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

Q.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