125 Flexible Benefit Plan Basics & Recent Changes

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1 125 Flexible Benefit Plan Basics & Recent Changes Educators Benefit Consultants, LLC Paige McNeal, VP Mary Harty, CFP Region V Conference For Training Purposes Only 1 Agenda Benefits Plan and Component Benefits Most Common Mistakes Individual Choice Ordering rules Coordination rules Recent Changes Region V Conference For Training Purposes Only 2 1

2 Internal Revenue Code Plan A 125 plan is the only employer sponsored group plan that provides an individual the choice between taxable and non taxable benefits. IRC identifies which benefits are allowed in the 125 plan IRC identifies which benefits are taxable or tax free Region V Conference For Training Purposes Only Plan A 125 Plan can be very basic or very elaborate Depending on the component benefits offered the 125 Plan may be referred to as a Premium Only Plan, or a 125 Flexible Benefits Plan or if the plan offers a menu of benefit choices it may be referred to as a Cafeteria Plan Region V Conference For Training Purposes Only 4 2

3 125 Plan Eligible Benefits Under the 125 umbrella a number of benefit categories are allowed: Premium Only Plan(s) Employee s share of cost for employer sponsored group insurance coverage Health Flexible Spending Account Full Use or Limited Use Health Savings Account (HSA) Not to be confused with Health Reimbursement Arrangement (HRA) Region V Conference For Training Purposes Only Plan Eligible Benefits Under the 125 umbrella a number of benefit categories are allowed: Individually owned supplemental insurance Flexible Spending Account Group Term Life Dependent Care Flexible Spending Account Transit Plans Taxable cash in lieu of benefits Region V Conference For Training Purposes Only 6 3

4 Benefits Not allowed under the 125 Plan umbrella 403(b)Plans 457 Plans (some exceptions in private sector) Health Reimbursement Arrangements (HRAs) Tax Free Reimbursement of the cost of Individually owned Health Coverage Region V Conference For Training Purposes Only 7 Health Reimbursement Arrangement A tax free savings account that may be used to reimburse eligible health care expenses incurred by employee, employee s legal spouse and/or legal dependent(s) Premium and/or out of pocket expenses depending on how the plan is designed Employer contributions or mandated employee contributions No voluntary employee contributions Region V Conference For Training Purposes Only 8 4

5 403(b) Plan 403(b) or commonly referred to as Tax Sheltered Annuity (TSA) in the school district world is a tax deferred retirement plan Participation is voluntary In MN it is very common for employer to offer an employer match Match is often collectively bargained Dollar for dollar match while actively employed Sick and vacation payouts are often bargained into 403(b) Save FICA cost Region V Conference For Training Purposes Only Plan 457 Plan or commonly referred to as a Deferred Compensation Plan. Also a tax deferred retirement savings plan Participation is voluntary Can also receive employer match dollars Sick and vacation payouts are often bargained into 403(b) No FICA savings Region V Conference For Training Purposes Only 10 5

6 ACA Changes/Requirements 125 Plan Restrictions on Individual Premium Reimbursement You may not give an employee cash with the intent that they purchase individual insurance coverage from the private market; No 125 Plan funds can be used to purchase insurance from a public exchange Region V Conference For Training Purposes Only 11 Examples Not Compliant Withdraw offer of insurance and provide a taxable cash payment to individual with intent to purchase insurance on a public or private Exchange or from the private market Compliant Provide offer of insurance (MV, MEC), provide cash in lieu of insurance benefit; however, cash only available if employee signs an attestation form that states he/she has insurance coverage through another employer or family member Region V Conference For Training Purposes Only 12 6

7 Common Mistakes Individual Choice No Individual Choice Outside the 125 Plan If employees are provided a choice between taxable and non taxable benefits outside the 125 Plan umbrella the legal doctrine referred to as assignment of income applies Region V Conference For Training Purposes Only 13 Examples Not compliant Example: provide an option for employees to choose between a cash payout and a contribution into a 403(b) plan or into a Health Reimbursement Arrangement. Why: because 403(b) nor HRAs are a qualified benefits under the 125 Plan umbrella no individual choice may be given. Compliant Example: All employees with 15 or more years of service at the School District shall have their unused vacation pay out, deposited into a Health Reimbursement Arrangement at separation of employment Why: No individual choice is allowed. The contribution is mandated not voluntary. Region V Conference For Training Purposes Only 14 7

8 Common Mistakes Ordering Rules & Coordination Issues See Handout Ordering Rules Coordination Issues Region V Conference For Training Purposes Only 15 ACA Changes/Requirements 125 Plan Review of Recent Changes No offer of employer sponsored group coverage from employer or family member s employer = not eligible to elect in the Medical Flexible Spending Account Does not impact other benefits under 125 Plan umbrella Definition of Dependent Child can be coverage by insurance through the month they turn age 26 Definition of Spouse Legally married same sex spouse Grace Period or $500 carryover Region V Conference For Training Purposes Only 16 8

9 Cadillac Tax 125 Plan Employer and Employee Contributions Cadillac Tax. Permanent Annual tax beginning in 2018 on employers that provide high cost benefits through an employer sponsored group health plan The tax is 40% of the cost of plans that exceed predetermined threshold amounts Self only coverage $10,200 Family coverage $27,500 Region V Conference For Training Purposes Only 17 Cadillac Tax 125 Plan Employer and Employee Contributions Fully Insured Plans. Employers calculate and insurers pay Self Funded Plans. Employers calculate and pay What benefit contributions may be subject to the Cadillac Tax: Certain Health FSAs Health Savings Accounts Premium Payments Certain Health Reimbursement Arrangements Onsite medical clinics Region V Conference For Training Purposes Only 18 9

10 Region V Conference For Training Purposes Only 19 Questions? Let us know! Paige McNeal Educators Benefit Consultants paige@ebcsolutions.com Region V Conference For Training Purposes Only 20 Mary Harty Educators Benefit Consultants maryh@ebcsolutions.com 10