Benefits Administration: Don’t Believe the Lies about Section 125 Plans
October 2, 2017
When it comes to benefit administration, Section 125 Plans can be a challenge for some employers to understand. Essentially, these plans offer employees the option to change their taxable salary into non-taxable benefits before any taxes are removed from their paycheck.
We compiled the most common misunderstandings concerning Section 125 Plans to help employers understand exactly what they’re dealing with.
1.A Section 125 Written Plan Isn’t Necessary
If you want your employees to pay for health, dental, and vision premiums before taxes are withdrawn from their paychecks, a written Section 125 plan document is required. You need to review the document and make necessary amendments to ensure it remains up-to-date. Our workforce benefit experts can help you write and review your plan to ensure accuracy and compliance.
2. Health Plan Administrators are Section 125 Experts
Most group health insurance providers are unfamiliar with Section 125 plans, including its requirements and regulations. They typically don’t retain documentation of which clients participate with Section 125 plans and which don’t. The benefits administration at USA Payroll can help you keep track of your employees’ health benefits.
3. Everyone Can Participate in a Section 125 Plan
Employees, not partnerships or over 2% shareholders in a Subchapter Corporation, are eligible for a Section 125 Plan. Spouses and dependents are not allowed to participate, but, unlike non-tax dependents such as domestic partners, they can receive tax benefits. If you have any questions, you can ask your benefits administration at USA Payroll to double check your eligibility in your Section 125 Plan document.
4. Changes in Component Plans Apply to Section 125
The terms of the Section 125 Plan, not necessarily component plans, must be followed. For example, if a certain midyear election change occurs concerning, say, the health plan, the Section 125 Plan does not change. There are no eligibility terms in the Section 125 Plan that bind the health insurer in any way that’s different from those in the health plan documents. If the Section 125 Plan includes hours and waiting-period requirements, you can make sure those terms align with your health plan document.
5. Status Changes Are Included in the Section 125 Plan Document
In reality, your employer doesn’t have to include qualifying events or permissible status changes in your Section 125 Plan document. For example, two new status changes that recently rolled out from the Affordable Care Act (Obamacare) are related to marketplace enrollment opportunities, but most employers haven’t added them to the Section 125 Plan. Make sure to check your plan document to see if any of these changes are omitted and consider adding them if appropriate.
6. You Don’t Need a Section 125 Plan to Qualify for HSA Contributions
A Section 125 Plan is the only way employees can contribute to their HSA before taxes are withdrawn from their paycheck. That’s one of the major benefits of a Section 125 Plan. Your benefits adviser can help you determine if the Section 125 Plan you offer to your employees allows pre-tax contributions to their HSA.
7. Section 125 Plan Facilitates Health Reimbursement
A Section 125 Plan doesn’t permit HRS contributions, which can be made only by employers. A traditional cafeteria plan doesn’t make HRA contributions automatically available to employees.
8. Section 125 Plan Can Pay For Supplemental Health Insurance
A vendor of these products might tell you that you can let your employees pay out-of-pocket medical expenses with their Section 125 Plan, but this may create compliance issues with benefits administration. You can always check with your workforce management specialists at USA Payroll.
9. Section 125 Testing Doesn’t Apply to Fully-Insured Health Plans
Section 125 nondiscrimination testing (not the delayed ACA nondiscrimination regulations) applies to both insured and self-funded plans.