A Premium-Only Plan Document (POP) is a type of Section 125 cafeteria plan that allows employees to pay their share of certain insurance premiums with pre-tax dollars. In other words, a POP plan allows employees to reduce their taxable income by paying for their share of health, dental, vision, or other eligible insurance premiums with pre-tax dollars.
Employers can offer a POP plan as part of their benefits package, and it can be a cost-effective way for both employers and employees to save money on taxes. By reducing the amount of taxable income, employees can effectively increase their take-home pay, while employers can save on payroll taxes.
The IRS has specific rules and regulations for POP plans, which include the requirement for a written plan document. The document must outline the terms and conditions of the plan, including the eligible benefits, employee eligibility requirements, and the contribution limits. It's essential that employers carefully review and follow these rules to ensure compliance with the IRS regulations.
What is Section 125 Compliance?
Section 125 of the Internal Revenue Code (IRC) is a provision that allows employers to offer employees a cafeteria plan, also known as a flexible benefits plan. A cafeteria plan is a type of employee benefit plan that allows employees to choose from a menu of pre-tax benefits, such as health insurance, dental insurance, vision insurance, dependent care assistance, and other benefits.
The IRS has specific rules and regulations that apply to cafeteria plans, including Section 125. These rules govern things like the types of benefits that can be offered, the eligibility requirements for employees, the contribution limits, and the tax treatment of benefits.
Under a cafeteria plan, employees can choose to receive a portion of their compensation in the form of non-taxable benefits rather than taxable salary. By doing so, they can effectively reduce their taxable income and increase their take-home pay. Employers can also benefit from offering a cafeteria plan, as they can save on payroll taxes by reducing the amount of taxable wages paid to employees.
Employers who offer a cafeteria plan must comply with the rules and regulations set forth by the IRS, including those related to Section 125 of the IRC. This includes having a written plan document in place, providing employees with written information about the plan, and following specific rules regarding enrollment, election changes, and other aspects of plan administration.
Are businesses required to have a POP document in place?
While businesses are not required to offer a Premium-Only Plan (POP) to their employees, if they do offer a POP plan, they are required to have a written POP plan document in place. The IRS regulations require that the POP plan document is in writing and includes certain information, such as the terms and conditions of the plan, the eligibility requirements for employees, the types of benefits that can be paid with pre-tax dollars, and the contribution limits.
Having a written POP plan document is important for several reasons. First, it helps to ensure that the plan is properly administered and complies with IRS regulations. Second, it can help to prevent disputes or confusion regarding the terms of the plan. Finally, having a written plan document can help to demonstrate compliance with the law in the event of an IRS audit or other inquiry.
Employers who are considering offering a POP plan should consult with a qualified benefits professional or legal advisor to ensure that they understand the requirements and have a plan document that is compliant with IRS regulations.
I offer a POP-Plan, but I do not have a written POP plan. What is the penalty?
If a company offers a Premium-Only Plan (POP) but does not have a written POP plan document in place, they may be subject to penalties and fines from the Internal Revenue Service (IRS). Typically, the Department of Labor (DOL) penalty for not having a POP plan document is $100/day, up to a maximum of $1,000 if an SPD is requested and is not provided within 30 days.
The IRS requires that POP plans be documented in writing and that the written plan document include specific information, such as the eligibility requirements for employees, the types of benefits that can be paid with pre-tax dollars, and the contribution limits. Failure to comply with these requirements can result in penalties and fines for the employer.
The penalty for not having a written POP plan document in place can vary depending on the circumstances. In some cases, the penalty may be a flat fee or a percentage of the amount of the plan contributions. In other cases, the penalty may be more severe, including the disqualification of the POP plan, which would result in all plan contributions being treated as taxable income for the employees.
It's important for employers who offer a POP plan to ensure that they have a written plan document in place that complies with IRS regulations. Employers should consult with a qualified benefits For those who fall under any of these categories, the penalties for non-compliance can be stiff, depending also on the gravity of the violation. The penalties for non-compliance are listed in the IRS Code Section 125 to include the following:
- Fines of up to $5,000, or imprisonment of up to one year for willful violation of ERISA provisions;
- Fines of up to $10,000 and/or imprisonment of up to 5 years for making any false statement or representation of fact, knowing it to be false, or for deliberate non-disclosure of any fact required by ERISA;
- A penalty of $110/day for failure to distribute a Summary of Plan Description or SPD to participants within 30 days of request;
- A Department of Labor (DOL) penalty of $100/day, up to a maximum of $1,000 if an SPD is requested and is not provided within 30 days.
In addition to these penalties for non-compliance of Section 125 Pop Plan requirements is that employes can be held liable for claims against the plan if the document do not give participants accurate information regarding their plan policies. In an extreme scenario, an employer may lost the right to pre-tax deductions of benefits, leading to an IRS assessment of an overdue back taxes plus interest and corresponding penalties.
Who typically creates a POP plan document for employers?
Premium-Only Plan (POP) documents are typically created by third-party administrators (TPAs) who specialize in designing and administering cafeteria plans. These TPAs can work directly with the employer to create a customized POP plan document that meets the specific needs of the employer and their employees.
The TPA will typically start by reviewing the employer's existing benefits program, including the types of insurance plans offered and the contribution amounts. They will then work with the employer to design a POP plan that is compliant with IRS regulations and meets the employer's objectives.
The TPA will draft the written POP plan document, which will include all of the required information and provisions, such as the eligibility requirements for employees, the types of benefits that can be paid with pre-tax dollars, and the contribution limits. The TPA will also provide ongoing administration of the POP plan, which may include maintaining records, processing claims, and providing compliance support.
Employers who are considering offering a POP plan should carefully evaluate potential TPAs to ensure that they have the expertise and experience to design and administer a compliant plan. It's also important to consider factors such as cost, service levels, and reputation when selecting a TPA for a POP plan.
Does Whirks help companies maintain Section 125 compliance?
Yes, in the Whirks service package, our team can help maintain Section 125 compliance for you. We offer support for employee benefit plans, including cafeteria plans, and can help ensure that these plans are compliant with IRS regulations.
We can assist with all aspects of cafeteria plan administration, including plan design, documentation, enrollment, employee communications, and compliance monitoring. We can also provide ongoing support for plan administration, such as processing contributions, handling claims, and ensuring that plan changes are communicated to employees. In addition, we offer compliance support to help ensure that their clients are meeting all of the requirements of Section 125 and other applicable regulations. This may include conducting periodic plan reviews, providing guidance on compliance issues, and helping clients to respond to IRS inquiries or audits.
It's important for employers to carefully evaluate potential HR outsourcing companies to ensure that they have the expertise and experience to provide high-quality support for employee benefit plans, including Section 125 cafeteria plans. Employers should consider factors such as the provider's experience, reputation, service levels, and cost when selecting an HR outsourcing company for benefits administration support.
If you haven’t carefully reviewed your POP document lately or are exploring benefit insurance for your employees for the first time, check out our articles Best Practices for Managing Employee Benefits and How to Build the Ideal Small Business Benefit Package for Your Employees. Do you have more questions and want to talk to a real live human being? We're just a click away.
