Section 125 POP Plan Documents: The Penalties for Non-Compliance

Section 125 POP Plan Documents: The Penalties for Non-Compliance

As many employers may be well aware by now, a Premium Only Plan (POP) Plan or Section 125 allows for 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’re 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, don’t 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 1 year for willful violation of ERISA provisions;
  • Fines of up to $10,000 and/or imprisonment of up to 5 year 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 polices.

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

As an employer you have multiple tasks to juggle.  The scenario’s above can clearly be avoided through the guidance and advice of the professionals.  There are web-based document creation companies like www.taxfreepremiums.com who can create, maintain and outline the employer responsibilities while assisting you with compliance updates for a low annual fee of $99.  Make sure that your Section 125 POP Plan documents are updated and in compliance today.