Tax-saving tactics are only useful when they are supported by systems that follow IRS rules. This is particularly true for companies that provide a Section 125 cafeteria plan. These programs may save a lot of money for both companies and workers, but they also have severe IRS rules that many firms don't know about.
The Lumara Plan is meant to make it easy to follow the rules while also giving you the best savings possible via a well-designed section 125 benefit plan framework. This article explains the main laws, makes it clear what companies need to do to remain in compliance, and illustrates how Lumara keeps businesses on the same page without adding to their workload.
What Is a Cafeteria Plan Under Section 125?
A Section 125 cafeteria plan, which gets its name from Section 125 of the Internal Revenue Code, lets workers use pre-tax cash to pay for qualified services. Employees might choose to put some of their taxable pay into authorized perks instead of getting their entire wage. This lowers their taxable income.
This method decreases the employer's payroll taxes and raises the employee's net compensation. It's one of the best ways to save money on taxes at work. But following the rules set by the IRS is very important to keep these savings.
Why it Matters to Follow Section 125
A lot of firms think that giving pre-tax perks is as easy as taking money out of employees' paychecks. In actuality, the IRS has clear, rigorous guidelines about how to run a section 125 benefit plan, but these rules are regularly ignored. Offering benefits to those who aren't eligible or not keeping track of elections are two common blunders that may get the plan disqualified, which means tax fines and back pay responsibility.
The Lumara Plan has built-in compliance management for every part of the Section 125 framework. This makes sure that companies can get the most out of their savings while lowering the risk of an audit.
Basic IRS Rules for Cafeteria Plans Under Section 125
1. A Written Plan Document Is Needed
There must be a written record for every Section 125 cafeteria plan that says:
- Who may apply
- What are the benefits?
- How to make elections
- Rules for making modifications throughout the year
You have to follow this plan paper. It's the law, and a corporation can't get the tax advantages of a Section 125 plan without it. Every customer of Lumara gets a unique plan document that meets IRS standards and is updated every year.
2. Only Employees Who Qualify Can Take Part
- The IRS says that only workers may take part. This implies that sole owners, partners in a partnership, and LLC members can't take part.
- Owners of S-corporations who possess more than 2% of the company and their family members are not allowed.
- One of the most frequent (and expensive) compliance mistakes is to include an ineligible owner or officer in a Section 125 plan. The Lumara Plan automatically enforces these exclusions.
3. Only Benefits That Are Qualified Can Be Given
Section 125 plans may only provide certain IRS-approved benefits, like:
- Premiums for group health, dental, or vision insurance
- Reimbursements for medical expenses (if they are part of a self-insured plan that meets the rules)
- Help in caring for dependents
- Contributions to a health savings account (HSA)
The Lumara Plan only contains benefits that have already been authorized, so businesses can't accidentally disqualify their plans by giving benefits that aren't qualified.
4. You Have to Make Choices Before the Start of the Plan Year
Before the start of each plan year, employees must select choices. Elections can't be modified once they're made unless the employee goes through a qualifying life event, such as:
- Getting married or divorced
- Having a baby or adopting one
- Change in job status
- Not having additional insurance coverage
Lumara's digital onboarding technology helps staff follow the rules for elections and keeps all documents safe.
5. Testing for Non-Discrimination Must Be Done Every Year
Plans under Section 125 cannot unfairly reward workers who make a lot of money or are very important. The IRS needs three tests each year to confirm this:
- Test of Eligibility: Do all workers have a fair chance to take part?
- Pros and Contributions Test: Are benefits shared fairly?
- Important Employee Concentration Test: Are no more than 25% of perks going to important employees?
To make sure that all of its clients are in compliance, Lumara conducts these tests every year and keeps records of them.
Common Mistakes Employers Make When Following the Rules
Even though they mean well, a lot of businesses don't follow the rules for their section 125 cafeteria plan. Some typical errors are:
- Not keeping a documented plan document
- Letting company owners who don't qualify take part
- Allowing modifications to elections in the middle of the year without proof
- Giving advantages that aren't qualified, such as gym memberships or cash alternatives
- Not doing the necessary tests for non-discrimination
Not only can these blunders cost you tax savings, they also lead to fines, back taxes, and compliance audits.
The Lumara Plan: Made to Follow Section 125
The Lumara Plan is designed to get rid of all of these hazards while making the most of the advantages. It has three parts that work together:
- A Section 125 benefit plan that follows the rules
- A self-insured medical reimbursement scheme (SIMRP)
- A simplified Pre-Tax Contribution Management Program (PCMP)
This system lets firms pay less in payroll taxes and give workers more money to go home without having to worry about following IRS rules.
How Lumara Follows the Rules:
- Plan Documentation: Writing and keeping up with custom plan papers
- Eligibility Filters: Only workers who meet the requirements are included
- Election Controls: Built-in automatic timing and limits on changes
- Testing and Audits: The IRS conducts annual non-discrimination testing and provides audit evidence
- Ongoing Monitoring: Help with making modifications to the plan as IRS rules change
What Lumara Does in the Real World
Employers that use the Lumara Plan say they save between $500 and $1,200 in taxes for each employee each year. But they also feel more confident knowing that their plan is always in line with IRS rules and ready for an audit.
A firm with 75 employees saved more than $85,000 a year in employer payroll taxes while also improving the benefits experience and getting rid of the requirement for internal compliance monitoring.
Conclusion: Following the Rules Pays Well
It's important to know the regulations of a section 125 cafeteria plan, but the true benefit comes from following them properly. The Lumara Plan gives companies a complete compliance solution that takes care of all the paperwork and lets them use all the financial advantages of pre-tax employee perks.
Instead of worrying about written plans, non-discrimination tests, or eligibility restrictions, companies can concentrate on what matters most: helping their staff and developing their businesses.
Are You Ready to Make Your Section 125 Compliance Easier?
Let Lumara take care of it. Find out how the Lumara Plan guarantees compliance with the IRS, gives employees better benefits, and saves you thousands of dollars in taxes.
To set up your bespoke tour, get in touch with Lumara Health
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