Offering HSAs and FSAs to employees is a helpful tactic used by many employers to give their team members the benefits they value. If these accounts are established correctly inside a Section 125 health plan, everyone wins: companies keep their taxes low, employees feel financially secure, and healthcare expenses become manageable. But honestly, understanding all the compliance rules can be complicated, and ignoring them could cost you a lot.
That is where the Lumara Plan helps most. It guarantees compliance with the HSA 125 cafeteria plan structure, making it possible for businesses to avoid usual mistakes. By working with a Preventative Care Management Plan (PCMP) and a Self-Insured Medical Reimbursement Plan (SIMRP) alongside Section 125, Lumara ensures its clients can receive valuable tax-advantaged benefits with no worry or risks.
In this blog, we show how Lumara stops those troubles employers might face with HSAs and FSAs, why its approach is totally different from others, and the benefits it offers to protect both the business and employees.
What Are HSAs and FSAs in a Section 125 Health Plan?
It’s necessary to know what HSAs and FSAs are, as well as understand how they work within a Section 125 health plan, before addressing compliance.
- Health Savings Accounts give workers who have a high-deductible health plan the opportunity to set aside tax-free funds for medical needs. You can deduct your contributions from your taxes, your money earns tax-free, and when you use it for qualified expenses, it isn’t taxed.
- By choosing an FSA, employees save taxes on their wages to pay for healthcare or dependent care, and these funds must be used within the current plan year.
Most employers include HSAs and FSAs in a Section 125 cafeteria plan, which means employees can pay for them with before-tax dollars, and both employees and employers pay less tax.
Common Compliance Challenges with HSAs and FSAs
While these accounts provide clear tax advantages, compliance errors are common. Here are some frequent mistakes employers make when managing HSAs and FSAs under Section 125:
1. Misclassifying Eligible Expenses
Each account type has different rules about what qualifies as an eligible expense. Mixing these up can lead to denied claims or IRS audits. For example, some expenses allowed under FSAs may not qualify under HSAs.
2. Failing to Meet Contribution Limits
The IRS sets annual contribution limits for HSAs and FSAs. Employers must ensure these limits are not exceeded by combined employee and employer contributions. Failure to monitor this can result in tax penalties for employees.
3. Overlapping Benefits and Double Dipping
Employees cannot be reimbursed twice for the same expense through both HSA and FSA funds. Without a proper plan design and administration, this “double dipping” can create compliance issues.
4. Not Maintaining Proper Documentation
Section 125 plans require accurate records and proof that expenses are qualified. Inadequate documentation can lead to disallowed deductions and costly fines.
5. Ignoring Eligibility Requirements
Employees must be properly eligible for HSAs (e.g., enrolled in a qualified HDHP) to contribute. If an ineligible employee contributes, tax issues may arise.
How Lumara’s HSA 125 Cafeteria Plan Prevents These Mistakes
The Lumara Plan addresses these compliance challenges head-on by combining Section 125 with a fully managed Preventative Care Management Plan (PCMP) and a Self-Insured Medical Reimbursement Plan (SIMRP). Here’s how:
Automated Compliance Management
Lumara’s platform automatically tracks contribution limits, expense eligibility, and employee eligibility status. This reduces human error and ensures the plan always operates within IRS guidelines.
Integrated Account Administration
By managing HSAs, FSAs, and SIMRP reimbursements in one system, Lumara prevents overlapping reimbursements and ensures clear, consistent application of benefits. Employees get the right benefits without risking double payments.
Comprehensive Documentation and Reporting
Lumara maintains detailed records for all transactions and provides employers with thorough reports. This supports audits and compliance reviews without burdening your HR team.
No Change to Existing Plans
Lumara layers on top of your current benefits without requiring changes to health insurance coverage or employee contributions. This seamless integration means you get all the compliance benefits without disruption.
Employer and Employee Savings
The Lumara Plan leverages Section 125 to reduce taxable income, saving employers an average of $600 per W2 employee annually in payroll taxes. Employees benefit from tax-free reimbursements, wellness tools, and expanded support—all with no impact on take-home pay.
Why Compliance Matters for Employers
Noncompliance with IRS regulations on Section 125 health plan, HSAs, and FSAs can have significant consequences:
- Tax penalties for the business and employees
- Disallowed deductions leading to unexpected tax bills
- Audit risks that consume time and resources
- Employee dissatisfaction occurs when benefits are mismanaged or denied
The Lumara Plan’s fully managed approach helps employers avoid these risks by keeping the plan compliant, efficient, and employee-friendly.
Implementing Lumara’s Plan: Simple and Fast
Getting started with the Lumara Plan takes just 30–45 days. Lumara’s experts handle implementation, compliance, and employee communications, so you don’t need to disrupt your current operations. The quick impact on your bottom line and minimal lift will be appreciated by your payroll and HR departments.
Frequently Asked Questions(FAQ)
Q1: How does Lumara ensure the plan stays compliant as IRS rules change?
A1: Lumara continuously monitors regulatory updates and automatically adjusts plan administration. With this proactive strategy, you don’t have to worry about legislation changing, and your benefits remain compliant.
Q2: What kind of support does Lumara provide for educating employees about their benefits?
A2: Employee engagement and happiness are raised by Lumara’s simple-to-understand resources and committed support staff, who help workers make the most of their tax-free reimbursements and wellness resources.
Q3: How does Lumara integrate with existing payroll and HR systems?
A3: In order to save administrative effort and guarantee proper tax reporting and reimbursements, Lumara’s platform easily interfaces with popular payroll and HR applications.
Q4: What happens if an employee leaves the company—do their benefits or reimbursements change?
A4: Employees keep access to their accrued benefits per IRS guidelines, but new reimbursements stop at separation. Lumara supports smooth transitions and clear communication to manage this process.
Conclusion
Protecting your company and providing genuine value to employees in a Section 125 plan requires avoiding compliance errors with HSAs and FSAs. The Lumara Plan’s cutting-edge HSA 125 cafeteria plan solution helps organizations save money while providing benefits to their employees by combining automation, compliance, and improved benefits.
With no changes required to existing plans, no added costs, and a fully managed system that reduces risk, Lumara offers a smarter, hassle-free way to maximize tax savings and improve employee satisfaction.
More than 40,000 employees are already enrolled in Lumara’s program, benefiting from its unique combination of Section 125, PCMP, and SIMRP.
Ready to stop wasting payroll taxes and start offering better benefits?
Book your 10-minute consultation with a Lumara expert today and get a free proposal tailored to your business needs.
