United Benefit Advisors Insight and Analysis Blog

Question of the Month: Penalties for failing to comply with Section 125 requirements

By Karen Hsu,
  Jul 12, 2018 12:55:32 PM

shutterstock_543880450Q.What are the penalties for failing to comply with Section 125 requirements, such as failing to follow a cafeteria plan document’s terms?

A: An operational failure occurs when a plan fails to follow its cafeteria plan document’s terms. There are several potential penalties for operational failures, including:

  • Cafeteria plan disqualification
  • Requiring the cafeteria plan to comply with Section 125 and its regulations, including reversing transactions that caused noncompliance
  • Imposing employment tax withholding liability and penalties on the employer regarding pre-tax salary reductions and elective employer contributions
  • Imposing employment and income tax liability and penalties on employees regarding pre-tax salary reductions and elective employer contributions

Topics: cafeteria plan, Section 125 plan, penalties