This Employer Webinar Series program is presented by Spencer Fane Britt & Browne LLP in conjunction with United Benefit Advisors

Transcription

1 This Employer Webinar Series program is presented by Spencer Fane Britt & Browne LLP in conjunction with United Benefit Advisors This Employer Webinar Series program is presented by Spencer Fane Britt & Browne LLP in conjunction with United Benefit Advisors Kansas City Omaha Overland Park St. Louis Jefferson City

2 The Basics of Cafeteria Plans Presented by Kenneth A. Mason Lawrence Jenab

3 Presenters Ken Mason Larry Jenab

4 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) A plan offering a choice between only taxable benefits (cash or paid time off), or only nontaxable benefits (e.g., a flex plan ) is not a cafeteria plan

5 Qualified Benefits Employer-provided health coverage Health flexible spending account ( FSA ) Dependent care FSA ( DCAP ) Group-term life insurance AD&D insurance STD and LTD insurance Adoption assistance HSA contributions 401(k) contributions PTO

6 Impermissible (but Tax-Favored) Benefits Scholarships Educational assistance benefits Dependent life insurance Long-term care insurance Fringe benefits 403(b) deferrals Heath reimbursement arrangement ( HRA ) Medical savings account ( Archer MSA )

7 Eligibility Current employees Former employees (so long as plan is not maintained predominantly for them) But not: Self-employed individuals Sole proprietors Partners Directors 2% shareholders of S-corporations

8 Written Plan Document Must have a written plan document Program must be operated in accordance with plan s terms Plan must be adopted and effective on or before first day of plan year Any amendments must be made through formal written instrument

9 No Deferral of Compensation Prohibition on deferred compensation does not apply to the following: 401(k) contributions HSA contributions Grace period (up to 2 ½-months after end of plan year) LTD policy Advance payments for orthodontia Salary reduction at end of one year to pay premiums for beginning of next year

10 Value to Employees Advantages for employees: No federal income tax No FICA or Medicare tax Generally, no state or city tax Allows choice among benefits (or cash) Increased take-home pay (vs. after-tax payment) Disadvantages for employees: Irrevocable elections Use-it-or-lose-it rule Possibly lower Social Security benefits

11 Value to Employers Advantages for employers: No FICA or Medicare tax Cushion blow of premium increases (if cafeteria plan is introduced at the same time) Non-comparable employer HSA contributions Disadvantages for employers: Set-up and administration costs Uniform coverage rule (under health FSAs)

12 IRS Guidance Final Regulations: : Effect of FMLA leave : Permitted Election Changes Proposed Regulations: : General Rules : Special Election Rules : Flexible Spending Accounts : Claim Substantiation Rules : Nondiscrimination Rules

13 IRS Guidance Proposed Regulations were issued in 2007, incorporating decades of sporadic guidance Expected to be finalized at any moment May be relied upon in the interim

14 Election Rules General Rule: Elections must be made and irrevocable before beginning of coverage period (generally, 12 months) Several exceptions specified in IRS regulations Exceptions apply only if also set forth in plan document

15 Exception: Change in Status Event Change in status events E.g. -- Birth, adoption, marriage, divorce, leave of absence, strike, lockout, change of worksite Election change must be consistent with change in status Limits who may add or drop coverage Also requires timely request to change (though no specific deadline)

16 Exception: Special Enrollment HIPAA special enrollment events Substantial overlap with status changes Two new events under CHIPRA : Loss of eligibility for CHIP or Medicaid Entitlement to premium subsidy under either program May allow even unaffected dependents to be enrolled at same time (i.e., no consistency requirement) Specific timeframes for enrollment Generally must request change within 30 days 60 days for CHIPRA events

17 Exceptions: Cost or Coverage Changes Cost changes If insignificant, may automatically adjust pretax premiums If significant, may allow election change Note: Not applicable to FSAs Coverage changes If significant, may allow move to other option If change amounts to loss of coverage, may allow revocation of election Note: Not applicable to FSAs

18 Example Employer sponsors health plan with HMO and PPO options, along with an FSA. PPO has $500 annual deductible. Employer amends PPO mid-year to raise deductible to $2000. Employees in PPO option may elect to change to HMO option. But may not drop coverage entirely, because not a loss of coverage. And may not modify FSA elections, even though desirable to cover higher deductible.

19 Exception: Court Order May allow employee to add dependent child or foster child if employee is ordered to cover child May also allow employee to drop child from coverage if other parent is ordered to cover child (and in fact does so)

20 Exceptions: Medicare or Medicaid Employee may be allowed to drop coverage for self or dependent upon becoming entitled to Medicare or Medicaid Similarly, employee or dependent who loses Medicare or Medicaid coverage may be allowed to enroll in employer plan

21 Exceptions: 401(k) or HSA If 401(k) contributions are made through a cafeteria plan (not recommended), 401(k) election change rules apply to that benefit If HSA contributions are made through a cafeteria plan, employees must be allowed to change their HSA elections monthly In neither case, however, may these election changes affect elections in effect with respect to other benefits (other than cash)

22 Other Enrollment Rules Negative elections are permitted 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 (less common with FSAs, though also permissible) New hires may be allowed to make initial elections within 30 days, retroactive to date of hire (although all pre-tax amounts must be taken from future pay) Electronic elections are specifically authorized

23 Nondiscrimination: HCEs Cafeteria plans may not discriminate in favor of highly compensated individuals as to eligibility, contributions, or benefits Highly compensated individuals include Officers, 5% shareholders, and Employees earning at least the HCE amount (currently, $110,000) in the current or prior year Regulations incorporate certain Section 410(b) rules (applicable to retirement plans)

24 Nondiscrimination: Key Employees Key employees may not receive more than 25% of the plan s total non-taxable benefits Key Employees include 5% shareholders, 1% shareholders earning more than $150,000, and officers earning more than $160,000 Particularly problematic for owners of small employers

25 Other Nondiscrimination Rules Safe harbor rule for premium-only plans (need only satisfy eligibility nondiscrimination rule, regardless of actual utilization) Safe harbor for health benefits -- but probably too complicated to use All tests are to be conducted on last day of plan year

26 Effect of Discrimination Under a discriminatory cafeteria plan, highly compensated individuals or key employees (as applicable) are taxed on the maximum taxable benefit they could have elected to receive Generally, this will be their full salary, denying them any tax exclusion for health or other benefits

27 Flexible Spending Accounts Health FSAs may reimburse medical expenses, but not insurance premiums Dependent Care Assistance FSAs may reimburse dependent care expenses (for which no credit is claimed) Adoption Assistance FSAs may reimburse adoption expenses (for which no credit is claimed)

28 Special FSA Rules All types of FSAs are subject to use-itor-lose-it rule, although Dependent care and adoption assistance FSAs may allow for spend-down, and Any FSA may allow for 2 ½-month grace period Health FSAs are subject to uniform coverage rule All FSAs are subject to substantiation requirements

29 FMLA Leave Alternatives Employees on FMLA leave must be allowed to continue health coverage at active-employee premium And employees on unpaid FMLA leave must be allowed to revoke coverage (or receive it at employer s cost, subject to employer s later recapture of premiums) Employer may waive employee premium payments while on unpaid leave (on a nondiscriminatory basis)

30 FMLA Leave Alternatives Alternatively, employer may choose to allow employee premium payments under one of three options: Prepay (generally pre-tax) Pay-as-you-go (generally after-tax, unless employee receives vacation or sick pay while on leave) Catch-up (generally pre-tax)

31 Special HSA Considerations Payroll deduction HSA contributions may be made on a pre-tax basis only through a cafeteria plan Although employees may claim a deduction for after-tax contributions, those contributions would be subject to FICA tax This deduction is not subject to the 7.5% (soon to be 10%) AGI threshold HSA election changes must be allowed on monthly basis (though they cannot affect other elections) Exception to prohibition on deferred compensation (i.e., even though HSA account balances may be carried from year to year, and may be used to pay medical premiums)

32 Common Mistakes Failure to have a plan document Allowing impermissible mid-year election changes (especially for FSAs) Violating the nondiscrimination rules (especially by small employers with owner or key employees) Not allowing monthly HSA elections

33 Health Care Reform: FSAs, HSAs, HRAs New restrictions on reimbursements from FSAs, HSAs, and HRAs No reimbursements for OTC drugs (other than insulin) unless prescribed by a physician Effective in 2011 New limit on FSA contributions Annual salary-deferral limit of $2,500 (indexed for inflation) Effective in 2013 Increased tax on nonqualified HSA distributions Tax increases from 10% to 20% For Archer MSAs, tax increases from 15% to 20% Effective in 2011

34 Reform: Safe Harbor for Simple Plans Simple cafeteria plans deemed to satisfy: The cafeteria-plan nondiscrimination rules; and The nondiscrimination rules for certain component benefits, such as: Group-term life insurance Self-insured medical coverage Dependent care assistance To be eligible, employer must: Have employed average of 100 or fewer employees during past two years Make minimum non-elective contribution for each eligible employee Available in 2011

35 Reform: Health Care Exchanges Affordable Care Act creates state clearinghouses ( exchanges ) for qualified health plans General rule: qualified health plans cannot be offered through a cafeteria plan Exception: certain small employers can offer employees the opportunity to enroll in a qualified health plan through an exchange