We are aware of recent IRS audit activity in which the IRS assessed tax liability against employers due to the absence of a compliant written plan document. These situations provide a good reminder for all employers (public sector, private sector, churches) of the importance of satisfying one of the basic legal requirements applicable to most benefit plans.
Written Plan Document Requirement
In most cases, the health and welfare benefits an employer provides to its employees have tax advantages. For example, the cost of coverage might be non-taxable or paid on a pre-tax basis and/or the benefits received may be non-taxable. The Internal Revenue Code (the “Code”) attaches strings to these tax advantages. To ensure the tax advantages are received by employees, an employer typically must satisfy certain conditions. One such condition that applies in many cases is the requirement to have a written plan document describing the benefits provided by the plan and the basic legal requirements applicable to the plan.
Note: The written plan document requirement found in various sections of the Code is separate from the written plan document requirement found in ERISA. All ERISA employee benefit plans must be reflected in a written plan document, regardless of whether the Code requires a written plan document. This alert focuses on the Code requirements.
The written plan document requirement is found in the following provisions of the Code:
- Section 125 – cafeteria plans, flexible benefit plans, and premium only plans (essentially any arrangement under which employees may pay for a benefit on a pre-tax, salary reduction basis)
- Section 105 – self-insured medical reimbursement plans, including any type of self-insured health plan (medical, dental, vision), health FSAs, health reimbursement arrangements, and most wellness programs and employee assistance programs (EAPs)
- Section 129 – dependent care assistance programs or dependent care FSAs
- Section 127 – educational assistance programs
- Section 137 – adoption assistance programs
Potential Tax Consequences of Not Having a Written Plan Document
An employer that provides any of the forgoing benefits without adopting a written plan document for the benefit jeopardizes its employees’ ability to receive the tax advantages that are normally available with respect to such benefits. If the IRS conducts a benefit or payroll audit and discovers the absence of a written plan document, the IRS may recharacterize employee contributions made to, or benefits received under, the plan or program as taxable wages. The employer and employees typically will owe additional taxes and/or penalties as a result of such recharacterization.
Next Steps
We recommend each employer (public sector and private sector) audit its compliance with the Code’s written plan document requirements. Such a self-audit should include the following steps:
- Make an inventory of each health and welfare benefit offered to employees and identify which benefits are required under the Code to have a written plan document.
- Locate all documentation related to such benefit.
- Confirm such documentation satisfies the Code’s written plan document requirement. Informal documents (e.g., employee handbook provisions) typically are not sufficient.
- If the documentation is old, confirm it accurately reflects the current terms and conditions of the plan and the current legal requirements applicable to the plan.
- Confirm the written plan document has been properly adopted by the company or organization. This generally requires approval by the company or organization’s governing body (e.g., Board of Directors) and the signature of an authorized representative of the company or organization. An executed document may not protect the employer in an audit.
If no formal written plan document can be located for the benefit, or the plan document is out of date, an up-to-date document should be prepared and adopted as soon as possible.
Please contact us for any questions or if you are in need of assistance with ensuring your benefits plans have proper written plan documents.