Section 125 Cafeteria Plan Compliance - Frequently Asked Questions

What is a Section 125 Cafeteria Plan?
A Section 125 Cafeteria Plan is an employer-sponsored benefits plan governed by Section 125 of the Internal Revenue Code that allows employees to pay for certain qualified benefits using pre-tax dollars, reducing taxable income.

Why is it called a "Cafeteria" plan?
Employees select benefits from a menu of options - similar to choosing items in a cafeteria - such as health premiums, FSAs, or dependent care assistance.

What types of benefits can be offered under a Section 125 plan?
Common offerings include:

• Premium Only Plans (POP)
• Health Flexible Spending Accounts (FSA)
• Dependent Care Assistance Plans (DCAP)
• Health Savings Account (HSA) contributions (when structured properly)

How do employees benefit from a cafeteria plan?
Employees:

• Lower federal income tax liability
• Reduce Social Security and Medicare taxes
• Increase take-home pay

How do employers benefit from a cafeteria plan?
Employers:

• Reduce payroll tax obligations
• Potentially lower workers' compensation premiums
• Offer competitive benefits packages

is Section 125 compliance critical?
Section 125 plans are strictly regulated by the IRS. Failure to comply may result in loss of tax-qualified status, retroactive taxation, payroll tax penalties, and audit exposure.

What happens if a plan loses tax-qualified status?
Employees may be taxed on benefits retroactively, and employers may lose payroll tax savings and face penalties.

What is nondiscrimination testing?
Section 125 plans must pass nondiscrimination testing to ensure they do not favor Highly Compensated Employees (HCEs) or Key Employees.

What happens if nondiscrimination testing fails?
Highly compensated employees may lose tax advantages, and employers may lose payroll tax savings.

Can improper mid-year election changes jeopardize compliance?
Yes. Allowing unauthorized election changes can invalidate pre-tax status for the plan year.

Is a written plan document required?
Yes. A written Section 125 plan document is mandatory to maintain tax-qualified status.

What documents are required for compliance?
Typical required documents include:

• Master Plan Document
• Summary Plan Description (SPD)
• Election Forms
• Status Change Forms
• Reimbursement Forms

What should the Master Plan Document include?
It must define:

• Eligibility rules
• Available benefits
• Contribution limits
• Election procedures
• Status change rules
• Claims procedures

Is the employer responsible if administration is outsourced?
Yes. Even if using a TPA, the employer remains legally responsible for compliance.

Must Summary Plan Descriptions be distributed?
Yes, when applicable. Employees must receive required disclosures.

What are some of the key administrative requirements of a Cafeteria Plan?
Employers must establish procedures for:

• Enrollment
• Open enrollment
• Election processing
• Status changes
• Termination handling
• Coordination with payroll

Are Section 125 elections irrevocable?
Generally, yes - elections are irrevocable for the plan year unless a qualified status change occurs.

What qualifies as a status change event?
Examples include:

• Marriage or divorce
• Birth or adoption
• Change in employment status
• Dependent eligibility changes

Can employees change elections for non-qualified reasons?
No. Changes outside IRS-approved status events may disqualify pre-tax treatment.

Must employers conduct annual enrollment?
Yes. Annual enrollment ensures updated elections and proper documentation.

Are there IRS limits on FSA contributions?
Yes. The IRS sets annual limits for healthcare and dependent care FSAs.

Must employers monitor contribution limits?
Yes. Employers must ensure employees do not exceed IRS limits.

What happens if contribution limits are exceeded?
Excess contributions may result in adverse tax consequences.

Do HSAs fall under Section 125 rules?
HSA contributions can be structured through a cafeteria plan but are subject to separate HSA eligibility rules.

Can employees contribute to both FSA and HSA?
It depends on plan design. Certain combinations are restricted under IRS rules.

Is Form 5500 required?
If the plan has 100 or more participants, Form 5500 filing may be required.

Who is responsible for filing Form 5500?
The plan administrator is ultimately responsible, even if outsourcing preparation.

What records must employers maintain?
Employers must retain:

• Election forms
• Contribution records
• Reimbursement records
• Testing results
• Plan documents

How long should records be kept?
Records should be retained for the duration of the plan year plus additional years to satisfy IRS requirements.

Why is accurate recordkeeping important?
Proper documentation protects against IRS audits and participant disputes.

What are common Section 125 compliance errors?
Common mistakes include:

• Missing written documentation
• Improper status change approvals
• Failure to test for discrimination
• Poor recordkeeping

What is the most common administrative error?
Improperly allowing mid-year election changes without qualifying status events.

Why is nondiscrimination testing often mishandled?
Employers may fail to conduct proper testing or misunderstand HCE definitions.

What risks arise from failing to communicate plan changes?
Lack of communication may result in confusion, disputes, and compliance failures.

Can incomplete documentation trigger IRS scrutiny?
Yes. Documentation failures are a primary compliance vulnerability.

What is included in the Section 125 Training & Certification Program?
Participants gain expertise in:

• Plan design
• Administrative requirements
• Status change rules
• Nondiscrimination testing
• Reporting requirements
• IRS audit readiness

What certification can participants earn?
Individuals may earn the Certified Cafeteria Plan Administrator designation.

Is there a certification option for TPAs?
Yes. TPAs may earn a Certified Cafeteria Plan TPA seal to enhance credibility.

Who should take this course?
Ideal participants include:

• HR Managers
• Benefits Administrators
• Payroll Professionals
• Compliance Officers
• TPAs
• Business Owners

Is this training appropriate for small businesses?
Yes. Even small employers must comply strictly with IRS requirements.

How does Section 125 integrate with payroll?
Pre-tax deductions must be accurately reflected in payroll and tax reporting systems.

How does Section 125 affect workers' compensation premiums?
Reduced taxable wages may influence payroll-based insurance premiums.

43. How do cafeteria plans interact with COBRA?
Health FSA continuation rights may apply under COBRA in certain circumstances.

Does Section 125 affect retirement plan contributions?
Yes. Reduced taxable wages may affect compensation calculations for retirement plan contributions.

Should employers list allowable status changes in plan documents?
Yes. Clear written rules protect plan qualification and ensure uniform administration.

What makes this training program different?
The program provides:

• Practical IRS-focused instruction
• Administrative workflows
• Real-world examples
• Compliance safeguards

Does this training help prevent IRS penalties?
Yes. Structured compliance training significantly reduces audit and penalty exposure.

How does certification enhance professional credibility?
Certification demonstrates technical expertise in benefits administration and tax compliance.

Why invest in Section 125 training now?
IRS scrutiny of pre-tax benefit plans continues to increase. Proper training ensures ongoing compliance and protects employer tax savings.

How do I enroll in the Section 125 Cafeteria Plan Training & Certification Program?
You may enroll by selecting the Cafeteria Plan Training & Certification Program listed above and completing online registration to earn your Certified Cafeteria Plan Administrator designation.

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