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Pretax Payroll Deductions of Insurance Benefits - IRS Requirements and Documentation

Nov 28, 2017

In order to deduct insurance benefits on a pretax basis, employers are required by the IRS to adopt a formal Section 125 plan document, provide a summary plan description (SPD) to employees, and distribute a new SPD once every five years if there have been any material changes. The document/SPD will specifically indicate the pretax benefits that are allowed and detail participation requirements as well as information regarding contribution elections and limitations.

It is essential that your document is up to date for current IRS rules and regulations and that it includes all the information above. If not, the employer can be subject to penalties and fines, and in a worst-case scenario, the pretax deductions may be disallowed from the beginning, leading to an IRS assessment of overdue back taxes plus interest and corresponding penalties.

If your company takes advantage of Section 125 pretax deductions, you should verify that you actually do have a Section 125 plan document. This document is sometimes called a Premium Only Plan, or POP. If you have a plan document, and it hasn’t been updated since before 2010, you may be making administrative decisions based on outdated tax law. If you determine that your plan document is missing or outdated, this may be a good time to update it.

Please contact Marci Boyarski or your Wipfli relationship executive with questions or for guidance.