Implementing a POP

[Guest hockey-mom]

It was recently discovered that the company I work for has been using pre-tax dollars for the employee's group health and group term life insurance premiums without a formal, written plan document. No enrollment forms were ever obtained from the employees. This started approximately six years ago.

Our insurance broker obtained a written plan document for the company with an effective date of 01/01/11. He informed us that enrollment forms were not required - that our employees were, by default, already in the plan and did not need to enroll. He also informed us that new hires did not need to enroll.

I am not an HR person but I do share the accounting duties. It is my limited understanding that this is a Premium Only Plan and falls under Sec. 125 of the Internal Revenue Code which requires us to have a written plan document and also requires us to obtain written enrollment/election forms from each participant. It is also my understanding that these forms should be obtained prior to the effective date of the plan.

What should we do from this point forward? Do we immediately stop using pretax dollars for benefits, amend the effective date of the plan to a later date to give us time to send out the enrollment forms and Summary Plan Document to all participants? Or, do we continue using pretax dollars for beneifts, keep the effective date of the plan 01/01/11 and obtain enrollment forms from the employees ASAP? If we use the second approach, will we be in compliance with IRS code and regulations upon receipt of the enrollment forms even though they are dated after the effective date of the plan?

Last question - I know we have an exposure here in case of an audit. How many years back can they go and how harsh are they on penalties?

Thanks in advance for any assistance.

[QDROphile]

Section 125 is not involved unless the employees have a choice between receiving dollors in take home pay or some benefit like health coverage. You did not exactly say that and it is the critical fact in your question. Otherwise, your broker might not be wrong about certain things, although even in the best light I would question what is meant by "enroll." Everyone needs to be enrolled, and family members who are covered need to be identified.

[Bird]

I'm usually over on the retirement plans side of this board but I have a little knowledge about POPs; we have written a few now and again. I think the broker is correct; enrollment is automatic unless an employee signs a form to waive out, which would be unusual. That's at least how ours are written.

And I wouldn't be too worried about exposure. I think there are many arrangement that are being treated as POP plans but without documentation, and from what I can tell, there is little or no enforcement. That doesn't make it ok, but your efforts to become compliant are probably good enough.

[Guest hockey-mom]

Section 125 is not involved unless the employees have a choice between receiving dollors in take home pay or some benefit like health coverage. You did not exactly say that and it is the critical fact in your question. Otherwise, your broker might not be wrong about certain things, although even in the best light I would question what is meant by "enroll." Everyone needs to be enrolled, and family members who are covered need to be identified.

Please bear with me as I am not very familiar with this issue. I don't understand the choice between receiving dollars or another benefit. We offer health insurance coverage and group term life insurance coverage. We, as the employer, pay a portion of that coverage and each employee pays a fixed amount every pay period. If an employee does not take the insurance coverage, they do not receive any additional compensation. We have not been including the amount of the premiums the employees pay each pay period in the computation of withholding taxes. We were told we needed a Premium Only Plan in place to do this.

Thanks.

[QDROphile]

Assume that an employee's gross pay amount is $1000 per month. Looking only at the insurance benefits (forget FICA and income tax withholding and other payroll amounts), assume the employee "pays" $100 per month for the benefit. That means the employee actually receives $900 per month in dollars. What happens if the employee does not take insurance benefits? Does the employee receive $900 per month or $1000 per month in dollars?

[masteff]

I don't understand the choice between receiving dollars or another benefit. We offer health insurance coverage and group term life insurance coverage. We, as the employer, pay a portion of that coverage and each employee pays a fixed amount every pay period. If an employee does not take the insurance coverage, they do not receive any additional compensation. We have not been including the amount of the premiums the employees pay each pay period in the computation of withholding taxes. We were told we needed a Premium Only Plan in place to do this.

Technically speaking, the employee has a choice between take-home-pay and insurance premiums (this is the cash or benefit choice referred to above). By choosing enrollment in the medical plan, the employee is, technically speaking, electing to put money into the 125 Plan which is then paid out to the insurance carrier. The actual mechanism is the employer deducts it from employees' pay and then pays the premiums (meaning no separate holding accounts or anything messy like that).

And to make it explicitly clear, you don't have a separate enrollment for the 125 Plan; enrollment in the particular benefits themselves is sufficient (because, technically, the benefits are "inside" the 125 Plan, so electing the benefit is by definition an election to participate in the 125 Plan).

[rcline46]

And if you have a qualified plan, the POP employee premiums are usually added back to income for deferral, match, and profit sharing calculations, in part of pay for db for cb plans!!!

[Guest jessib]

Depending on the language in your document and SPD or specific enrollment/waiver forms you should be just fine. Most updated or current plan documents are written with language that state negative/default or automatic enrollment giving notice to the employees that they are automatically enrolled but they have the option to waive their right to enroll in writing. The notice and SPD should be given prior to enrollment but legally you have up until 90 days after the enrollment event.

I work for a company that administers, creates, and updates POP documents. When laws change, updates are made to the document and automatically delivered via the web in .pdf for amendments. You can find details including a checklist of all required items, SPD, Plan Documents, and a board resolution adopting the plan information at www.taxfreepremiums.com