Section 125 Compliance: Common Mistakes Employers Must Avoid
Learn the top compliance mistakes with Section 125 cafeteria plans and how Trevia Benefits keeps your plan fully compliant, audit-ready, and worry-free.
Introduction
A Section 125 plan can unlock significant tax savings and fund employee benefits at no extra cost. But here’s the catch: if your plan isn’t compliant, the IRS can disqualify it — wiping out savings and creating headaches for both you and your employees.
At Trevia Benefits, compliance isn’t an afterthought. It’s baked into everything we do. Let’s break down the most common Section 125 compliance mistakes and how to avoid them.
The Most Common Section 125 Compliance Issues
1. No Written Plan Document
The IRS requires every Section 125 plan to have a written plan document. Many employers think payroll adjustments alone are enough, but without this document, the plan is technically invalid.
2. Covering Ineligible Benefits
Section 125 only allows specific pre-tax benefits (like health insurance premiums, FSAs, and certain supplemental coverages). Allowing non-qualified expenses to run through payroll pre-tax can disqualify the entire plan.
3. Not Following Election Rules
Once employees make their benefit elections, those choices generally must remain fixed for the plan year — unless a qualifying life event occurs (marriage, birth of a child, loss of coverage, etc.). Letting employees change elections mid-year without a valid reason is a red flag.
4. Failing Nondiscrimination Testing
Section 125 plans must pass nondiscrimination tests to ensure highly compensated employees don’t benefit disproportionately. Skipping or failing these tests can void the tax advantages.
5. Outdated Documents
Tax codes change, and so do IRS interpretations. Using an old Section 125 plan document that hasn’t been updated is a compliance risk.
Why Compliance Matters
Non-compliance isn’t just paperwork. If the IRS audits your plan and finds violations:
- Employer tax savings can be reversed.
- Employees may owe back taxes.
- Penalties and fines may apply.
In other words, the “free savings” can quickly become a costly liability.
How Trevia Benefits Ensures Compliance
We provide end-to-end compliance management so you don’t have to stress over fine print. Our approach includes:
- Audit-Ready Documentation – Customized Section 125 plan documents prepared from day one.
- Year-Round Monitoring – Regular updates as IRS, ACA, or HIPAA rules evolve.
- Nondiscrimination Testing – Performed annually to maintain plan validity.
- Specialist Oversight – Managed by a team with decades of benefits compliance experience.
The Bottom Line
Section 125 plans offer incredible value — but only if they’re maintained properly. Trevia Benefits ensures your plan isn’t just saving you money but also bulletproof against audits.
👉 Schedule your 10-minute consultation and let us set up a compliant plan that works for your business today.
