Massachusetts State Section 125 Plan Requirements

November 5, 2013

No penalty for employers who don’t comply with state section 125 plan requirements

The Health Connector issued guidance this week in the form of Administrative Bulletin 03-13, providing that employers would not be subject to penalties for failing to comply with specific state based section 125 plan requirements. Section 125 plans allow employees who are not eligible for benefits to purchase health insurance on a pre-tax basis. State law currently requires employers with 11 or more full-time employees to offer a section 125 plan or face a penalty in the form of a Free Rider Surcharge. Proof of compliance with the section 125 plan requirement is through a report called the Health Insurance Responsibility Disclosure Form.

Recent federal guidance from the Department of Labor and the Internal Revenue Service prohibits the use of pre-tax dollars from section 125 plans to purchase non-group health insurance inside or outside the Health Connector. While earlier versions of this prohibition applied only to the purchase of non-group plans from the Exchange (in MA, the Exchange is the Health Connector), the final rule applies to section 125 facilitation of non-group plans both inside and outside the Exchange, starting in 2014.

As a result of the federal guidance, the Patrick administration will pursue a repeal of the section 125 plan requirement. The legislature will need to take action before anything is actually undone (e.g., the section 125 requirement, the Free Rider Surcharge, or the employer Health Insurance Responsibility Disclosure), but the Health Connector is pursuing a path of “non-enforcement” with respect to the Free Rider Surcharge, which is the mechanism to enforce the section 125 requirement. While the legislative process takes place, no employers will be subject to penalties for failing to comply with the section 125 requirement.

Existing section 125 plans may continue until the expiration of the employee’s plan in 2014.

If employers have any questions about their specific 125 plans or benefit plans, they should contact their attorneys or tax advisors.

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