Why CPAs keep finding PCMP while researching Section 125
Preventative Care Management Programs (PCMPs) commonly use a Section 125 cafeteria plan as the mechanism that enables employees to pay the cost of the wellness coverage on a pre-tax salary reduction basis. The underlying program materials describe the PCMP structure as a self-insured medical expense reimbursement care plan designed to align with multiple tax code sections (including §213(d), §106(a), §105(b), and §125) and to integrate with an ACA-compliant medical plan.
From a compliance standpoint, Section 125 is the gatekeeper: if the cafeteria plan isn’t established and operated properly, the entire “pre-tax” framework can unravel, and errors can cascade into wage reclassification, withholding errors, and payroll tax exposure. Program legal materials emphasize that failing to establish and operate a compliant cafeteria plan can put the broader arrangement at risk for all participants—not just the individuals “improperly benefitting.”
That’s why this page focuses on compliance mechanics—the exact things auditors ask for.
The compliance stack: what must be true for Section 125 to hold up
Below are the core cafeteria plan requirements CPAs typically validate in any serious review. Each section includes how Ficava’s partners operationalize the requirement (based on the program’s supporting materials and controls).
1) A written cafeteria plan document exists—and mirrors how payroll is run
A cafeteria plan is not “real” for tax purposes unless there is a written plan document and the employer actually operates the plan according to its terms. Program materials explicitly note that auditors will review the plan document to ensure it meets IRS requirements and reflects actual plan operation, and that the administrator provides the employer a copy of the Section 125 plan document for the offering.
What our partners do (per the materials):
Provide the employer a Section 125 plan document that “stipulates all details associated with Section 125.”
Design the plan as a distinct written document for the cafeteria plan portion.
CPA audit checklist (ask for these artifacts):
Signed plan document + adoption/effective date
Eligibility definitions (including any ACA-linked conditions)
Election process and default election language (if auto enrollment is used)
Permitted election change rules
Employer/administrator responsibilities (e.g., testing, notices, recordkeeping)
2) Plan year is defined; elections are tied to it
Cafeteria plan compliance is anchored to the 12-month plan year; many election and testing requirements depend on this.
What our partners do (per the materials):
Use plan documentation that reflects plan year mechanics.
CPA checklist:
Confirm the plan year (calendar vs fiscal)
Confirm election timing is prospective and tied to plan year rules
Confirm how new hires enroll mid-year and what “effective date” means operationally
3) Irrevocable election rule: elections generally can’t be turned on/off at will
A key Section 125 rule is that the election to pay for a benefit pre-tax is generally irrevocable unless a recognized exception occurs, and most exceptions must be reflected in the plan document to be usable.
Program legal materials go further: cafeteria plans generally cannot allow participants to “just stop paying” unless coverage is no longer available.
How our partners align operations to this requirement:
The plan documentation is described as reflecting irrevocable elections and the exceptions to the rule.
CPA checklist (what to test):
Sample employees where deductions began: confirm election was prospective
Sample employees who stopped deductions: confirm there was a permitted reason and supporting documentation
Confirm the employer isn’t informally allowing “pause and resume” outside plan terms
4) Nondiscrimination testing: it’s not optional (and it may be layered)
Section 125 plans have their own nondiscrimination requirements, and other program components can have additional testing (e.g., §105(h) for self-insured medical reimbursement plans).
The legal materials state: the employer is responsible for performing the nondiscrimination testing or arranging for a third party to perform it.
The program documentation is also described as relying on a “special rule” that can excuse the cafeteria plan from satisfying all nondiscrimination requirements if an eligibility test is passed—but the same materials also emphasize that failure to establish and operate correctly can jeopardize the program broadly.
What our partners do (per the materials):
Perform eligibility analysis prior to implementation and throughout operations to ensure all who qualify can participate.
Frame participation eligibility using ACA-style parameters (see next section), which ties directly to who is offered participation.
CPA checklist:
Obtain annual testing results (or documentation of third-party testing arrangement)
Confirm controlled group / affiliated service group issues are addressed
Confirm testing is retained in the “audit file” package
5) Eligibility controls: consistent application is a top audit focus
Auditors often validate that all eligible employees were offered participation and that eligibility/enrollment processes were followed correctly.
Program materials describe eligibility parameters that include:
Full-time status (30 hours/week)
W-2 employee status (ICs excluded)
Having major medical coverage at time of inclusion
They also state eligibility is assessed before implementation and throughout the year to mitigate eligibility risk.
And they describe monthly monitoring and retroactive implementation of eligibility roster changes.
What our partners do (per the materials):
Conduct eligibility prior to go-live and continuously throughout the year
Monitor and implement roster changes monthly (including retroactive adjustments)
CPA checklist:
Validate eligibility determination methodology (hours measurement, roster sources)
Reconcile monthly eligibility rosters to payroll deductions
Confirm proof of major medical coverage requirement (as applicable under the program rules)
6) Rolling enrollment vs annual enrollment: how to reconcile in a CPA-grade way
You may see two concepts that need to be explained carefully and accurately:
Program materials state enrollment is conducted on a rolling basis and “is not required to comply with single date open enrollment periods.”
Auto enrollment compliance guidance states employers “typically must allow” employees to review and change elections during an annual open enrollment period, and allows changes for qualifying life events.
A CPA-friendly reconciliation:
Rolling enrollment can be operationally appropriate for new hires, newly eligible employees, and ongoing eligibility changes.
Even with rolling processes, best practice is to maintain an annual election review/notice cycle (especially where default elections or auto enrollment is used), and to ensure any mid-year changes occur only under permitted rules reflected in the plan document.
What our partners do (per the materials):
Support annual notices/open enrollment communications as part of auto enrollment governance, including required employee communications and recordkeeping.
Assist in distributing disclosures to employees to support transparency and compliance.
7) Auto enrollment (if used): the required compliance components
Auto enrollment is described as allowed under certain conditions, but it requires specific safeguards:
Clear employee notification (benefits, default elections, timelines)
An opt-out process and ability to change elections (during enrollment or qualifying events)
Compliance with nondiscrimination rules
Ongoing recordkeeping (document choices, review for compliance)
CPA checklist:
Obtain the exact notice template(s) and timing
Confirm opt-out process is “straightforward and accessible” (and that it actually works in payroll)
Confirm record retention of defaults, opt-outs, and changes
A critical boundary CPAs should insist on: §213(d) medical care vs “general wellness”
Even when Section 125 is operated properly, the tax position for benefits often hinges on whether the services/reimbursements qualify as medical care under §213(d) rather than general wellness.
Program legal support materials explicitly warn that “general health and wellbeing expenses are not ‘medical care’ under Section 213.”
And program risk/audit materials state the Section 125 offering includes only §213(d) medical deductible expenses recognized by relevant agencies.
The program also provides a §213(d) eligible medical expenses reference list.
CPA checklist:
Ask for the program’s definition of eligible “medical care” and what is excluded
Validate the service catalog against §213(d) boundaries and IRS Pub. 502 logic
Ensure employee-facing materials don’t blur the line between medical care reimbursements and taxable “cash rewards”
Audit readiness: what auditors request first (and what our partners provide)
Program materials emphasize that audits focus on documentation, eligibility/enrollment records, and required disclosures.
They also state that the administrator will produce a “full audit file” for clients to support IRS or other governmental review, and that there are written insurance policies intended to support audit-related costs.
CPA-grade audit file contents should include (at minimum):
Signed Section 125 plan document + effective date
Eligibility methodology + monthly rosters and changes
Election records (including defaults/opt-outs if auto enrolling)
Disclosure/notice materials and proof of distribution
Nondiscrimination testing records (or documentation of third-party testing arrangement)
Substantiation framework and eligible expense definitions aligned to §213(d) boundaries
ERISA “plan assets” handling: a compliance topic many overlook
Even though this page is Section 125-focused, sophisticated reviewers will ask about plan asset handling.
Program legal materials note:
Employee contributions are plan assets even when withheld on a pre-tax basis
DOL Technical Release 92-01 provides a limited nonenforcement position in certain cafeteria-plan-funded contexts
Operationally, the TPA should take possession of plan assets for “no more than a mere moment in time” when gathering and forwarding payments, and this should be reflected in the services agreement
CPA checklist:
Review service agreement language for funds flow and custody
Confirm operational reality matches the described approach
Ensure the employer understands where fiduciary responsibility sits (even if administration is outsourced)
CPA takeaway: what “good” Section 125 compliance looks like in a PCMP environment
If you’re evaluating PCMP Section 125 compliance as a CPA, you’re looking for tight cohesion across four layers:
Plan document governance (written plan, plan year, election rules, exceptions)
Operational controls (eligibility, payroll mapping, monthly roster updates, change handling)
Testing and fairness (Section 125 nondiscrimination testing and any additional component testing)
Audit readiness (disclosures, records, and a defensible audit file package)
And the compliance warning to keep front and center is the one embedded in the program’s own legal discussion: if the cafeteria plan is not established and operated properly, the plan may not be treated as a cafeteria plan, and amounts can be reclassified as taxable wages—with withholding timing issues and penalty exposure.
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