Many employers are typically aware that a Premium Only Plan (POP) or section 125 allows for the employee’s health insurance premium to be taken out with the use of pre-tax dollars. This results in substantial tax savings for all parties involved.
Although this may sound intimidating, the process of setting up and maintaining a plan can be simple if you seek the assistance of a professional. However, if you are one of those people who are unaware of Section 125, you could be in for a world of hurt. When it comes to sponsoring a Section 125 Premium Only Plan does not only come with benefits but also documentation requirements. To this point, many employers can potentially be misadvised by their tax advisors and professionals where or how to start with staying compliant.
The penalties that can come about if you are not compliant in the IRS Code Section 125 are included in the following list:
1. Fines of up to $5,000 or imprisonment of up to 1 year for willful violation of ERISA provisions
2. Fines of up to $10,000 and/or imprisonment of up to 5 years for making any false statements or representation of fact, knowing it to be false, or for deliberate non-disclosure of any facts required by ERISA
3. A penalty of $110/day for failure to distribute a Summary of Plan Description or SPD to participants within 30 days of the request.
4. 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 consequence that could come about from non-compliance of Section 125 POP Plan requirements is that the sponsoring employer could be held liable for the claims against the plan if the documents do not give participants accurate information for the plan policies.
In worst case scenarios, the pre-tax deductions may be disallowed from the beginning, leading to an IRS assessment of overdue back taxes plus interest and corresponding penalties.
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