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Section 125 Compliance

Internal Revenue Code (IRC) Section 125 compliance allows employees to pay for a variety of benefits with pretax dollars, thus reducing the amount of their wages that are subject to federal income and employment taxes. Employers also get a tax savings because their share of employment taxes is also reduced. According to IRS regulation, qualified benefits that may be provided through IRC Section 125 compliance, also known as flex or cafeteria plans, include: health insurance, short-term disability insurance, long-term disability insurance, group term life insurance, group legal services coverage, elective contributions to 401(k) plans, adoption assistance, medical reimbursements and child care reimbursements.

The Internal Revenue Service (IRS) regulations specify that both cafeteria plan health savings account (HSA) and a high deductible health plan (HDHP) associated with the HSA may be offered as options under a cafeteria plan. An employee may elect to have pretax salary reductions contributed as employer contributions to an HSA and an HDHP. Certain cafeteria plan benefits such as long-term care insurance may not be funded with pretax dollars through an IRC section 125 compliance plan.

Types of Flexible Benefit Plans: There are three major types of flexible benefit plans, including:
  • The premium-only plan - the simplest and least expensive to administer.
  • The child care reimbursement, medical reimbursement, and adoption assistance flexible spending account (FSA) plan.
  • The full-scale flexible benefit plan - the most complicated plan to operate.

If the cafeteria plan includes a flexible spending account (FSA), IRS regulations require that the plan is written and must include provisions complying with the uniform coverage rule and the use-or-lose rule. IRS regulations require that the written cafeteria plans must specify that only employees may participate in the cafeteria plan and that all provisions of the written plan apply uniformly to all participants.

Qualified Benefits - For purposes of IRS regulation and IRC section 125 compliance, qualified cafeteria plan benefits must be excludable from employees’ gross income under a specific provision of the IRC and must not defer compensation, except as specifically allowed in IRC Section. 125 (d)(2)(B), (C), or (D). Examples of qualified cafeteria plan benefits include the following:
  • Group term life insurance on the life of an employee
  • Employer-provided accident, disability and medical insurance plan, including health FSA, accidental death, disability, and dismemberment policies
  • Child care reimbursement programs
  • Adoption assistance
  • Elective contributions to 401(k) plans
  • Contributions to certain plans maintained by educational organizations
  • Contributions to health savings accounts (HSA)
  • Long-term disability and short-term disability insurance plans
  • Group legal services coverage
An IRC Section 125 compliance plan year must be 12 consecutive months in length and must be set out in the written cafeteria plan. A short cafeteria plan year (or a change in plan year resulting in a short cafeteria plan year) is permitted only for a valid business purpose.

Call 877-OKTRITONand speak with one of our licensed Benefit Specialists to learn more about which type of insurance plans are best for you and your employees.