.

Thanks in advance.

[Guest Sieve]

Does old plan provide for automatic enrollment for payroll reduction for premiums (many do)?

[LRDG]

Review the administration contracts with both of the Payroll companies/plan administrators to verify responsibilities of the parties involved. You want to verify who is responsible for: annual enrollment/default elections; providing and updating P/D; discrimination testing annually and when there are mid-year participation changes; annual or mid-year benefit changes, etc.

Request enrollment forms from the original P/R company for the 1st POP plan year. If the P/D states there will be annual open enrollments, request those enrollment forms also, if not verify default elections comply with Plan Doc.

Contact P/R company #2 for copies of IRS Sec. 125 non-discrimination testing reports. If they did not conduct discrimination testing, it is possible to conduct the test today with payroll the records for the missing years, assuming there is access to pre-tax P/R deductions for the plan years involved. It may not be necessary to issue a new plan document when the Payroll company/plan administrator was changed, unless benefits changed or in the event of other material changes.

It is possible that the plan sponsor/ER & the Payroll company/plan administrator intended elections to be 'default' elections after the first plan year. "Default' elections refers to plans that do not require POP annual open enrollments after the initial elections for the 1st plan year. Default elections refer to participant elections that automatically renew on the anniversiary date of the plan. The plan document must state that the type of elections involved are default elections for all plan years following the 1st plan year/open enrollment.

Assuming 'default' elections are in effect and included the plan doc., verify there are enrollment forms for mid-year newely eligible participants and for mid-year and annual participant election changes, assuming they are allowed in the PD.

You are correct that IRS prohibits retroactive elections or retroactive plan changes. Begin creating a document trail with both payroll companies in the event of an IRS audit. The documentation and correspondence in writting, will raise the possibility that in the event of an IRS audit the responsible parties will be held accountable and taxes/penalties can be recovered.

In the event of an audit, IRS will probably recover taxes and/ penalties from the plan sponsor/ER. It's possible those expenses can be recovered from the payroll companies/plan administrators, if they failed to provide services contracted for with the plan sponsor/ER.

Be in a position to demonstrate good faith compliance w/IRS, for instance by getting enrollment forms signed for each of the plan years the forms are missing. Document an explanation for the 'retroactive' enrollment forms that explains to IRS in event of audit, the contractural failure? of the plan administrator. Keep this in mind when communicating with the Payroll companies/plan administrators. Hopefully you will squeek by without hearing from IRS. Beyond that, I don't know first hand how agressively irs is auditing sec. 125s for the past couple of years.

[Guest ANON-MD]

Does old plan provide for automatic enrollment for payroll reduction for premiums (many do)?

I don't remember seeing language in the plan document that I found having automatic enrollment as an option. It is possible that there may have been another plan document drafted and that I am looking at the wrong one.

If permissible, I would prefer to avoid having new hires sign up for the Premium Only PLan. If auto enrollment is a legal option and I would prefer this. This way. I would only need an employee to sign if opting out , correct? Any suggestions on where I can find a plan document crafted in this manner? The one that ADP has sent requires enrollment into the plan.

[LRDG]

This type of POP election is referred to as a default or evergreen election, or assumptive election.

There are a few administrators taking a position that EEs, by electing to participate in the group health plan, will automatically have pre-tax premium deduction assumed to be a Sec. 125 POP election. I don't recall IRS providing for this kind of non-'election' for Sec. 125. I have seen many plans encounter problems under this scenerio and with initial POP election automatically renewing each year.

For instance, consider the earlier post titled "can a waived participation be revoked after 1 year?" concerning a group health plan with assumptive/automatic POP enrollment. The participant signed a waiver for 2008. In 2010 insisted she was a participant despite the signed waiver. Assumptive elections and automatic renewing elections seem to open the door and invite problems w/EEs leaning on plans to make decisions that are ambegious, despite clear provisions in the regs.

The non-'election', participation in the group health plan an assumptive election for Sec. 125, is counter to the premise of an election/choice between cash and a non-taxable benefit, IRS's defination of a qualified plan under Sec. 125.

[Guest Sieve]

I believe that Corbel's 125 checklist, from which the plan document is generated, gives the opportunity to choose whether premiums will (or will not) automatically be taken from the pay of those enrolling in the health plan. The document generated contains the specific election (i.e., either "will" or "will not") which is chosen on the checklist. This automatic election (unless specifically elected otherwise by the participant) makes sense for those who are being required to pay a portion of their heath care premiums, and I would have no problem using it for for that reason (while other potential automatic election provisions--like flex or DECAP--make little sense in a cafe plan).

Also, I think the Corbel checklist gives the opportunity for the plan to be drafted so that affirmative elections either (i) remain the same form year to year, or (ii) end at the close of the year and do not begin at the beginning of the next year unless specifically and affirmatively elected (e.g., flex or DECAP).

There may be others out there, too.

[oriecat]

This type of POP election is referred to as a default or evergreen election, or assumptive election.

There are a few administrators taking a position that EEs, by electing to participate in the group health plan, will automatically have pre-tax premium deduction assumed to be a Sec. 125 POP election. I don't recall IRS providing for this kind of non-'election' for Sec. 125.

Revenue Ruling 2002-27?

[LRDG]

oriecat, thanks for the link.

"At the time an employee is hired, the employee receives a notice explaining the automatic enrollment process and the employee's right to decline coverage and have no salary reduction. The notice includes the salary reduction amounts for employee-only coverage and family coverage, procedures for exercising the right to decline coverage, information on the time by which an election must be made, and the period for which an election will be effective. The notice is also given to each current employee before the beginning of each subsequent plan year, except that the notice for a current employee includes a description of the employee's existing coverage, if any. "

My concern with automatic, default elections under Sec. 125 for subsequent plan years is addressed in the highlighted section above.

[Guest Sieve]

LRDG -- The material you quote is a portion of the facts as presented to the IRS. The Revenue Ruling's holding does not require that this additional information (your italics) be given as part of the Notice. However, I think we can take some guidance from the Notice requirements for a EACA, where there may be continuing automatic deferrals if the participant doesn't continue to opt out prior to each subsequent year.