Section 125 Cafeteria Plans. Presented by Brady Barham

Transcription

1 Section 125 Cafeteria Plans Presented by Brady Barham

2 What is a Cafeteria Plan? Choice between taxable benefits (e.g., cash) and non-taxable benefits (e.g., health care coverage) Section 125 is the exclusive means by which employer can offer a choice without the choice itself resulting in taxable income to the employee (under constructive receipt doctrine) Constructive receipt. For federal income tax purposes, the doctrine of constructive receipt is used to determine when a cash-basis taxpayer has received gross income. A taxpayer is subject to tax in the current year if he or she has unfettered control in determining when items of income will or should be paid. A plan offering a choice between only taxable benefits (cash or paid time off), or only non-taxable benefits (e.g., a flex plan ) is not a cafeteria plan

3 A qualified benefit is a benefit that does not defer compensation and is excludable from an employee s gross income under a specific provision of the Code, without being subject to the principles of constructive receipt. The written plan must specifically describe all benefits and establish rules for eligibility and elections. A section 125 plan is the only means by which an employer can offer employees a choice between taxable and nontaxable benefits without the choice causing the benefits to become taxable. A plan offering only a choice between taxable benefits is not a section 125 plan.

4 How does a cafeteria plan work? Employer contributions to the cafeteria plan are usually made pursuant to salary reduction agreements between the employer and the employee in which the employee agrees to contribute a portion of his or her salary on a pretax basis to pay for the qualified benefits. Salary reduction contributions are not actually or constructively received by the participant. Therefore, those contributions are not considered wages for federal income tax purposes. In addition, those sums generally are not subject to FICA and FUTA. See Sections 3121(a)(5)(G) and 3306(b)(5)(G) of the Internal Revenue Code.

5 Benefits of a Cafeteria Plan Pre-tax Savings Employees are able to pay for benefits on a pre-tax basis, typically a 25-30% savings on elected contributions, when compared with using after tax dollars. Control Leveraging the pre-tax benefits of the Section 125 plan allows participants to control how to use their income to adequately cover the expenses for them and their family. FSA programs allow participants to set aside pre-tax dollars which can be used to pay for out-of-pocket expenses that they know may be incurred throughout the year.

6 Plan Types There are 3 benefits that make up a Section 125 Cafeteria Plan. Note that you can implement just one of them, a combination of them, or all 3 of them for your cafeteria plan. Premium Only Plan (POP) Flexible Spending Account (FSA) Dependent Care Assistance Plan (DCAP) FSA

7 Premium Only Plan The Premium Only Plan is the building block of the Section 125 Plan. It allows for certain employee paid group insurance premiums to be paid with pre-tax dollars. The qualified premiums (if offered by employer) are: Health Dental Vision Disability Group Term Life Cancer Accident Prescription

8 Flexible spending account (FSA) A flexible spending arrangement (FSA) is a form of cafeteria plan benefit, funded by salary reduction, that reimburses employees for expenses incurred for certain qualified medical benefits such as: Prescription Drugs Co-Pays Vision Dental The benefits are subject to an annual maximum of $ (for 2018) and are subject to an annual use-or-lose rule.

9 Dependent Care Assistance Plan (DCAP) FSA The Dependent Care Assistance Plan (DCAP) FSA is a benefit for employees who pay for childcare or adult care for their parents. Employees may hold back as much as $5,000 annually of their pre-tax salary for DCAP, including expenses they pay while they work, look for work or attend school full time. Qualified expenses may include the care of a child under the age of 13, daycare for parents, care for a disabled family member, and summer day camps.

10 Cafeteria Plan Must Haves To be compliant, your section 125 cafeteria plan must have A Plan Document A Summary Plan Description (SPD) Ongoing Compliance Amendments to Plan through formal written instrument This is why it is recommend using a professional, like an insurance broker and Third-Party Administrator to make sure your section 125 plan is compliant.

11 Value to Employees Advantages No Federal Income tax No FICA or Medicare tax Generally, no State or City tax Increased take-home pay Disadvantages Irrevocable elections Use-It or Lose-It rule Possible lower Social Security benefits

12 Value to Employers Advantages No FICA or Medicare tax Employee retention through Benefit Package Disadvantages Set-up and Administration costs Uniform Coverage Rule (under FSA)

13 Election Rules General Rule: Elections must be made before the beginning of the coverage period. Exception: Qualifying Event Change in Marital Status (marriage, divorce, death of spouse) Birth/Adoption of a child Change in employment Change in residence/cost of coverage (restricted to DCAP only) Qualifying Events must be elected/changed within 30-days of event Exceptions apply only if in Plan Document Additional qualifying event are listed in the handout

14 Other Enrollment Rules Negative elections are permissible May be automatic - if enrolled in health plan, premiums must be pre-tax May be default - if enrolled in health plan, premiums will be pre-tax, unless employee elects after-tax, instead May be evergreen -renewed from year to year unless changed. New hires may be allowed to make initial elections within 30-days

15 Nondiscrimination In order to qualify for tax-favored status, a benefit plan must not discriminate in favor of highly compensated employees (HCEs) and key employees with respect to eligibility, contributions, or benefits.

16 Nondiscrimination-Key Employees A Key Employee is one who in the prior plan year met one or more of the following criteria Key Employees may not receive more than 25% of the plans total benefit Key Employees include: 5% (or more) owners regardless of salary 1% owner with a salary of $150,000 or more An officer of the company earning more than $175,000 or more annually

17 Nondiscrimination-Highly Compensated Employees The plan may not favor Highly-Compensated Employees (HCEs). An HCE is defined as: An officer in the prior year 5% (or greater) shareholder in the current or prior year Employees earning at least the HCE amount of $120,000 in the current or prior year An employee paid $120,000 or more in 2017 An employee whose salary is in the top 20% of all employees

18 Special FSA Rules All types of FSA are subject to Use-It or Lose-It Rule FSA may allow for 2 ½ month Grace Period, or, $500 Rollover allowance. Choice between Rollover or Grace Period, not both If $500 Rollover chosen for Health FSA, the DCAP FSA can have Grace and Run-Out Period Health FSA subject to Uniform Coverage Rule All FSA plans are subject to substantiation requirements

19 Uniform Coverage Rule Uniform Coverage Rule applies to FSAs and states an employee s annual election amount must be made available from the beginning of the plan year. For example, if you elect $2,000 for the FSA plan year and have a $1,000 medical claim in the first month, it is required that you are paid or reimbursed in full for that expense. The employer will collect the full election amount back from you throughout the course of the plan year. This rule does not apply to DCAP FSA. *Once a plan election is made for the year, the election is irrevocable unless the employee incurs an IRS-defined qualifying event like marriage, divorce, birth or child adoption, employment status change, etc.

20 Common Mistakes Failure to have a Plan Document Allowing impermissible mid-year election changes Violating nondiscrimination rules

21 Cost Benefits of using a Third-Party Administrator Compliance Operations Privacy Recordkeeping

22 Levels of service to look for when selecting your TPA $300,000 in payments processed daily Dedicated Account Management Toll-free call center Mobile App to Manage Account 90,000 + reimbursement account participants served 5 years average experience of account managers Claims processed within 48 hours at an accuracy of 99% Net-promoter score of 49

23 Full-service Administration Plan design and consultation Plan document preparation Employee enrollment Daily claims processing Form 5500 filing Non-discrimination testing Takeover support On-staff ERISA attorneys On-demand reports for employer Employee Service Center

24 Mobile App Easy and Secure shares user authentication with the portal. Registered users can download the app and login immediately to gain access to their benefit accounts. No sensitive account information is ever stored on the mobile device and all transmissions are encrypted. Saves time and hassle while on the go. Submit claims, check balances, view transactions, pay providers, submit documentation using the device s camera, and so much more. EMMA it is here! EMMA is the first voice-activated intelligent assistant for consumer driven healthcare. EMMA can answers questions regarding account balances, annual contribution limits, and even changing election amounts.

25 The FSA Benefits Card When you use your FSA Card, the merchant code identifies the type of expense and the applies the expense towards the appropriate account.

26 9 years of SAS 70/SSAE 16 Control Audits AWD processes for primary workflows with QA controls Secured Mailroom controls for all incoming information/money Lean process management Audit Controls

27 Q&A

28 Thank you!