Questions your CPA will ask about a payroll tax savings program
Expect your CPA to ask what tax code sections the program relies on, how payments to employees are substantiated and taxed, who administers the plan, and who carries the risk if the IRS disagrees. Bring the plan documents and the administrator's written legal basis to that conversation.
Why involve your CPA at all
Your CPA signs off on your payroll tax position, so they should see a program like this before it touches a paycheck. A good program survives their questions. Use the list below to gather answers ahead of time.
Tax treatment
- Which code sections does the program rely on (typically Sections 105, 106, 125 and 213(d))?
- Are employee contributions made pre-tax through a written Section 125 plan?
- Are any payments made to employees? If so, are they reimbursements of substantiated medical expenses or fixed amounts?
- Is there a written legal opinion, who wrote it, and can the employer rely on it?
Plan documents and administration
- Who is the plan sponsor, and who is the third-party administrator?
- Can we see the plan document, summary plan description and administrative services agreement?
- How are claims substantiated and records kept?
- How does it integrate with our payroll provider, and how will amounts appear on Form W-2?
Compliance
- Who performs Section 125 and Section 105(h) nondiscrimination testing, and how often?
- Which ERISA, ACA, HIPAA and COBRA obligations apply, and who handles each?
- Are there state-specific tax or wage rules that change the result where we operate?
Cost and risk
- What are all fees, to the employer and to employees, and who is paid from them?
- What does the savings estimate assume about participation and pay levels?
- If the IRS challenges the tax treatment, who responds and who pays back taxes, penalties and interest?
- What are the contract term and exit provisions?
How to use this list
Send it to the administrator and ask for written answers. Then give those answers, with the plan documents, to your CPA or benefits attorney. If a seller cannot or will not answer in writing, treat that as your answer.
Common questions
Which tax code sections do these programs rely on?
Typically Section 125 for pre-tax contributions, Sections 105 and 106 for employer health plan benefits, and Section 213(d) for the definition of medical care.
What documents should a CPA review?
The plan document, summary plan description, administrative services agreement, the written legal basis for the tax treatment and a sample pay stub.
Who is responsible if the IRS disagrees with the tax treatment?
The employer is generally responsible for its own payroll taxes. Ask what indemnification or audit support the contract provides, and get it in writing.
See if your company is a fit
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Book a free callThis article is general information, not tax, legal, accounting, insurance or benefits advice. Everlasting Benefits Group is an independent sales representative for third-party plan administrators and may be paid by them when an employer adopts a plan. We are not a plan administrator, insurer, law firm or accounting firm. Tax rules change and results vary by state, payroll and plan design. Talk with your own CPA or attorney before adopting any plan.