CAFETERIA PLANS The Essentials of Plan Design and Regulatory Compliance Richard J. Princinsky & Associates, Inc. designs and manages cost-effective, integrated employee benefit programs with a customer service focus on account management, human resource and welfare benefit regulatory compliance, integrated benefit and HR technology solutions, and corporate wellness programs. RJP is your one-source solution for employee benefits and HR services. Account Management Customized Benefits Communications Creative Services Underwriting Market Analysis Claims Resolutions Group Benefit Enrollment and Billing Services Client Risk Management Services Human Resource Management Services Health Care Reform Education (web-based tools, client e-alerts, seminars) HR/Benefits Technology Solutions (HR/payroll coordination, online benefit enrollment) Corporate Wellness Programs Presented By Sandra C. Krauer Director, Client Risk Management Services Sandy is a key member of the RJP management team, contributing 27 years multi-state human resources management expertise. Sandy s HR generalist experience includes oversight of the HR function for Maryland-based employers encompassing strategic planning, company reorganization and acquisition integration; company policy and procedure design and implementation; group welfare benefit plan design, administration and regulatory compliance; under ERISA and Code 125; federal and state employment law and recordkeeping compliance; ERISA, HIPAA, COBRA, FLSA, Title VII, FMLA, and OSHA,; recruitment and retention management; manager and staff training and development including sexual harassment, wage and hour compliance, personnel and performance management. As an independent HR management consultant for ten years, Sandy advised small employers throughout Maryland, facilitating the effective management of the company s HR-related employment practices to minimize employment related risk exposure. Through Sandy s direction the RJP CRM Services department provides specialized and practical information, compliance services and administrative tools for group welfare benefit plan regulatory compliance and HR/employment practices management. Sandy graduated Summa cum Laude from the University of Baltimore, Robert G. Merrick School of Business B.S./Business Administration, and is a member of the national Society of Human Resources Management (SHRM) professional-level membership since 1995. skrauer@rjpassociates.com / 410-773-4300 ext. 4337
Discussion Topics Code 125 Purpose and Rules Plan Design Plan Administration Health Care Reform Impact What Is a Cafeteria Plan? Under IRCode 125(d), the term cafeteria plan means a written plan under which (1) all participants are employees, and (2) the participants may choose among two or more benefits consisting of cash and qualified benefits.
Code 125 Enacted in 1978 as part of the Revenue Act of 1978, Pub. L. No. 95-600 (Nov. 6, 1978) Amended many times since then latest 2007 Proposed Regulations Code 125 is the exclusive means by which employer can offer a choice without the choice itself resulting in taxable income to the employee ( constructive receipt safe harbor) Final Regulations: IRS Guidance 1.125-3: Effect of FMLA leave 1.125-4: Permitted Election Changes Proposed Regulations: 1.125-1: General Rules 1.125-2: Special Election Rules 1.125-5: Flexible Spending Accounts 1.125-6: Claim Substantiation Rules 1.125-7: Nondiscrimination Rules
Other Code sections also pertain to Cafeteria Plans 79 Group Term Life Insurance Purchased for Employees; 105 Amounts Received Under Accident and Health Plans; 106 Contributions by Employer to Accident and Health Plans 129 Dependent Care Assistance Programs; 137 Adoption Assistance Programs 152 Dependent Defined 318 Constructive Ownership of Stock 414 Definitions and Special Rules (controlled group and HCE definitions) 1372 Partnership Rules to Apply for Fringe Benefit Purposes 3121 Definitions (FICA) 3306(b) Definitions (FUTA) 3401(a) Definitions (federal income tax withholding) 5000 Certain Group Health Plans 6039D Returns and Records with Respect to Certain Fringe Benefits Plans* *Form 5500 filing requirement for cafeteria plans suspended Cafeteria Plans are also indirectly impacted by laws that affect their component benefits, such as ERISA COBRA HIPAA FMLA USERRA The Affordable Care Act
Who may sponsor a Cafeteria Plan? Any employer with employees subject to U.S. income taxes Corporations (Subchapter S or Subchapter C) Partnerships Nonprofit organizations Government entities Limited liability companies (LLCs) Limited liability partnerships (LLPs) Sole proprietorships Who may Participate? Current and former common-law employees But not: Self-employed individuals Sole Proprietors Partners Outside Directors >2% shareholders of S-Corporations (and employee-spouse, children, parents, grandparents) Code 318 ownership attribution rules
Cafeteria Plan Compliance Rules Must have a written plan - 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 Plan year 12 consecutive months Any amendments must be made through formal written instrument Plan Administration Requirements No deferred compensation All participants are employees Choice among two or more benefits cash and qualified benefits Advance elections prospective only Irrevocable during plan year Use-it-or-lose-it rule Uniform coverage rule Cannot discriminate in favor of Highly Compensated Employees (HCE s)
Plan Noncompliance Consequences Participant nontaxable elections under the Plan are taxable No statute of limitations Employment taxes and income tax withholding Amended FormsW-2 and 941 Penalties for non-payment of payroll taxes Really unhappy employees and payroll department Qualified Benefits Employer-provided health coverage HSA contributions Health flexible spending account ( FSA ) Dependent care assistance program ( DCAP ) Group-term life insurance / AD&D STD and LTD insurance Adoption assistance 401(k) contributions PTO Buy/Sell
Impermissible (but Tax-Favored) Benefits Scholarships Educational assistance benefits Dependent life insurance Long-term care insurance Fringe benefits (Code 132 ) 403(b) deferrals Heath reimbursement arrangement ( HRA ) Medical savings account ( Archer MSA ) Premium-Only Plan (POP) Source: Thomson Reuters/EBIA Cafeteria Plan Manual (2012)
Salary Reduction Plan with FSAs Source: Thomson Reuters/EBIA Cafeteria Plan Manual (2012) Plan Implementation Steps Source: Thomson Reuters/EBIA Cafeteria Plan Manual (2012)
Participant Election Rules Only participants can make elections Elections governed by Code 125 must be voluntary Elections generally must be made in advance of the coverage period Participants generally cannot elect to use salary reductions to buy benefits that are provided in a later plan year some exceptions allowed Participants may make affirmative, negative, default, rolling, and evergreen elections Elections must be irrevocable during the plan year, subject to certain exceptions Insurance and other contractual provision restraints
Mid-Year Plan Election Changes No requirement to allow mid-year election changes If allowed, must comply with IRS regulations Allowed election change events must be included in Plan document Allowed event must have occurred, and allowed change must be consistent with the event Allowable Mid-Year Election Events Change in status events e.g., marriage, birth, adoption of a child, and various employment status changes Cost or coverage changes Other laws or court orders e.g., HIPAA special enrollment, CHIP/Medicaid, COBRA, FMLA, HSA rules, 401(k) rules
Plan Nondiscrimination Rules Cafeteria Plans and component plans cannot discriminate in favor of Highly Compensated Employees (HCE s) and Key Employees Plan nondiscrimination testing requirement three basic components Eligibility Benefits Utilization most difficult for small plans to pass Nondiscrimination testing must be performed as of the last day of the plan year Special Safe Harbor Test for POP Premium-only Plan is deemed to satisfy the Code 125 nondiscrimination requirements if it satisfies the safe harbor percentage test for eligibility under the regulations. Ratio Percentage = Non-HCIs who benefit All non-excludable non-hcis HCIs who benefit All non-excludable HCIs If the plan's Ratio Percentage is 50% or more, the plan automatically passes the Safe Harbor Percentage Test
Plan Discrimination Consequences If the Cafeteria Plan discriminates in favor of highly compensated individuals/employees Plan does not cease to be valid Adverse tax consequences to all participating HCEs or Key Employees must include in gross income the value of the taxable benefit with the greatest value that the employee could have elected to receive, even if the employee elects to receive only the nontaxable benefits offered benefit amount treated as taxable income on Form W-2 and for purposes of income tax, FICA, and FUTA withholding PPACA Provisions Tax-favored treatment for children who have not attained age 27 as of the end of the taxable year, regardless of whether the child qualifies as a tax dependent effective plan renewal following 9/23/2010 Revised definition of dependent under Code 152 Simple cafeteria plan provisions under which eligible small employers may qualify for a safe harbor from plan nondiscrimination rules effective 1/1/2011 Nondiscrimination rules for insured group health plans [Code 105(h)(2)] delayed pending further guidance
Medicines or drugs other than insulin be prescribed in order to qualify for reimbursement from a health FSA effective 1/1/2011 $2,500 cap on annual health FSA salary reduction contributions effective 1/1/2013 Exchange coverage (group plan only) may be offered as a qualified benefit under a cafeteria plan effective 1/1/2014 Questions?
Allowable Mid-Year Election Change Events Events Permitting Election Change Applicable Benefit Elections 1. Change in Status Six categories of events: change in employee's legal marital status; change in number of dependents; change in employment status; dependent satisfies (or ceases to satisfy) dependent eligibility requirements; change in residence; and commencement or termination of adoption proceedings Applies to elections for all qualified benefits (e.g., accident or health coverage, group term life, health FSA, and DCAP benefits). Includes detailed consistency rules. 2. Cost Changes, With Automatic Increases/Decreases in Elective Contributions Applies to elections for all qualified benefits except health FSAs (see discussion regarding DCAPs). 3. Significant Cost Changes Applies to elections for all qualified benefits except health FSAs. Events Permitting Election Change Applicable Benefit Elections 4. Significant Coverage Curtailment (With or Without Loss of Coverage) 5. Addition or Significant Improvement of Benefit Package Option Applies to elections for all qualified benefits except health FSAs. Applies to elections for all qualified benefits that are group health plans except health FSAs. 6. Change in Coverage Under Other Employer Plan Applies to elections for all qualified benefits except health FSAs. 7. Loss of Group Health Coverage Sponsored by Governmental or Educational Institution Changes in 401(k) Contributions Applies to elections for all qualified benefits that are group health plans except health FSAs. Applies to elections for 401(k) plans. 9. HIPAA Special Enrollments Applies to elections for group health plans that are not excepted benefits under HIPAA (see discussion regarding health FSAs).
Events Permitting Election Change Applicable Benefit Elections 10. COBRA Qualifying Events Applies to elections for group health plans subject to COBRA, including health FSAs. 11. Judgments, Decrees, or Orders Applies to elections for plans that provide accident or health coverage, including health FSAs. 12. Medicare or Medicaid Entitlement Applies to elections for plans that provide accident or health coverage, including health FSAs. 13. FMLA Leaves of Absence Applies to elections for plans that provide accident or health coverage, including health FSAs. Also applies to elections for non-health benefits. 14. Changes in Pre-Tax HSA Contributions Applies to elections to make HSA contributions under a cafeteria plan. Required Plan Nondiscrimination Tests Plan Type Required Tests Cafeteria Plans /POP Eligibility Test 125 - HCE/Key and tests defined Contributions and Benefits (C&B) Test Key Employee Concentration Test Health FSAs 105(h)- HCI/Key and tests defined Eligibility Test Benefits Test DCAPs Eligibility Test 129 and 414 - Contributions and Benefits Test HCE/Key and tests defined More-Than-5% Owners Concentration Test 55% Average Benefits Test Group Term Life Insurance Eligibility Test 79 - HCE/Key and tests defined Benefits Test Self-Insured Major Medical, Dental, and Vision Plans 105(h)* Eligibility Test Benefits Test *Application to fully-insured plans under PPACA
Highly Compensated Employee (HCE) Definition Code 105(h) - Self insured Health Plan, Health FSA Code 125 - Cafeteria Plan Code 129 - DCAP a) One of the five highest paid company officers (total number up to 5) a) An officer at any time during preceding or current year. Apply Code 414(q) HCE definition: b) a shareholder who owns more than 10% of the value of stock of the employer's stock (see ownership attribution rule below); or c) among the highest-paid 25% of all employees (other than allowable excludable employees). NOTE: Ownership attribution rules under Code 318(a)(1) apply. Under that provision, one spouse is deemed to own the ownership interest of the other spouse; an employee is deemed to own the ownership interest of his or her parents, children, and grandchildren. b) More-than-5% shareholder (without Code 318 attribution) a) More-than-5% Owners during current or preceding year (family ownership attribution rules under Code 318(a)(1) apply regarding employee spouse, children, parents, grandchildren). c) Ee with earnings of ($110,000 for 2011; $115,000 for 2012) or greater in preceding year (or current year if new hire) d) a spouse or tax dependent as defined in Code 125(e)(1)(D) of an individual in first 3 groups listed above (Code 152 definition of dependent applies). Employee spouse and tax dependent(s) of individuals identified as a), b) or c) above are HCEs regardless of compensation level below dollar threshold. b) All EEs with prior year compensation of $110,000 (for 2009-2011) ($115,000 for 2012) or greater - or, if elected by employer (and applied to all benefit plans), the alternative Top Paid Group* method to determine dollar threshold HCE's. * Top Paid Group Election (include ee's that are included in the identified top 20% paid group instead of all ee's above dollar threshold compensation) - this is an optional dollar threshold election if group is having trouble passing NDT. Cannot be elected if pension plan does not use this election. Key Employee Definition - Code 416(i)(1) During the preceding plan year, was a) an officer with annual compensation in excess of the dollar limit for that year ($160,000 for year 2009 thru 2011) ($165,000 for 2012); b) a more-than-5% owner of the employer (see ownership attribution rules below for family members); or a c) more-than-l% owner of the employer with annual compensation greater than $150,000 (not indexed) for year 2009 thru 2012. NOTE: Ownership attribution rules under Code 318(a)(1) apply. Under that provision, one spouse is deemed to own the ownership interest of the other spouse; an employee is deemed to own the ownership interest of his or her parents, children, and grandchildren. Code 79 - Group Term Life Key employees are the prohibited group -- see Key Employee definition