Section 125 document "failure"

[Belgarath]

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?

[Peter Gulia]

Before too hastily assuming an examination might find a written-plan defect under IRC § 125(d)(1) or another section of the statute, the employer and lawyer you describe might evaluate whether more than one document or writing states the written plan.

 

For example, if the election forms and claims forms were sometimes revised, could those revisions have restated the written plan?

[Belgarath]

Thanks Peter. Probably my qualified plan background peeking through - for example, new salary deferral or distribution forms wouldn't suffice for a plan restatement on a 401(k) plan, so I never thought that what you describe might work in a 125 plan. But I expect the attorney will consider this - or perhaps not, if the advice is to "move forward and ignore the past." Of course, if this business is like most businesses we run into, they won't pay for legal advice anyway...

[Luke Bailey]

Belgarath, in similar situations we have figured that since there is no trust that needs to be "qualified" and no language and history such as under 401(a) that says that a qualified plan is a (and is only) a plan that meets all the requirements of 401(a), the only reasonable response to this situation under 125 is to adopt a new, current document to replace the old (which, frankly, sometimes cannot even be found), and move on. I have never had the IRS ask for old documents in an exam (honestly, I have never had a client examined for 125, or if this was included in the document request by the agent, it was just checked off for existing), but in the context of corporate acquisitions where we have represented target company usually sophisticate buyer's counsel will accept the replacement document, albeit that they get indemnification, either specifically or generally. So I think the standard of practice is to replace with new and move on.

[Belgarath]

Bumping this one up with a related question:

Is there any way to reasonably know what provisions REQUIRED an amendment or amendments? Let's say, for example, the document was done in (pick a year - 2008). Is there any source that says, in effect, that Section 125 plans were required to be amended for(law/act/regulation) by (date) - so that you could check to see if they had been amended? Alternatively, assuming no amendments whatsoever have been done since 2008, any source to discover what amendments were required, or potentially required, from 2008 to the present?

This information is available for qualified plans, but for 125 plans, it seems to be lacking.

[Brian Gilmore]

@BelgarathThere really aren't required cafeteria plan amendments in the same sense as a qualified plan. 

There have been some changes that employers may have needed to adopt to comply with changes to law (e.g., ACA capping health FSA salary reduction contributions and prohibiting individual policy payment) or wanted to adopt to based on changes to law (e.g., ACA-related permitted election change events, Covid-related relaxed election change rules).  But it's certainly conceivable that a plan would not have needed (or an employer would not have wanted) to adopt any cafeteria plan amendments since that timeframe.

If you're working off an old doc, you would just want to check if any of the provisions are inconsistent with current legal requirements or administrative practice.

[Belgarath]

Thanks Brian, I appreciate the response  - that's what I was afraid of! More facts and circumstances, less certainty...

[Bird]

We've written a handful of these over the years and as far as I know, there were no required amendments...until a few weeks ago, I was talking to someone at Fort William and they said, well, something different was required and would be sending some info.  Glad this came up b/c I forgot about it.  I will share if I learn anything.

[Belgarath]

Just a guess, they may be talking about a CARES, etc. Amendment, which is voluntary? I'll be interested to see, thanks. 

[Bird]

20 hours ago, Belgarath said:

Just a guess, they may be talking about a CARES, etc. Amendment, which is voluntary? I'll be interested to see, thanks. 

Correct.  Also something called a carryover increase.  I haven't fully digested it yet but it sounds like with older versions, it's not required.  I'm pretty much bluffing my way through this so don't mind education...

[Brian Gilmore]

1 hour ago, Bird said:

Correct.  Also something called a carryover increase.  I haven't fully digested it yet but it sounds like with older versions, it's not required.  I'm pretty much bluffing my way through this so don't mind education...

The health FSA carryover increase to $550 (from $500) is optional, but basically every employer offering the carryover is going to adopt it.  It's indexed going forward now, too.

Here's an overview: https://www.theabdteam.com/blog/the-550-carryover-vs-the-grace-period/

[Bird]

2 hours ago, Brian Gilmore said:

The health FSA carryover increase to $550 (from $500) is optional, but basically every employer offering the carryover is going to adopt it.  It's indexed going forward now, too.

I'm guessing that is irrelevant in the case of a Premium Only Plan?

[Brian Gilmore]

3 hours ago, Bird said:

I'm guessing that is irrelevant in the case of a Premium Only Plan?

Correct, it does not affect the POP.  The carryover is relevant only for the health FSA--which, like the POP, is a component of the Section 125 cafeteria plan where offered.

[austin3515]

What vendor is responsible for this?  Why is this not standard for whomever sells health insurance?  I feel like no one ever addresses these documents the way us 401k geeks do for ours...

[Brian Gilmore]

1 hour ago, austin3515 said:

What vendor is responsible for this?  Why is this not standard for whomever sells health insurance?  I feel like no one ever addresses these documents the way us 401k geeks do for ours...

@austin3515 Most employers offer a health FSA and/or dependent care FSA.  Those are almost universally administered by a TPA, and the TPA almost always will provide a template cafeteria plan document that employers can adopt for this purpose.  They will typically include a POP, too, since that's also a component of the Section 125 cafeteria plan.

It's not a perfect arrangement, but in the vast majority of situations it covers the necessary bases.

[austin3515]

But only if they have an FSA?  Not everyone does.  I'm talking about the small employer with a health plan taking medical premiums out on a pre-tax basis.  I swear the health providers never provide the 125 document.

[Brian Gilmore]

I take your point--maybe in an ideal world it would work that way.

In reality, the broker should be the intermediary advising on the POP where there is no FSA. The health plan carrier or TPA isn't going to provide a cafeteria plan doc that relates only the the employee pre-tax contributions.  It doesn't fall under their responsibility because it doesn't actually affect plan benefits.  The carrier or TPA just thinks of that as an employer payroll function and an area of potential liability they want no part of.

[austin3515]

7 minutes ago, Brian Gilmore said:

The carrier or TPA just thinks of that as an employer payroll function and an area of potential liability they want no part of.

If I was looking for somoene to blame that's where I would start.  You sell health insurance, you own the 125 plan, period.  I'm not saying Anthem Blue Cross/Blue Shield owns it, but the advisor getting paid boku-bucks in commissions sure does.  And if I'm that person, I should know my clients will blame me, and I'm going to take care of it.

As it turns out I am not the person.  But what is shocking is that no one is.  This is important.  It's someone's responsiblility.  You can;t count on your clients knowing these requirements. That's why they hire brokers in the first place./

[Brian Gilmore]

@austin3515 Amen. Preaching to the choir, my friend.

I work for a broker/consulting firm, and I feel your pain when bringing in new clients at how much of this is never addressed in the industry.

I've yet to meet a client that wanted to take employee contributions after-tax outside of a cafeteria plan.  It's a near universal norm.