1 Volume seventeen , Issue Six September 2014 . In This Issue A Recap of Section 125 . In this sixth Issue of the Section 125 of the Internal Revenue Employers must meet these specific Code allows most employees to pay for Section 125 requirements: McGraw wentworth Benefit certain benefits with pre-tax dollars, Advisor for 2014 , we review but complex and specific rules apply. 1. The plan must be described in a the Internal Revenue Code plan document. This Advisor re- The plan document Section 125 rules. Employers views the Section must include the need to follow the rules to 125 rules including: following : allow employees to pay for Benefits and certain benefits with pre-tax Basic Legal coverage periods. Requirements A specific descrip- dollars. Health care reform Mid-year tion of benefits has affected Section 125 Changes and the coverage rules. Employers need to be period. Flexible aware of these changes.
2 Spending Accounts (FSAs) Participation rules. The plan Non-Discrimination Requirements must be limited to eligible We welcome your comments employees. Former employ- ees can participate if your and suggestions regarding Health care reform has now changed organization allows pre-tax this Issue of our technical several aspects of the Section 125 rules. payments from their While most employers try to comply bulletin. For more informa- severance pay. with all the Section 125 details, some tion on this Benefit Advisor, do not realize that failing to meet the Election rules. This section requirements can have serious conse- should include the new hire please contact your Account waiting periods and the quences. The IRS could even disqualify Manager or visit the McGraw the plan. timeframe for making wentworth web site at elections. In general, With that in mind, it makes sense to elections are good for the review your documents and processes.
3 Entire plan year. The plan document also needs to specify when the plan allows Basic Legal Requirements mid-year changes and the timeframe for making those Section 125 allows employees to pay changes. Section 125 allows for qualified benefits with pre-tax dol- mid-year changes in up to 14. lars. To qualify as a Section 125 plan, situations. Your plan your plan must offer employees a choice document must include the between cash and non-taxable benefits. situations you want to allow If you allow your employees to either to trigger mid-year changes. take their full pay or contribute part of it to qualified benefits, your plan meets this requirement. Continued on Page 2. Volume seventeen , Issue Six September 2014 , Page 2. Contribution rules. 3. The plan must comply with the Only qualified benefits can be paid for Employer and employee following Section 125 rules: with pre-tax dollars. These include: contribution options must It must offer only qualified be stated.
4 These options benefits. Employer-sponsored benefits include allowing employ- such as: ees to pay either through It must offer a choice between cash or benefits. Accident and health salary reductions or a This means full salary or a benefits (medical, dental, credit-based flex system. reduced salary to pay for vision and so on). Benefits offered. This benefits. Accidental death and needs to address what The plan document must dismemberment benefits. benefits will be offered under the plan. They need include all mid-year changes Employee paid group term to be qualified benefits the employer wants to life insurance. However, pre- under Section 125. permit. tax term life insurance Additional benefits the The plan must not allow could create imputed plan offers should also be employees to defer compen- income issues. Please read included. This could sation. In our Benefit Advisor at include other words, http://.
5 Opt-out an employee bonuses, can't pay for Benefit_Advisor/2013/. vacation a benefit in to learn buy or sell one year more about imputed arrange- and expect income. ments, to use it in Short- or long-term medical future years. disability plans. Employees and However, can choose to pay tax on dependent Section 125 the employer-paid premi- care FSAs, has a few ums. In general, if employ- and so on. stated exceptions to the ees pay for disability Plan year. Generally, deferred compensation coverage with post-tax Section 125 requires a 12- requirement, including: dollars, they do not pay tax month plan year. A plan i. Pre-tax contributions on disability benefits. Take can have a short plan year, to a 401(k) plan or a care here; make sure your but only for a valid trust that is part of a disability plan vendor can business reason. The plan profit-sharing stock administer this option. year can never exceed 12 bonus plan.
6 Medical and dependent care months. The employer FSAs. ii. Contributions to a must let employees know Health Savings Vacation buy or sell arrange- before the beginning of a Account (HSA). ments. short plan year. In general, employers should iii. Salary reductions made Adoption assistance programs. avoid back-to-back short in the last month of However, offering these plans plan years. Although the the plan year to pay under Section 125 is more IRS allows short plan years for benefits in the first limiting than an employer- for business reasons (for month of the next sponsored plan outside Section example, to change from a plan year. 125. July year to a calendar iv. Mandatory two year COBRA premiums. The COBRA. year), consecutive short lock-in or lock-out premiums must be for an plan years will send a red on voluntary dental or employee or IRS-qualified flag. vision plans. dependent. An employee can't 2.
7 The plan must be maintained pay COBRA premiums for an ex- solely for employees. spouse pre-tax. Continued on Page 3. Volume seventeen , Issue Six September 2016, Page 3. Certain educational institutions' The plan must state its rules on To verify whether a mid-year change plans elections, including: is permitted, employers need to ask New hire waiting period these four key questions: Neither legal service plans nor long- Open enrollment timeframe term care insurance can be paid for 1. Is the change allowed under for making annual elections with pre-tax dollars. Also, under Section 125? or changes health care reform, employers can- 2. Is the change consistent with not allow pre-tax payment of indi- Section 125 does not set the event prompting the vidual health insurance premiums. timeframes for mid-year change? Although some employers did allow changes and notifying employees to pay for individual cov- employee's of changes.
8 How- 3. Is the change allowed under the erage under a Section 125 plan, it is ever, HIPAA special enrollment employer's Section 125 plan? no longer permitted. rules require 30-day notice for 4. Is the change permitted by the most changes and 60-day for underlying medical, dental, or Any employer can sponsor a Section Children Health Insurance life plan? 125 plan and set the eligibility re- Program (CHIP) changes. Most quirements. The law specifically ex- 125 plans adopt these time If the answer to all the above ques- cludes the following individuals from periods to coincide with HIPAA tions is yes, then the employer can participating in a Section 125 plan: requirements. make the change mid-year. Almost all elections and most Self-employed individuals changes must be made before Mid-year changes to medical or de- Sole proprietors their effective pendent care date. Retroac- FSAs are more Partners in a partnerships tive changes limited than (including their family mem- are permitted the changes bers) only in these allowed for Two percent or more sharehold- two situations: other pre-tax ers in a subchapter S corpora- Addition contribu- tion and their family members of a tions.
9 Below newborn is a list of the Employers need to make sure they or newly 14 mid-year follow the Section 125 legal require- adopted change events ments if they intend to allow pre- child and whether the changes are allowed: tax deductions on benefits. The IRS. For benefit plans that have can disqualify plans that do not meet 1. Specific changes in family status an effective date based on basic requirements, such as operat- (allows medical and dependent date of hire, employees ing a plan without a plan document. care FSA changes): have a 30-day window to In that case, all of your employees Change in legal marital make initial elections under would lose the tax-favored status of status, which now includes the plan. Election can be any contributions they made same sex marriages. A. made retroactive to the through the plan. same-sex marriage is date of hire. The elections are made for the recognized if the ceremony plan year.
10 In most cases, this is performed in a jurisdic- Mid-year Changes tion that recognizes same- means 12 months. Mid-year changes have always posed sex marriage. Section 125. a challenge for employers. Employ- Section 125 governs only pre-tax defers to the federal legal ers should first understand the Sec- contributions to pay for benefits. It definition of marriage. tion 125 rules for employee elections permits mid-year changes in just 14 Change in number of listed below before trying to make situations. Your plan document dependents as defined by sense of the changes. must state which specific mid-year Section 152 of Internal changes your plan permits. Any mid- Revenue Code. Only participants are allowed to year change must also be consistent make elections. with the status change prompting it. Continued on Page 4. Volume seventeen , Issue Six September 2014 , Page 4. 6. A change in coverage under NOTABLE THOUGHTS another employer's health plan may allow mid-year changes (DCRA allowed).