POP: Plan Documents And Renewals
Source: Word & Brown, by Paul Roberts
Employers commonly allow employees to fund their portions of health premiums – that is, their employee contributions – with pre-tax dollars. This feature is so common that many employers (incorrectly) assume they are automatically privileged to utilize pre-tax dollars to fund benefits, just by sponsoring a health plan alone.
While there is some work involved in attaining permission from the IRS to utilize such pre-tax dollars for employee contributions, it is relatively simple for employers to do so. Employers must establish a “Premium Only Plan” (POP), which is sometimes called a “premium conversion plan,” in order to utilize this pre-tax option. Employers are prohibited from utilizing tax-free funds from employees’ paychecks to fund employee benefit contributions without a POP in place.
In order to establish and implement a POP, employers must adopt a written “plan document” for the POP. This plan document governs the administration of the POP, and includes details about the compliance items required by the IRS for employers’ POPs.
What details are in a POP plan document?
Under its rules, IRS generally requires employee plan elections under a POP to be “irrevocable” – meaning employees’ plan elections cannot be changed, altered, dropped, etc., until the conclusion of the plan year – unless an employee experiences a change-in-status event such as marriage, divorce, change in dependent status, Medicare entitlement, etc. Refer to the previous column in our W&B Newsroom for more information on these “irrevocable” election plan rules: Section 125 Plans Generally Mean Irrevocable Elections. The IRS also requires employers to conduct testing to satisfy nondiscrimination requirements related to the benefits and contributions provided through the plan. The scope of these details must be included in the POP plan document.
The POP plan document also outlines eligibility for the employer’s POP, including information on the benefits offered, participation eligibility, how benefits are funded, the frequency of benefit funding, and other legal notices. And of course, the employer’s own tax ID information, etc., is included in the plan document as well.
How does an employer establish a POP and the required documentation?
When employers establish a POP, they usually utilize a POP Third Party Administrator (TPA) to help create the required plan documents. After the first year, a POP renewal is generally sent to the employer – and many employers ask if paying the fee to update the plan document is necessary. While there is no specific language in the Internal Revenue Code Section 125 that requires an employer to pay to renew its POP, the law does say that the plan must comply with the IRS rules and documentation requirements at all times. This means the employer must conduct nondiscrimination testing annually to ensure compliance, and keep plan documents up to date. The renewal fee most POP TPAs charge includes the annual nondiscrimination testing and POP Plan Document compliance review – though all TPAs have different practices and packages. The employer’s TPA should be consulted for detail in this area.
Does an employer need to update its POP Plan Document after the plan is established?
Yes. Employers must keep their POP plan documents up to date, as required by the law. It is critically important for the employer to follow all the rules contained in its plan document(s). If the employer fails to operate the plan according to its own rules (and the rules required by the IRS) as described in the plan document, then the tax-advantageous status of the plan could be lost. If this happens, pre-tax benefits could be disallowed retroactively back to the beginning of the plan year. This could require the employer to pay back-taxes, plus interest… and can bring potential noncompliance penalty assessments by IRS and/or Employee Benefits Security Administration (EBSA) for violations of tax law and/or ERISA law. This can also have implications on employees’ personal taxes, payroll, and more. It’s important for employers to seek legal counsel and/or qualified guidance from a tax professional in these tax-related matters.
A failure to conduct annual nondiscrimination testing to ensure compliance with nondiscrimination requirements could also cause the plan to lose its tax-advantageous status. For additional information on this component, refer to this related column in the W&B Newsroom: Section 125 Plans: Restrictions by Business Entity Type and Required Nondiscrimination Testing
What potential occurrences would require a POP Plan Document to be updated?
The employer should annually review its POP plan document for compliance with all IRS laws, ERISA laws, other related laws, and its own policies. This review is most commonly conducted with the POP TPA (usually as part of the paid renewal fee), but can also be facilitated separately by a benefits attorney and/or qualified taxperson. If changes are made to the employer’s plan offerings, employer/employee contribution scenarios, funding frequency, employee eligibility, plan effective date, etc., then the plan document must generally be updated to reflect such changes.
If there are regulatory changes that affect POP and benefit eligibility, then the plan documents must be updated as well. For example, when the Defense of Marriage Act (DOMA) was overturned in 2015, plan documents for many employers’ POPs were automatically out of date. When DOMA was ruled unconstitutional, any two persons could legally wed irrespective of gender. Previous plan documents that outlined benefit eligibility according to former DOMA law – marriage between a man and a woman only – were out of date, due to conflicts with the change in legislation.
An employer must also update its plan documents if it has a change in name, tax ID, etc.
COVID-19 changes have caused many POP plan documents to become out of date, or in need of update.
Because of the pandemic, various congressional relief was provided to citizens and businesses throughout the country. Part of this congressional relief gave employers a temporary option to allow employees to break the longstanding “irrevocable election” rule in their POPs – giving them the ability to add, drop, increase, or decrease coverage due to the unforeseen challenges of the pandemic. If an employer adopted this option, then its plan documents must be updated to reflect such changes. When those temporary allowances expire (either by the employer’s own accord, or by the IRS itself), plan documents will need to be updated once more.
Ultimately, it is the employer’s responsibility to ensure its POP meets IRS compliance. POP TPAs will help employers with annual POP plan document review, and related annual required nondiscrimination testing – usually in exchange for an annual renewal fee, which is paid by the employer to the POP TPA.
As a reminder, it is very important for employers to seek counsel from a qualified attorney, CPA, or tax person for any tax-related matters. Health insurance brokers should tread lightly when giving tax advice, as most insurance brokers’ errors and omissions coverage does not cover errors or omissions in tax-related matters.
Filed Under: ACA/Health Reform