The Section 125 Plan
Before completing the application to establish a Section 125 Premium Payment Plan, carefully. review the plan statement. You should also provide a copy to your legal or tax advisor for review. The plan statement is very specific about the manner in which the plan must be administered.
The following comments are intended to help you in your decision whether to establish a Section125 Premium Payment Plan.
Establishing a Section 125 Premium Payment Plan
Tax Benefits
The employee is able to pay his or her share of the cost of the benefit on a pre-tax basis, which is an obvious benefit to the employee. The employer also receives a tax benefit because the contributions to the Section 125 Premium Payment Plan are not subject to payroll taxes.
Coordination With Other Plans
You should review your qualified retirement plans to determine how contributions to the Section 125 Premium Payment Plan will be treated under those plans. In particular, will 'compensation', as defined in your qualified retirement plans, be less because an employee chooses to participate in this plan? That is, will an employee be 'penalized' for participation in the Section 125 Premium Payment Plan? If so, this is probably not what you want and an amendment to your qualified retirement plan may be necessary.
Discrimination Rules
As long as the Section 125 Premium Payment Plan is available to all of your employees, you should be in compliance with the discrimination requirements of Section 125 of the Internal Revenue Code. For this purpose, the employees of your company and all its affiliates must be taken into account. It is possible that, if you have a disproportionate number of 'key employees (as defined In the Internal Revenue Code) then the utility of this plan will be limited. Also, self-employed persons are not eligible to participate in cafeteria plans under the Internal Revenue Code.
Affiliates
As noted previously, for discrimination testing purposes you must consider the employees of your company and all its affiliates. ‘Affiliate’ is defined in the plan statement and that definition follows the requirements of the Internal Revenue Code. you should consult your legal or tax advisor to determine whether this pertains to you.
Retro-activity - The plan cannot be adopted retroactively.
Administering the Plan
Annual Return/Report (IRS Form 500).
Section 6039D of the Internal Revenue Code requires that a report be filed with the IRS for a cafeteria plan (such as this plan) within seven (7) months after the end of each plan year. You should consult your tax or legal advisors about combining the filing requirement for the filing requirement for each of the benefits you have selected.
* For employers with over 100 employees, there is only one question pertinent to Section 125 on the Form 5500. This is question 6a.
The employer would simply need to place an X in box N. this indicates to the IRS that a Section 125 cafeteria plan is in existence.
