The IRS and the Department of Labor require employers to establish a formal plan document and summary plan description before they allow their employees to pretax insurance premium. The beginning of a new tax year is historically when most employers start a new Section 125 Premium Only Plan year. There is still plenty of time to update your Section 125 Premium Only Plan by January 1, 2019.
Section 125 Premium Only Plans allow employees to pretax or avoid paying income taxes on their portion of employer sponsored health insurance plans and some forms of non-employer-sponsored health insurance premium. January marks the beginning of a new Section 125 plan year for most employers.
If your company takes advantage of Section 125 pretax deductions you might want to verify that you actually do have a current Section 125 Plan Document. It’s not unusual for employers to take Section 125 insurance pretax deductions for years without knowing that a formal plan document and summary plan description are required by the IRS and Department of Labor.
For the unfortunate employer who goes into a IRS audit without a current Section 125 plan documents the result could be reclassification of all pretax insurance deductions back to taxable income. The IRS then could assess and add interest and penalties on the unpaid taxes.
Many more employers have Section 125 Plan Documents that have never been updated. These employers are making administrative decisions based on outdated tax law and could be allowing events that would disallow their plan. If your Section 125 Plan Document hasn’t been updated since 2010 you should seriously consider updating it this January. Also, the Department of Labor requires employers to distribute new summary plan descriptions to employees once every five years.
If your Section 125 Plan Document is old, outdated or missing, the New Year would be a good time to update it. How much does it cost to update or replace an old Section 125 plan? Cafeteria Plan Direct has been helping employers amend or replace their Section 125 plan document for just $79 (Basic PDF).
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