Introduction
Tax compliance is one of the foremost concerns for companies exploring Section 125 programs, and for good reason. The IRS has strict regulations surrounding pre-tax deductions and employer-sponsored benefits, making it crucial for businesses to ensure any cafeteria plan they implement is fully compliant. Flex Health is at the forefront of Section 125 compliance, offering a fully funded, fully insured Section 125 program that meets all IRS requirements.
In this article, we’ll break down the legal framework behind Flex Health, explain why it stands apart from self-funded programs, and detail the IRS codes and regulations that reinforce the need for Section 125 compliance.
The Risks of Self-Funded Section 125 Plans
Many companies exploring Section 125 plans may encounter self-funded or employer-funded options that promise substantial tax savings. However, these programs carry significant compliance risks.
- Commingling of Funds: Self-funded cafeteria plans require employers to collect pre-tax contributions from employees and later reimburse out-of-pocket expenses. The IRS scrutinizes these arrangements, as they often fail to maintain proper separation between employer and employee funds.
- Reimbursement vs. Indemnity Payments: The IRS classifies reimbursements differently than indemnity payments. Self-funded programs that offer direct reimbursements may inadvertently create taxable events for employees, putting companies at risk of non-compliance.
- Audit Risk: Large companies, in particular, should be cautious. While self-funded programs may offer greater immediate incentives, they expose businesses to IRS scrutiny and potential penalties.
Why Fully Funded and Fully Insured Plans Are Key for Section 125 Compliance
Flex Health eliminates the compliance risks associated with self-funded programs by ensuring that all premium payments and claim payments flow through a licensed insurance carrier. Partnering with Clear Spring Health and Crum & Forster, Flex Health provides a fully funded and fully insured program, meaning:
- Premiums are paid pre-tax through a licensed carrier, not the employer.
- Employees receive indemnity claim payments, not reimbursements, from the carrier.
- All transactions are structured to align with IRS regulations.
This approach guarantees that the tax treatment of Flex Health’s benefits remains compliant while preserving the financial advantages for both employers and employees.
IRS Compliance and Legal Backing
To ensure complete Section 125 compliance, Flex Health engaged highly accredited law firms to conduct an extensive review. Their legal opinions confirmed that the program fully adheres to IRS tax codes, including:
- Section 125: Establishes the framework for pre-tax benefits and cafeteria plans.
- Section 105(b): Allows employees to exclude amounts received from employer-sponsored health programs from taxable income.
- Section 106(a): Excludes employer-provided health plan contributions from an employee’s gross income.
- Revenue Ruling 69-154: Confirms that indemnity payments from an insurance policy paid on a pre-tax basis remain non-taxable if they do not exceed the employee’s out-of-pocket medical expenses.
What Happens if a Company Gets Audited?
While IRS audits are rare, they do happen. Companies enrolled in Flex Health can rest assured that they are protected. Since the program’s inception in 2019, only one company out of thousands has undergone an audit regarding its Section 125 participation. With Flex Health covering the legal fees, the company successfully defended its Section 125 compliance, and not a single business has faced penalties.
Long-Term Viability of the Program
One of the most common concerns surrounding Section 125 programs is whether they will remain viable in the long run. Historically, the IRS has attempted to reclassify the taxability of indemnity payments on multiple occasions. However, Congress has rejected these efforts each time, reinforcing the legitimacy of programs like Flex Health.
Furthermore, Flex Health operates under the same tax classification as Aflac, a $60 billion company that has provided similar benefits since 1955. This precedent establishes a strong foundation for the program’s sustainability.
How Flex Health Ensures Tax-Free Benefits
The mechanics of the Flex Health program ensure that employees legally receive tax-free payments:
- Pre-Tax Premium Deduction: Employees’ taxable income is reduced through payroll deductions to cover premiums.
- CPT Code Compliance: Employees complete medical activities that qualify under the policy.
- Indemnity Claim Payment: Employees receive an indemnity payment below the IRS’s “excess benefit” threshold, ensuring the payment remains non-taxable.
By following this structure, Flex Health upholds the highest standards of tax compliance while maximizing savings for businesses and employees alike.
Conclusion: The Compliance-First Section 125 Program
For companies considering a cafeteria plan, Section 125 compliance should be the top priority. Flex Health’s fully insured, fully funded model ensures that businesses can reap the financial benefits without the risks associated with self-funded programs. By adhering to IRS regulations, securing legal backing, and following established tax codes, Flex Health stands as the premier compliance-first Section 125 program for mid-market and enterprise clients.
With the increasing scrutiny on tax-saving programs, now is the time for businesses to ensure they are participating in a legally sound, IRS-compliant plan. Flex Health provides the peace of mind and financial advantages that companies need to succeed.
