Cafeteria 125 benefits may save a lot of money on taxes for both companies and workers if they are set up appropriately. But even modest mistakes in setting up or running an IRS cafeteria plan may cause problems with compliance, cost you tax benefits, and even get you in trouble. To save the most money and avoid making mistakes that cost a lot of money, businesses need to know how to navigate the compliance environment.

At Lumara Health, we've witnessed firsthand how businesses may get into trouble with Section 125 plans that they might have avoided, particularly if they use old or too complicated plan designs. The Lumara Plan is meant to make compliance easier, streamline administration, and provide you regular payroll tax savings without the usual problems.

In this piece, you'll learn about the most typical compliance problems that come up with cafeteria plans and how the Lumara Plan helps companies remain compliant while getting the most out of pre-tax benefit deductions.

What are the benefits of Cafeteria 125?

Before we talk about compliance issues, let's make sure we understand the basics. Cafeteria 125 perks are a list of pre-tax advantages that workers may choose from under an IRS-approved Section 125 plan. These advantages usually include:

• Premiums for group health insurance
  
  
• Contributions to Health Savings Accounts (HSAs)
  
  
• Help in caring for dependents
  
  
• Accounts for Flexible Spending (FSAs)
  
  
• Help with adoption
  
  

The main benefit is that workers may choose to get certain benefits before taxes, which lowers their taxable income and raises their take-home pay. At the same time, employers save on payroll taxes like FICA and FUTA.

But these benefits depend on following the IRS cafeteria plan rules exactly.

Common Mistakes When Following IRS Cafeteria Plans

1. Missing or Incomplete Plan Document

Problem: The IRS says that any cafeteria plan must have a formal, documented plan document. A lot of small companies don't have one or utilize old themes that don't show what they provide now.

If you don't have compliant paperwork, the whole strategy might be invalidated. This implies that any deductions made before taxes must be recognized as taxable income going back in time, for both the employer and the employee.

The Lumara Plan Advantage:
Every Lumara Plan comes with a fully maintained, compliant Section 125 plan document that is customized to the exact benefit structure of your organization. We take care of updates for you so you never fall out of compliance.

2. Wrong enrollment and changes to elections

Problem: Employees have to choose their benefits at the start of the plan year, and they can only modify them in certain situations, including getting married or having a kid. Many firms let employees make adjustments in the middle of the year without any qualifying events, which is against the regulations of the plan.

If elections are made or amended incorrectly, the tax treatment of the benefits might be invalidated.

The Lumara Plan Advantage:
Our technology locks in elections correctly and keeps track of eligible life events to make sure that any modifications follow IRS rules.

3. No Testing for Non-Discrimination

Problem: IRS cafeteria programs can't provide more benefits to highly paid workers, important employees, or stockholders than to other employees. To confirm this, plans must pass a number of yearly exams that show they don't discriminate.

If a plan fails testing, higher-paid workers may lose their tax-free status.

The Lumara Plan Advantage:
We do built-in non-discrimination testing every year to make sure the plan satisfies IRS regulations, and we don't put any more work on your HR or payroll staff.

4. Wrong Pre-Tax Deductions for Benefits That Don't Qualify

Problem: Some businesses think they're giving workers value when they let them pay for non-qualified perks, such gym memberships or insurance products that don't meet the requirements, via pre-tax deductions.

As a result, these deductions are not authorized, and companies have to pay back taxes and fines.

The Lumara Plan Advantage:
We only provide perks in our cafeteria plan that the IRS fully approved for pre-tax treatment. We check every part to make sure it meets the rules from the start.

5. Not changing because of new rules

Problem: The rules from the IRS for cafeteria programs change over time. Employers need to alter their plan paperwork to reflect changes in tax legislation, healthcare requirements, and laws for employee benefits.

If a plan isn't updated on time, it might become noncompliant, which means the pre-tax deductions won't work.

What is good about the Lumara Plan?
Our compliance staff keeps an eye on changes in the law and makes adjustments to plan papers as required. You'll never miss an important update.

6. Not giving workers the necessary notifications and paperwork

Problem: Employers must provide employees clear written information regarding their rights under the cafeteria plan, such as their choices for benefits and yearly elections. Not doing so might cause misunderstanding and disobedience.

Without the right paperwork, companies don't have records that can stand up to an audit, which might lead to plan disqualification.

The Lumara Plan has several benefits:
The Lumara Plan has all the necessary employee notifications and election forms recorded digitally and sent out automatically, making sure that every plan participant has all the paperwork they need.

Why You Shouldn't Do Compliance Yourself

Running a cafeteria 125 benefits plan in-house could sound like a good way to save money, but it might not be. The regulations for IRS cafeteria plans are hard to understand and don't give you any leeway. Most companies don't have the time or resources to keep up with the layers of plan administration, paperwork, regulatory monitoring, and contact with employees that are needed to be compliant year after year.

We have replaced old DIY and third-party-administered plans at Lumara Health with a fully managed solution that works well. The Lumara Plan is created from the bottom up to follow IRS Section 125 guidelines and doesn't need any work from the employer when it's set up.

You don't need to know a lot about compliance; we've got that covered.

The Cost of Not Following the Rules

Even employers who intend good may get into trouble. If an IRS cafeteria plan is not compliant, it doesn't only effect one or two deductions. It may undo years of payroll savings, cause back taxes, and even lead to fines or audits.

For instance:

• Employers may owe hundreds of dollars in overdue payroll taxes.
  
  
• Employees may have their pre-tax deductions turned into income, which would lower their wages.
  
  
• Audits may find problems with recordkeeping or discriminatory testing, which might lead to more financial risk.
  
  

With the appropriate strategy, these things can be completely avoided.

How the Lumara Plan Makes Compliance Easy

The Lumara Plan is more than simply a benefits program; it's a way to make sure that your Section 125 benefits are in line with the law. Here's how we take the danger away from you:

• Turnkey Setup: We set up a Section 125 plan that meets all the rules, including unique paperwork.
  
  
• Automated Administration: A safe, easy-to-use interface handles enrollment, elections, and revisions.
  
  
• Built-In Testing: We perform all the testing for discrimination and provide you the paperwork.
  
  
• Records that are ready for an audit: All forms, notifications, and employee elections are preserved digitally.
  
  
• Ongoing Monitoring: Our staff keeps an eye on changes to the legislation and makes sure your strategy stays in line with it.
  
  

Last thoughts: Get the benefits without the risk

Cafeteria 125 perks are definitely good for your finances. But to really save money without putting your organization at danger of breaking the law, you need more than a strategy; you need a solution.

It's simple to break the IRS cafeteria plan restrictions, even if they are obvious. That's why hundreds of businesses have already signed up for the Lumara Plan. It's a platform that is 100% compliant, easy to use, saves money, keeps employees, and gets rid of expensive mistakes.

Want to stay compliant and save?

The Lumara Plan will perform the hard work for you, so you can keep your mind on building your company.

👉 Get in touch with an expert immediately to make sure you get all the tax breaks you're entitled to.