Section 125 POP Document: The Penalties for Non-Compliance

Section 125 POP Document: The Penalties for Non-Compliance

As many employers may be well aware by now, a Premium Only Plan (POP) or “Section 125” allows employees health insurance premiums to be deducted with the use of pre-tax dollars, thereby resulting in substantial tax savings for both parties.  A lot of small and medium-sized businesses across the country have already availed of this tax-saving measure provided for in Section 125 of the Internal Revenue Service Code.

The process of setting up and maintain a plan is very simple if you choose to seek the assistance of a professional.  If you are one of those employers who are blissfully unaware of, or are intentionally choosing to ignore Section 125 POP Plan compliance requirements, BEWARE. You may be in for some serious consequences.

Sponsoring a Section 125 Premium Only Plan does not only come with benefits, but also documentation requirements.  In this regard, many employers may be ill-advised by their tax professionals, many do not know where or how to start with staying in compliance, or they may have simply forgotten.

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 are enumerated 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.

Another key consequence that could stem from non-compliance of Section 125 POP Plan requirements is that the sponsoring employer could be held liable for claims against the plan if the documents do not give participants accurate information of the plan policies.

But that is not all.  In a worst case scenario, the pre-tax deductions may be disallowed from the beginning, leading to an IRS assessment of an overdue back taxes plus interest and corresponding penalties.

As an employer you have multiple tasks to juggle.  The scenarios above can clearly be avoided through the guidance and advice of the professionals. Please make sure that your Section 125 POP documents* are updated and are in compliance today.  
-authored by www.taxfreepremiums.com/blog/index.php/index.php/2010/05/section-125-pop-plan-documents-the-penalties-for-non-compliance/

*Clients of Century Benefits Group, Inc. receive these documents free of charge!  

Employers may also wish to read this critically important blog post (click on title for link:)

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