Section 125 Premium Only Plan

Transcription

1 Voluntary Benefits Program for individuals and their families from United American Insurance Company Section 125 Premium Only Plan Employer Implementation Manual P.O. Box 8080 McKinney, TX F4500 R0509 UAW0215

2 United American Insurance Company UAatWork Section 125 Premium Only Plan Employer Implementation Manual Table of Contents Illustrations of Tax Advantages to Employer and Employee Section 1 Answers to Frequently Asked Questions on Section 125 Cafeteria Plans Section 2 Employer s Guide to the s of Establishing a Section 125 Plan Section 3 Sample Letters and Questions Bookkeeper May Have Section 4 a. Letter to Employees b. Letter to Bookkeeper United American Insurance Company Section 125 Plan Premium Only Plan Plan Adoption Agreement Section 5 Summary Plan Description Section 6 Salary Reduction Form Section 7 Legal Requirements for Section 125 Cafeteria Plans, Points to Remember About Your Section 125 Plan Section 8 Section 2

3 United American UAatWork Section 125 Premium Only Plan Provides you and your employees with tax savings and new employee benefits. Here s how it works Employees redirect qualified insurance premiums to be paid with pre-tax dollars. By doing this, the employees do not have to pay Federal or State Income tax (where acceptable) or Social Security tax on the redirected premiums. Estimated Employee Savings Based on $2,000 Monthly Income Without Premium Only Plan With Premium Only Plan Monthly Pay $ 2,000 $ 2,000 Pre-Tax Insurance Premium deducted before taxes, i.e. medical, life, dental, etc. Taxable Income $ 2,000 $ 1,800 Federal Income Tax (25%) $ 1,500 $ 1,350 After-Tax Insurance Premium deducted after taxes, i.e. medical, life, dental, etc. TAKE HOME NET PAY $ 1,300 $ 1,350 Monthly Increase in Take Home Pay - 0 +$ 50 Annual Increase in Take Home Pay - 0 +$ 600 Based on this example of reduced taxable employee income, your company would pay less Social Security, and save about $10 for every $100 of employee contributions. Employees Average Monthly Redirected Premium (Include only premiums paid by the employee) Employer s Group Medical Employer s Group Life Group Term Life Insurance Cancer Insurance Health Insurance Disability Insurance Accident Insurance Dental Insurance Vision Insurance Other Supplemental Coverage Total Monthly Redirected Premium $ $ $ $ $ $ $ $ $ $ $ Section 1 1

4 Tax Advantages to the Employer The employer does not have to pay Social Security Tax (FICA) or Federal Unemployment Tax (FUTA) on the redirected premiums. Estimated Employer Tax Savings Number of Employees Average Monthly Redirected Premium per Employee $100 $150 $200 $250 $ $ 1,200 $ 1,800 $ 2,400 $ 3,000 $ 3, ,400 3,600 4,800 6,000 7, ,600 5,400 7,200 9,000 10, ,800 7,200 9,600 1,200 14, ,000 9,000 12,000 15,000 18, ,000 18,000 24,000 30,000 36, ,000 36,000 48,000 60,000 72, ,000 54,000 72,000 90, , ,000 72,000 96, , , ,000 90, , , ,000 The chart is based on a combined Social Security (FICA) and federal unemployment (FUTA) tax rate of ten percent. Additional state and local taxes may apply in some states which could affect overall tax savings. * These tax savings are simply an example. Individual tax savings will vary from employer to employer. Section 1 2

5 Answers to Frequently Asked Questions on Section 125 Plans What is a Section 125 plan? A Section 125 plan is an employee benefit plan established by an employer which allows each employee to select certain benefits from a menu of benefit options made available by the employer. The employee s cost for the selected benefits is paid on a pre-tax basis. Why is it called a cafeteria plan or a Section 125 cafeteria plan? It is called a cafeteria plan because employees have the opportunity to select options from a menu of benefits, just as they can select food items in a cafeteria. It is referred to as a Section 125 cafeteria plan because Internal Revenue Code Section 125 allows employers to offer benefits under a cafeteria plan on a pre-tax basis. Section 125 was added to the Internal Revenue Code by the Revenue Act of What is a Premium Only Plan (POP)? A premium only plan is a type of cafeteria plan that allows employees to convert premium payments that they would otherwise have made on an after-tax basis to before-tax payments that you make on their behalf by payroll deduction. Who is eligible for a Premium Only Plan? Only firms in which employees pay to the cost of their employer-sponsored benefit plans are eligible for a Premium Only Plan. C corporations Employees of regular corporations are eligible for a Premium Only Plan. Owners are eligible to participate if they are employees, earn wages, and pay the cost of the employer-sponsored benefits plans. Professional Corporations Employees of professional corporations are eligible for a Premium Only Plan. Owners are eligible to participate if they are employees, earn wages, and pay the cost of the employer-sponsored benefits plans. Not-for-Profit Organizations Employees of not-for-profit organizations are eligible for a Premium Only Plan. Directors are eligible to participate if they are employees, earn wages, and pay the cost of the employer-sponsored benefits plans. S Corporations Employees of S corporations are eligible. Shareholders owning more than 2% of the company, however, are ineligible and cannot participate. Partnerships Employees of partnerships are eligible. Partners are ineligible and cannot participate in a Premium Only Plan. Sole Proprietorship Employees of sole proprietorships are eligible. The sole proprietor is ineligible and cannot participate. Limited Liability Companies (LLC) Employees of an LLC are eligible. The members (in most cases) are ineligible and cannot participate in a Premium Only Plan. For the purpose of determining ownership, stock owned by an employer s spouse, children, grand-children, or parents is treated as owned by the employer. Section 2 1

6 What are pre-tax benefits under a cafeteria plan? A benefit is a pre-tax benefit under a cafeteria plan if the employee s cost for the selected benefit is paid from the employee s salary before taxes are calculated. The effect of providing pre-tax benefits is to reduce the employee s taxes, which usually results in more take-home pay. This includes FICA, federal taxes, and most state taxes. Is it legal to offer benefits on a pre-tax basis under a cafeteria plan? Yes. Internal Revenue Code Section 125 allows the employer to adopt a cafeteria plan. Section 125 also allows the employee to sign a Salary Reduction form (Tab 7) which authorizes the employer to deduct the cost per pay period for benefits selected by the employee from the plan menu. Who should establish a cafeteria plan? An employer should establish a cafeteria plan if employees contribute towards the cost of group health coverage, group term life coverage, or other medical, sickness, accident, or disability coverages. Are employee Social Security benefits affected by reducing taxes under a cafeteria plan? Yes, but the effect is small. Since the employee s taxable income is reduced, thereby reducing FICA, or Social Security taxes, future Social Security benefits may be reduced slightly to reflect the employee s lower taxable salary. What types of benefits may be offered under a cafeteria plan? Generally, under a premium only plan such as yours, you may only offer so called qualified benefits. Qualified benefits consist of one or more of the following insurance coverages: individual and dependent family medical insurance, dental insurance, disability insurance, hospital indemnity or cancer insurance, or group term life insurance. For example, United American s cancer insurance, hospital intensive care insurance, group term life insurance, and accident insurance are qualified benefits that may be offered under a cafeteria plan. Are there limits on how much group term life insurance may be offered under a cafeteria plan? Yes. No more than $50,000 of group term life insurance may be provided to an employee under the cafeteria plan. What is a Plan Year, and may the plan have a Short Plan Year as the First Plan Year? A Plan Year is any period of twelve months that the employer selects. All plan records must be kept on the basis of the plan year. The Plan Year also serves as the period of time for which an employee s benefit election must remain in effect. Many times the Plan Year coincides with the calendar year. However, it may also make sense for the Plan Year to coincide with the contract year of the employer s group health program since this is when rate increases typically go into effect. In almost all cases, it is necessary for the First Plan Year to be a short Plan Year beginning on the effective date of the plan and ending on the last day of the Plan Year. Section 2 2

7 May a participating employee change his or her selection of qualified benefits under a cafeteria plan during the year? Generally, qualified benefits which are selected during the election period, may not be changed and must remain in effect for the entire Plan Year. However, the law allows an exception if an employee has a qualified change in status. A qualified change in status includes marriage, divorce, death of a spouse or child, birth, adoption or placement for adoption of a child, or a change in employment status for a family member that affects coverage under an employersponsored plan. If one of the described changes in status occurs, the employee may change his or her selection of qualified benefits under the plan as long as the change is consistent with the change in family status and, if applicable, a change in coverage under another employersponsored plan. May the employee select a benefit which is not designated in the cafeteria plan? No. The plan requires that employees select among the qualified benefits which are offered under the plan by the employer. How does an employee benefit by participating in a cafeteria plan? The employee benefits when he or she elects to pay for certain benefits with pre-tax dollars. This election creates a tax savings for the employee which he or she can receive in either higher takehome pay or in additional benefits. Does the employer benefit by offering a cafeteria plan? Yes. Just as the employee s taxable salary is reduced by the cost of the qualified benefits which are chosen, the employer s taxable payroll is also reduced. This results in reduced FICA (Social Security taxes) and FUTA (federal unemployment taxes). The reduced payroll expenses make it advantageous for the employer to offer a cafeteria plan to employees. Why should an employee participate in a cafeteria plan? In addition to the tax savings, the employee is allowed to assemble a package of benefits which is more meaningful to his or her personal situation. Are there any nondiscrimination rules that apply to cafeteria plans? Yes. A cafeteria plan may not discriminate in favor of highly compensated employees. This means that the employer may not favor highly compensated employees with respect to eligibility to participate in the plan or contributions and benefits under it. Furthermore, no more than 25% of the tax-free benefits under the cafeteria plan may go to key employees. Since the benefit under the United American premium only plan is insurance coverage, no more than 25% of the total premiums under the cafeteria plan may be attributable to key employees. For further information about nondiscrimination testing, please see the Guidelines for Employer Self- Calculation behind Tab 8. Are there any filing requirements that apply to cafeteria plans? Generally, no. A cafeteria plan is a fringe benefit plan under Section 6039D of the Internal Revenue Code. Prior to 2002, this meant an Employer sponsoring a cafeteria plan was required to file an annual report (Form 5500) each year. The requirement was satisfied by completing and filing portions of Form 5500 and Schedule F. With the issuance of Notice , however, the IRS suspended the annual Form 5500 reporting requirement for cafeteria plans, except in some cases where the cafeteria plan contains a health flex spending account. Since the Employer s Section 125 Premium Only Plan does not contain a health flex spending account, it is not required to file a Form Section 2 3

8 Form 5500 may still be required, however, for one or more of the benefit plans offered under the cafeteria plan, depending on the nature of the benefit and whether the benefit plan is a welfare benefit plan under the Employee Retirement Income Security Act of 1974 (commonly referred to as ERISA). If the Employer maintains other tax-qualified programs - such as pension, profit sharing, or 401(k) plans - the Employer should already be familiar with these filing requirements. It is not the responsibility of United American Insurance Company to prepare or file Form This is the Employer s responsibility. Under what circumstances would this cafeteria plan have to comply with the privacy regulations promulgated by the Department of Health and Human Services pursuant to the Health Insurance Portability and Accountability Act? The privacy regulations under the Health Insurance Portability and Accountability Act, also known as HIPAA, require group health plans to maintain the privacy of certain medical information, known as protected health information, or PHI. Only group health plans defined under the privacy regulations are required to comply. The Office of Civil Rights in the United States Department of Health and Human Services has provided the following guidance regarding whether a cafeteria plan falls within the type of plan required to comply with the privacy regulations: A group health plan is a covered entity under the Privacy Rule and the other HIPAA, Title II, Administrative Simplification standards. A group health plan is defined as an employee welfare benefit plan, as that term is defined by the Employee Retirement Income Security Act (ERISA), to the extent that the plan provides medical care. See 42 USC 1320d(5)(A) and 45 CFR Thus, to the extent that a flexible spending account or a cafeteria plan meets the definition of an employee welfare benefit plan under ERISA and pays for medical care, it is a group health plan, unless it has fewer than 50 participants and is self-administered. Employee welfare benefit plans with fewer than 50 participants and that are self-administered are not group health plans. Flexible spending accounts and cafeteria plans are not excluded from the definition of health plan as accepted benefits. See 45 CFR , paragraph (2)(i) of the definition of health plan. The guidance provided by the Office of Civil Rights does not specifically address the applicability of the privacy regulations to a premium only type of cafeteria plan. In some cases, a cafeteria plan that helps pay the premiums for a self-insured or fully-insured group health plan has been considered to be a part of the group health plan for purposes of ERISA. Consequently, in the event a cafeteria plan would be used to pay the premiums for a self-insured or fully insured group health plan, the privacy regulations would apply to the premium only cafeteria plan to the same extent it applies to the particular self-insured or fully insured group health plan. Accordingly, a Privacy Policy has been included in the Premium Only Plan to address situations where the Plan is used as a funding vehicle for an underlying benefit that is required to comply with the HIPAA privacy requirements. As with all business matters with legal or tax implications, if tax or legal advice or expert assistance is required, United American recommends that you seek and consult a competent professional prior to implementing any Section 125 plan. Section 2 4

9 Guide to Establishing a Section 125 Plan IRS IRS IRS IRS IRS IRS 1. Adopt the plan and have the Plan Document in writing (Section 5 Tab). This is done by completing and signing the Plan Adoption Agreement (Section 5 Tab, page 1). You must assign a three-digit plan number. All welfare plan numbers and Code Section 6039D plan numbers start at Fill in the blanks on the Summary Plan Description (Section 6 Tab, page 3). 3. Announce the plan with a letter to the employees (Section 4 Tab, page 1) and a completed Summary Plan Description to be delivered to all eligible employees (Section 6 Tab). 4. Maintain copies of all employee Salary Reduction Forms. 5. Implement payroll deductions for employees who have elected to participate in the plan and notify the bookkeeper (Section 4 Tab, page 2, for sample letter to bookkeeper). 6. Test the plan initially and annually as the law requires to determine whether the plan passes discrimination tests. For more information see Legal Requirements for Section 125 Cafeteria Plans in Section 8 Tab. Section 3 1

10 To All Employees: We are pleased to announce the introduction of a new employee benefit plan for all employees. It is called a Section 125 Premium Only Plan. This exciting new Section 125 Premium Only Plan allows you to select additional employee benefits which can be paid for with money that would normally be used to pay taxes. Current tax laws allow you to pay for certain expenses with untaxed dollars. Those expenses include premiums for group medical insurance, group life insurance, supplemental medical insurance, cancer insurance, and accident insurance. With our new Section 125 Premium Only Plan, the money that would normally be used to pay taxes on these items would go toward providing you and your family with new benefits which will improve your financial security. There will be group meetings and/or individual sessions to explain the Plan and the new employee benefits. We will let you know when your meeting is scheduled. In these times of higher taxes, rising insurance costs, and a changing economic climate, we are pleased to offer you a chance to add valuable new benefits to your insurance program and at the same time, possibly increase your take home pay. Sincerely, Company President Section 4 1

11 Letter to Bookkeeper: The company adopted Premium Only Plan you will be implementing will alter the way you calculate future payroll checks. The Premium Only Plan will affect only those employees who have qualified health, group term life, or disability premiums deducted from their payroll and choose to participate in the plan. Employees are currently having insurance premiums deducted on an after-tax basis. The Premium Only Plan simply requires that insurance premiums on the qualified plans be deducted on a pre-tax basis. In other words you will need to deduct the insurance premium of employees who participate in the plan from gross salary before you compute FICA and federal (and in many cases state) income taxes. You will notice that these employees take home pay will now be increased. How is this possible? Under Section 125 of the Internal Revenue Code gross salaries must be reduced by the insurance premiums that are being funded through your company s payroll deduction. Consequently taxes will go down and the employee s paycheck will increase. Following are some frequently asked questions and answers that will help you understand the new Premium Only Plan. If you have any other questions, please contact your United American representative. Section 4 2

12 Bookkeeper Information: Frequently Asked Questions Will my payroll system change? This is the most frequent question asked. Payroll check writing can be handled with manual or computerized payroll systems. It is also possible to coordinate the premium only plan through your external payroll service. The primary feature required by your computer system or payroll service is that it has the capabilities to handle nontaxable deductions. How are deductions for local payroll taxes handled under the Premium Only Plan? Some localities allow the Premium Only Plan deduction in computing the paycheck while other localities do not. Contact your local Department of Revenue for a determination. How will state unemployment taxes be affected by Premium Only Plans? Each state treats the Premium Only Plan differently. Check with your state unemployment division for clarification. How will the Employer s worker s compensation premium be affected by the Premium Only Plan? According to a letter from the National Council on Compensation Insurance (NCCI), compensation for calculating worker s compensation insurance premiums includes Employer contributions to the Premium Only Plan if made pursuant to Employee elections in lieu of an Employee s current receipt of salary. Check with your state to determine if it follows these guidelines. How does the Premium Only Plan reduction to gross salary affect contributions to our qualified pension, profit sharing, or 401(k) plan? Check the definition of gross salary (compensation) in your specific qualified Plan Document. It is legal to include or exclude the Premium Only Plan reduction in the definition of compensation. Consult your pension adviser for other tax compliance rules regarding the Premium Only Plan reductions. How will the Premium Only Plan change the information on Forms 941 and 940? The amounts on these forms included as wages, tips, other taxable compensation, and Social Security wages will now be the gross salary after the start of the Premium Only Plan. We currently have a 401(k) plan that is funded by employee payroll deductions. Are the salary reduction features the same? Yes, however, there is one difference. Under the premium only plan, gross salary for FICA purposes is reduced by premium only plans. Social security wages cannot be reduced by 401(k) payroll deductions. Is a premium only plan required to be based on a calendar year? No. Nothing in the Code or regulations requires that a Premium Only Plan be on a calendar year basis. Section 4 3

13 Can a sole proprietor, partner, or more than 2% shareholder in an S-corporation participate in a premium only plan? No. Under the provisions of Prop. Reg. Sec (g), a sole proprietor, partner, or more than 2% shareholder would not be allowed to participate. Can a sole proprietor, partnership, or S-corporation sponsor a premium only plan? Yes. These entities can sponsor a premium only plan and benefit by saving the FICA tax on premiums paid through the plan. Section 4 4

14 United American Insurance Company Section 125 Premium Only Plan PLAN ADOPTION AGREEMENT Instructions to Employer: You must complete, sign, and date this Plan Adoption Agreement in order to adopt the United American Insurance Company Premium Only Plan. The Plan, once adopted, will become effective as of the date you specify below in paragraph 3. Do not specify an effective date earlier than the first day of the payroll period beginning after the day on which you sign the Plan Adoption Agreement. 1. Employer s full name: 2. Name of any affiliated employers, if any, who will participate in the Plan: A. B. 3. Effective Date: 4. Plan Year: The twelve month period commencing on (mm/dd) and ending on (mm/dd). The first Plan Year shall be a short Plan Year beginning on (mm/dd/yyyy) and ending on (mm/dd/yyyy). 5. Franchise number: 6. Employees shall be considered to work full-time if they work at least hours per week [specify minimum number of hours]. 7. Qualified Benefit Plans shall mean: Employer s group term life plan Cancer Insurance Employer s group health plan Accident Insurance Group Term for Life Insurance Dental Insurance Health Insurance Vision Insurance Signature of Employer: Date: By: Title: Signatures of Affiliated Employers: By: Title: By: Title: EIM-001 R0509 Section 5 1

15 Voluntary Benefits Program for individuals and their families from United American Insurance Company Section 125 Premium Only Plan P L A N D O C U M E N T This document is intended to satisfy the requirements of Section 125 of the Internal Revenue Code for establishment of a premium only plan. Because the document has consequences under federal income tax laws, the employer should consult with a professional tax advisor before adopting this Plan. P.O. Box 8080 McKinney, TX Section 5 2

16 Table Of Contents ESTABLISHMENT OF THE PLAN PURPOSE OF THE PLAN SECTION I - DEFINITIONS Affiliated Employer Benefits Administrator Change in Cost or Coverage Change in Status Code Dependent Election Period Effective Date Employee Employer ERISA Participant Plan Plan Administrator Plan Adoption Agreement Plan Year Premium Qualified Benefit Plans SECTION II - PREMIUM REDUCTION A. Description of Benefit B. Eligibility to Participate C. Becoming a Participant and Participant Elections Salary Reduction Agreement Election Before Plan Year Begins Election After Plan Year Begins Revocation of Election and New Election Automatic Changes in Election D. Termination of Participation SECTION III - GENERAL PROVISIONS A. Plan Administrator B. Amendment or Termination of the Plan C. Nondiscrimination D. No Guarantee of Nontaxability E. The Plan is Not an Employment Contract F. Role of Benefits Administrator G. Governing Law H. Privacy Policy Section 5 3

17 ESTABLISHMENT OF THE PLAN This document is the United American Insurance Company Section 125 Plan Document (hereinafter called the Plan ). An employer may adopt the Plan by properly completing and executing a Plan Adoption Agreement (Page 1 of the Plan). Once an employer has done this, benefits under the Plan shall be available to Employees of the Employer in accordance with the terms of the Plan and the Plan Adoption Agreement. PURPOSE OF THE PLAN The Plan is intended to provide benefits in compliance with Section 125 of the Internal Revenue Code of 1986, as amended. The Plan provides eligible Employees with a choice of receiving certain tax-free or tax-deferred benefits provided by the Employer in lieu of current taxable compensation. The tax-free or tax-deferred benefits available under the Plan consist of coverage under accident or health plans, excludable under Section 106 of the Code; and, The specific tax-free or tax-deferred benefits available under the Plan are identified in the Plan Adoption Agreement. Section 5 4

18 SECTION I - DEFINITIONS 1. Affiliated Employer an employer that satisfies one or more of the following conditions: the employer is a member of a controlled group of corporations, within the meaning of Code Section 414(b), that includes the Employer; the employer and Employer are under common control, within the meaning of Section 414(c) of the Code; the employer is a member of an affiliated service group, within the meaning of Section 414(m) of the Code, that includes the Employer; or, the employer is a member of any other entity required to be aggregated with the Employer pursuant to regulations under Section 414(o) of the Code. 2. Benefits Administrator United American Insurance Company 3. Change in Cost or Coverage a change in the cost or coverage of a Qualified Benefit Plan or a change in coverage under another employer-sponsored group health plan (including a plan of the Employer or of another employer) for the Employee or his spouse or Dependent. Subject to the following conditions: In the event of a change in the cost of a Qualified Benefit Plan, the Employer may make a corresponding increase or decrease in the amount of elective contributions for affected Participants on a prospective basis (see Section II. C.5); in the event of a significant increase or decrease in the cost of a Qualified Benefit Plan, a Participant may make a corresponding change in his election under the Plan, including, without limitation, commencing participation in the Plan for a benefit with a decrease in cost, or revoking an election for an option with an increase in cost and either receiving prospective coverage under another option providing similar coverage or dropping coverage if no other option providing similar coverage is available; a cost increase or decrease may occur on account of a change in the premium charged by an insurer, a change in the Employee s work status, or action taken by the Employer (such as reducing the amount of Employer contributions for coverage); a change in coverage must be significant. A significant reduction in coverage occurs when there is an overall reduction in coverage under a Qualified Benefit Plan, or an option under a Qualified Benefit Plan. Examples of a significant reduction in coverage are significant increases in the deductible, the co-pay, or the out-of-pocket limit under a group health plan, or a substantial decrease in the medical care providers available under a group health plan (such as a major hospital ceasing to be a provider or a substantial decrease in the physicians participating in a preferred provider network). Improvement in coverage occurs when coverage under an existing Qualified Benefit Plan is significantly improved or a new Qualified Benefit Plan or coverage option under a Qualified Benefit Plan is offered to Employees; the only permitted change on account of a significant reduction in coverage which does not result in a loss in coverage is the revocation of an existing election for that coverage and, in lieu thereof, a corresponding election for similar coverage. Examples of significant reductions in coverage which are not a loss in coverage are significant increases in the deductible, co-pay, or out-of-pocket expenses under an accident or group health plan; in the case of a significant reduction in coverage which does result in a loss in coverage, the Participant may revoke an existing election and either make a new election for similar Section 5 5

19 coverage or drop coverage altogether. Examples of significant reductions in coverage which are a loss in coverage are the elimination of a Qualified Benefit Plan or an option for coverage under a Qualified Benefit Plan, the loss of coverage under an option by reason of an overall lifetime or annual limitation, a substantial decrease in the medical care providers available under the option, a reduction in the benefits for a specific type of medical condition or treatment with respect to which a covered individual is currently in a course of treatment, or any other fundamental loss in coverage (determined on a consistent, reasonable and nondiscriminatory basis); the only permitted change in election on account of a significant improvement in coverage is the revocation of an existing election by an Employee (whether or not he has previously made an election under the Plan, or previously elected the improved benefit option), and, in lieu thereof an election for prospective coverage under the new or improved coverage option; in the case of a change in coverage under another employer plan (including a plan of the same Employer or another employer), an Employee may make a prospective change that is on account of and corresponds with the change made under the other plan, as long as either (1) the other plan permits participants to make an election change because of a significant cost or coverage change, or (2) the period of coverage (the plan year) under the other plan is different from the Plan Year of the Plan; similar coverage is coverage for the same kind of benefits for the same individuals (e.g., family to family or single to single). Coverage by another employer plan may be treated as similar coverage. 4. Change in Status a change in family or employment circumstances that justifies a change in an election under the Plan. Changes in Status include, a Participant gets married or divorced, or legally separated, or his marriage is annulled; a Participant s spouse or one of his dependents dies; a Participant has or adopts a child (including placement for adoption); a Participant or his spouse or dependent begins or terminates employment, participates in a strike or lockout, or begins or returns from an unpaid leave of absence; a Participant has special enrollment rights under Section 9801(f) of the Code, including retroactive coverage of a newborn or adopted child, or a child placed for adoption; a Participant or his spouse or dependent has a change in employment status that causes the Participant, his spouse, or dependent to become eligible (or cease to be eligible) to participate in this Plan or a plan covering his spouse or Dependent (for example, switching from full-time to part-time employment, from hourly to salaried status, or a change in worksite); an event occurs that causes a Participant s dependent to satisfy or cease to satisfy eligibility requirements for coverage on account of attainment of age, student status, or any similar circumstance; the Plan receives a judgment, decree, or order resulting from a divorce, legal separation, annulment, or change in legal custody that requires coverage under the Employer s group health or accident plan for the Participant s dependent child, or a judgment, decree or order requires coverage under another person s group health plan, and the other person s plan actually provides the accident or health coverage for the child; a Participant or his spouse or dependent becomes entitled to coverage under Medicare or Medicaid, or a Participant or his spouse or dependent loses entitlement to coverage under Medicare or Medicaid, in which case the Participant may elect to decrease or increase, as the Section 5 6

20 case may be, the premium that he is paying for coverage for himself and his Dependents under the Employer s group health plan; a Participant s spouse or dependent, if employed, makes a change in coverage under his or her cafeteria plan and the Participant elects to make a change in coverage under this Plan that is on account of and corresponds to the change in coverage made by the Participant s spouse or Dependent; a Participant elects to revoke an existing election of group health coverage while on leave under the Family and Medical Leave Act of 1993 (FMLA). 5. Code the Internal Revenue Code of 1986, as amended. 6. Dependent any individual who qualifies as a dependent under an insurance contract for purposes of that contract or under Code Section 152 (as modified by Code Section 105(b)). 7. Election Period a period established by the Employer during which Employees may elect participation in the Plan or revoke or modify existing elections. The Election Period must end before the beginning of the Plan Year for which it will be effective, and must apply on a uniform and nondiscriminatory basis to all Employees. 8. Effective Date the effective date specified in the Employer s Plan Adoption Agreement. 9. Employee any full-time individual who is classified by the Employer as an employee of the Employer, regardless whether the individual is, or would be, classified as an Employee according to the usual common law or wage withholding and reporting rules governing the Employeremployee relationship. An employee covered by a collective bargaining agreement is not eligible unless the collective bargaining agreement provides for participation in the Plan. Full-time shall mean that the employee is not a temporary or seasonal employee, is designated as a full-time employee in the company payroll system, and regularly works at least the number of hours specified in the Employer s Plan Adoption Agreement. If Affiliated Employers also participate in the Plan, full-time employees of Affiliated Employers shall also be considered Employees and shall be covered to the same extent as Employees of the Employer. Self-employed individuals (sole proprietors and partners) and 2% owners of Subchapter S corporations shall not be considered Employees eligible to participate in the Plan. Leased employees shall not be eligible to participate in the Plan. A leased employee for this purpose shall be an individual who is not a common-law employee of the Employer and who provides services to the Employer if: a. such services are provided pursuant to an agreement; b. the individual has worked for the Employer on a substantially full-time basis for a period of at least one year; and c. such services are performed under the primary direction or control of the Employer. By way of illustration, and not limitation, individuals shall not be considered Employees of the Employer if they serve only as a director of the Employer, if they are classified as independent contractors, or if they are leased employees as described herein. 10. Employer the company identified as the Employer in the Plan Adoption Agreement. 11. ERISA the Employee Retirement Income Security Act of 1974, as amended. 12. Participant an Employee who has elected to participate in the Plan. 13. Plan the United American Insurance Company Section 125 Plan Document, as adopted by the Employer through the Plan Adoption Agreement. Section 5 7

21 14. Plan Administrator the employer is the plan administrator for purposes of ERISA. 15. Plan Adoption Agreement the written document completed and signed by the Employer, which sets forth certain plan terms and establishes a cafeteria plan under Section 125 of the Code. 16. Plan Year the plan year identified in the Employer s Plan Adoption Agreement. 17. Premium the Participant s share of the cost of coverage under one or more Qualified Benefit Plans. 18. Qualified Benefit Plans the accident or health plans or group term life insurance plans identified as Qualified Benefit Plans in the Employer s Plan Adoption Agreement. Section 5 8

22 SECTION II - PREMIUM REDUCTION A. Description of Benefit An Employee may elect to participate in the Plan and thereby have his or her compensation reduced by the amount needed to pay the Employee s Premiums for coverage under one or more of the Qualified Benefit Plans specified in the Employer s Plan Adoption Agreement, and the Employer will pay such Premiums on the Participant s behalf. The Employer excludes the amount of the Premium from the Participant s compensation for FICA and federal income tax purposes. Where state law permits, the Employer also excludes the amount of the Premium from the Participant s compensation for state income tax purposes. B. Eligibility to Participate All Employees of the Employer are eligible to participate in the Plan. If the Plan Adoption Agreement provides for the participation of one or more Affiliated Employers, all Employees of Affiliated Employers shall also be eligible to participate in the Plan. C. Becoming a Participant and Participant Elections 1. Salary Reduction Form An Employee elects participation in the Plan by completing and signing a Salary Reduction Form with his or her Employer on a form distributed by the Employer. Through such an agreement, the Employee agrees to have his or her compensation reduced by the amount necessary to pay his or her Premium for coverage under one or more Qualified Benefit Plans, and the Employer agrees to pay such amount on the Participant s behalf. If an Employee fails to make an election to participate in the Plan he or she will be deemed to have elected to receive current compensation in lieu of coverage under a Qualified Benefit Plan. 2. Election Before Plan Year Begins Except as indicated in the section entitled Election After Plan Year Begins, an Employee may elect participation only during the Election Period. An election under this section shall be effective as of the first day of the Plan Year following the Election Period until the last day of such Plan Year, and from Plan Year to Plan Year thereafter, unless properly revoked or modified during the Election Period. An election is irrevocable during a Plan Year except as provided in the section entitled Revocation of Election and New Election. 3. Election After Plan Year Begins A newly hired Employee may make an initial election to participate within a period of time established by the Employer and applied on a uniform and nondiscriminatory basis to all Employees. Such an election shall be effective only with respect to compensation that has not been actually or constructively received by the Participant as of the date of the salary reduction agreement and (except as provided in the section entitled Revocation of Election and New Election ) shall remain in effect until the last day of the Plan Year for which the Employee signs the agreement, and from Plan Year to Plan Year thereafter, unless properly revoked or modified during the Election Period. 4. Revocation of Election and New Election After the coverage period has begun, a Participant may revoke his or her election and make a new election (if applicable) only if the revocation and new election arise from and are consistent with a Change in Status or a Change in Cost or Coverage. A Participant may also (1) make a new election to add coverage for the Participant, his spouse, or Dependent Section 5 9

23 if the Participant, his spouse or Dependent loses coverage under a group health plan sponsored by a governmental or educational institution, or (2) revoke an existing election of accident or health coverage and make another election for the remaining portion of a period of leave under the Family and Medical Leave Act (FMLA). Any change in an existing election made by an employee on account of a Change in Status for coverage under a group term life or disability plan is deemed to be consistent with the Change in Status, and may result in either an increase or decrease in coverage 5. Automatic Change in Election If the cost of a Qualified Benefit Plan increases or decreases during the Plan Year, a Participant s salary reduction shall be automatically increased or decreased, as applicable, to reflect the change in premiums. Automatic changes in the affected Participants salary reductions must be made on a reasonable and consistent basis. D. Termination of Participation An Employee s participation in the Plan ends: on the effective date of a revocation of participation, if no new election is made; at the end of an Employee s last day of eligible service with the Employer; upon the Employer s termination of the Plan; or at the Participant s death. Section 5 10

24 SECTION III - GENERAL PROVISIONS A. Plan Administrator As Plan Administrator, the Employer has general responsibility for the operation and administration of the Plan. The Employer is the named fiduciary for purposes of section 402 (a) (1) of ERISA. The Employer has the discretion and authority to interpret Plan language and determine eligibility for participation. Such interpretations and determinations by the Employer shall be final and conclusive unless they are arbitrary or capricious. B. Amendment or Termination of the Plan The Employer, through its officers, has authority to amend or terminate the Plan at any time. C. Nondiscrimination It is the Employer s intention that the Plan comply with nondiscrimination rules that apply to cafeteria plans under Section 125 of the Code. It is the Employer s responsibility and obligation - and not the responsibility of the Benefits Administrator - to take appropriate steps to comply with the operational requirements of Section 125 of the Code so as not to violate these rules. D. No Guarantee of Nontaxability Although the Plan is intended to provide certain tax-free benefits to Participants, the Employer and the Benefits Administrator do not guarantee nontaxability and will in no way be liable for any taxes or other liability incurred by a Participant or anyone claiming through a Participant. E. The Plan Is Not an Employment Contract The establishment of this Plan and the provision of benefits under it shall not be deemed to constitute a contract of employment between the Employer and an Employee. F. Role of Benefits Administrator The Benefits Administrator and its agents are responsible for offering accident and health coverages and group term life coverages to Participants in the Plan. The Benefits Administrator is also responsible for construing and interpreting the terms of any policies issued by it to Participants in the Plan. Such policies shall be considered the funding mechanism for benefits under the Plan. Interpretations of policy provisions by the Benefits Administrator shall be final and conclusive unless arbitrary or capricious. G. Governing Law This Plan shall be governed by the laws of the State of Alabama except to the extent preempted by ERISA. H. Privacy Policy To the extent a Qualified Benefit Plan is required to comply with the privacy regulations promulgated by the Department of Health and Human Services pursuant to the Health Insurance Portability and Accountability Act, the Plan shall be deemed to comply to the same extent. Section 5 11

25 Voluntary Benefits Program for individuals and their families from United American Insurance Company Section 125 Premium Only Plan S U M M A R Y P L A N D E S C R I P T I O N for the Employees of F4500 SPD 0509 P.O. Box 8080 McKinney, TX Section 6 1

26 Worksite Advantage Section 125 Premium Only Plan Summary Plan Description for Employees of Table of Contents I. INTRODUCTION II. ELIGIBILITY Who is eligible to participate in the Plan? When can I become a Participant in the Plan? What do I do to participate in the Plan? How long does a Salary Reduction Agreement remain effect? What is the election period? Can I make a change in my Election during the Plan Year? What is a change in status? What is a change in cost or coverage? Are any changes automatic? Do I have any special rights under the Family or Medical Leave Act? When will I cease to be a Participant? III. PREMIUM REDUCTIONS What insurance coverages may I purchase? IV. BENEFIT PAYMENTS When will I receive benefit payments? Do I have to pay federal income tax when I receive a benefit payment? Will my Social Security benefits be affected? V. HIGHLY COMPENSATED AND KEY EMPLOYEES Do limitations apply to highly compensated employees? VI. ADDITIONAL PLAN INFORMATION Your Rights Under ERISA Section 6 2