Q.What are the penalties for failing to comply with Section 125 requirements, such as failing to follow a cafeteria plan document’s terms?
A: An operational failure occurs when a plan fails to follow its cafeteria plan document’s terms. There are several potential penalties for operational failures, including:
- Cafeteria plan disqualification
- Requiring the cafeteria plan to comply with Section 125 and its regulations, including reversing transactions that caused noncompliance
- Imposing employment tax withholding liability and penalties on the employer regarding pre-tax salary reductions and elective employer contributions
- Imposing employment and income tax liability and penalties on employees regarding pre-tax salary reductions and elective employer contributions