Yes!
And this might be enough explanation if you do not need details. If you have a Section 125 plan, you should to get a salary reduction agreement signed by participating employees.
But, for people who would like the detail, this is a discussion about what an employer “May” do and what they “should” do. And it is also about understanding how employee benefits regulation works. So, may an employer take money out of an employee’s payroll, for Section 125 benefits related costs, without a signed salary reduction agreement? Of course, they “could”, they control payroll, but, “should they?”
No!
Let’s look at why an employer should get employee approval for salary reductions, and, payroll deductions. Note – those are different terms.
Section 125 is an IRS section that allows an employer to provide benefits like HSA, FSA, Group Medical and some others, and use “Pre-Tax” payments from employee payroll to fund these benefits plans. This means the employer and the employee do not pay some federal taxes, like FICA, on the money they spend on benefits.
https://www.irs.gov/pub/irs-drop/n-05-42.pdf “Section 125(f) defines a ‘qualified benefit’ as any benefit which, with the application of § 125(a), is not includable in the gross income of the employee….”
What you need to understand here is that to get this tax savings, the employee is literally allowing the employer to reduce their payroll. The employee is agreeing to get paid less. Does it make sense the employer would want a written agreement from the employee?
You betcha!
And that is called a Salary Reduction Agreement, and if the employee has not signed one of these, they could come back later and ask for all that money back that was removed from their payroll. The chances of this are remote because almost no employee is aware of this, and the resulting tax penalties and the general hassle factor would deter almost everybody.
There is language your benefits administrator can implement in the enrollment agreement, and plan SPD, the employee receives that legally meets this requirement, but like most large forms people get, few read these disclosures and it is still better to have an employee also sign a simple salary reduction agreement.
You might have this question at this point. “But if an employee enrolled in a benefit, didn’t they already agree to whatever payment might be required?”
Yes and no, without that salary reduction agreement, there may never have been any authority given by the employee to take money out of their payroll. The typical enrollment paperwork allows the employer to add the participant to the benefit plan and the employee agrees to an after tax “deduction”, not a payroll “reduction.” In the case of Section 125 benefits the Salary Reduction Agreement authorizes a “Pre Tax payroll reduction” and the necessary payroll “deductions.”
I know I am leaving out several important legal issues, but the point is an employer has an employment agreement to pay an employee and if the employer plans to take money out of that employee’s payroll, they need to have an agreement signed by the employee that authorizes the reduction/deduction.
If you want to know what I was leaving out, please feel free to call or send me a question.