IRS Section 125 Plan Audits

Within the last two years, the IRS has developed a cafeteria plan Industry Specialization Program (ISP). The focus of the ISP is cafeteria plan audits. The ISP has prepared "preliminary draft" guidelines for their agents conducting cafeteria plan audits. For your benefit, here is a laundry list of items that TSP suggests you, as the Plan Sponsor, make sure you have in the case of an audit.

General plan requirements

• Form 5500s from past years for the cafeteria plan (This requirement has been suspended for plans with under 100 health reimbursement accounts)
• A signed Plan Document and any amendments
• The summary plan descriptions for the cafeteria plan
• Employee election forms
• Nondiscrimination testing results
• W-2 reporting requirements for DCAP plans
• Confirm benefits do not carry over to future years

  Claim reviews process

• Confirm 213 status of claims submitted
• Confirm expenses are for eligible DCAP
• Confirm that expenses incurred during period of coverage

  Consequences of failing to satisfy cafeteria plan legal requirements

  Unlike the pension area, there is no formal voluntary correction or closing agreement program for cafeteria plan audits. However, the potential penalty for failing to comply with Code Section 125 legal requirements could be serious, including the imposition of income taxes against the employer and/or employee, employment taxes and penalties for failing to withhold and report taxes properly.