1 Public Employees’ Benefit Board Cafeteria Plans 101 Presentation toPEBBOctober 21, 2008Bobbie Barott, Plan Design Manager
2 What is a Cafeteria Plan? A Cafeteria Plan gives employees an opportunity to choose among a menu of benefits consisting of cash or regular pay and certain non-taxable benefits (for example, health insurance benefits).Cafeteria Plans must meet the requirements of Internal Revenue Service (IRS) Code 125 and regulations issued by the IRS. The regulations:Govern employee eligibility, enrollment, dependent eligibility, type of benefits offered, funding, and more.Require plans to maintain a written plan document that provides a detailed description of the adopted plan.Require certain reporting and testing requirements.Additional regulations come from other sources including Department of Labor, Treasury Department, Center for Medicare and Medicaid, etc…and other federal and state mandates.PEBB’s Plan is a Code 125 Cafeteria Plan
3 PEBB’s Plan is a Non-Federal Governmental Cafeteria Plan Regulations Specific to Non-Federal Governmental Cafeteria PlansPEBB is exempt from ERISA Title I requirements, including Health FSAs. However, ALL Code 125 and State law must be followed.HIPAA – portability requirements apply to insured health plans. Self-funded plans may opt out of portability, except to provide certificates of credible coverage. There is no governmental exemption from HIPAA’s privacy, security and EDI requirements.COBRA – PEBB is subject to COBRAFMLA –applies to non-federal governmental entitiesUSERRA –applies to governmental employers just as it does to private sector companiesMental Health Parity Act, Women’s Health and Cancer Rights Act, and Newborns’ and Mother’s health Protection Act apply.
4 All Code 125 Plans Must Complete Discrimination Testing By providing tax savings, cafeteria plans must not discriminate in favor of highly compensated employees (HCEs) and key employees.Plans must complete discrimination testing on each plan component;Most employers hire a third party administer to complete the tests.Testing revolves around these two concepts:Eligibility. Unless enough non-HCEs can get into the plan, the plan will fail as discriminatoryBenefit Availability/Utilization. A plan is discriminatory if the HCEs or Keys receive more benefits than the non-HCEs/non-keys.
5 Why Have a Cafeteria Plan? CODE 125 plans are the only means by which an employer can offer eligible employees an election between taxable and nontaxable benefits without the election resulting in inclusion in gross income for the employee. (Avoiding Constructive Receipt)Employers also realize some tax savings.Employers can tailor plans to meet specific goals. (Most of the IRS regulations are mandated, however in some instances employers can choose the regulations that work best for them.)
6 Who Can Sponsor and Who Can Participate in a Cafeteria Plan? Any employer, regardless of size, may sponsor a cafeteria plan.Only employees of the sponsoring employer can participate in the plan. But, an employer can allow an employee to elect certain benefits for his or her spouse, domestic partner, or dependents.
7 CODE 125 Regulates Employer Benefit Offerings to Employees Allowable Plan Benefits(pre-tax)Accident or Health Plan -Health FSA, AD&D, HMOs, Dental, traditional group healthDependent Care Assistance Programs (DCAPS)Group Term Life (GTL)–employee only, pretax premiums up to $50K coveragePaid Time Off401 KAdoption Assistance BenefitsHealth Savings AccountsUnallowable Plan BenefitsCertain specified benefits, such as: Scholarships, Educational assistance programs, GTL on anyone other than employee, transportation, long-term care, HRAs, Employer provided meals & lodging, Code 403(b) contributions, Archer medical savings accountsBenefits that Defer CompensationIndividual Health Insurance PoliciesHospital Indemnity and Cancer Insurance Policies
8 What Allowable (pre-tax) Benefits does PEBB’s Cafeteria Plan Sponsor? Premium Conversion ComponentIncludes:HealthDentalVisionEmployee GTL Insurance premium up to $50,000 in coverage.Health Flexible Spending Account (Health FSA) ComponentDependent Care Assistance Program (DCAP) Component
9 What about PEBB’s Accidental Death and Dismemberment or Long and Short Term Disability Insurances? Employees pay these insurance premiums post tax and receive benefits tax free.If these insurances were added to the PEBB plan, employees would pay premiums pretax and then have to pay taxes on received benefits.
10 CODE 125 Participant Election Regulations Only an eligible employee (participant) can choose the type and amount of benefits they want. (Other individuals such as spouse or dependents may receive coverage under certain benefits as allowed by employer)Only three events allow a participant to make elections:When an employee first meets eligibility requirements (Newly eligible PEBB employee has 60 days to choose elections)Annual Open Enrollment – the time when new elections can be substituted for old ones. (PEBB OE = month of October)Certain events identified by the IRS that permit an election change (Mid-year plan changes)Generally, all elections must be prospective---employees must make their elections before the cash that they could otherwise receive is available to them.(HIPPA exceptions : birth, adoption, placement for adoption, loss of other group insurance)
11 When are Mid Year Plan Election Changes Permitted and What are the Requirements? All participant elections are irrevocable and cannot be changed during the period of coverage.Employers don’t have to allow exceptions to this rule. However, most allow participants to change elections during the year if the employee experiences an event that falls under one of 14 exceptions allowed by the IRS as, “permitted change in election events.” Employers may allow less than all the exceptions or make the exceptions more restrictive.The “consistency rule” must be met in order to make an election change---this means that the event justifies the election change ONLY if the change is consistent with the event that occurred. Some events do not apply to all benefits offered under a plan. (e.g., A permitted change due to a significant cost increase in a plan does not apply to an election change in a Health FSA.)Plans must impose a time limit for making an election change mid-year. (e.g., 30 or 60 days) PEBB’s time limit is 60 days from event date or receipt of the update form, whichever is later. Note: The IRS views changes made too long after the event as unlikely to satisfy the consistency rule.
12 What are the 14 Permitted Election Change Events Change in statusCost changes in benefit with automatic election increases/decreasesSignificant cost changesSignificant curtailment of coverageAddition or improvement in benefit package optionChange in coverage of spouse or dependent under another employer sponsored planLoss of certain other health coverageHIPAA special enrollment rightsJudgments, decrees, ordersEntitlement to Medicare or MedicaidFMLA LeaveChanges in 401(k) ContributionsCOBRA qualifying eventPre-Tax HAS contributionsNOTE: The PEBB Plan includes all permitted events except the last three bullets.
13 Paying for Cafeteria Plan Benefits There are a variety of ways employers and employees pay for Cafeteria Plan Benefits:Salary reductionEmployee agrees in writing to reduction of salary for benefit payment on a pre-tax basisNon-elective Employer Contributions – employers may subsidize benefits under the plan in several waysContingent Contribution- employer pays a specified amount towards cost of a benefitMatching Contribution – employer matches amount employee contributes to buying a benefitFlex Credits – employer offers credits or money toward the purchase of qualified benefits used at the discretion of the employee for benefit purchases.Some employers, such as PEBB, combine several contribution methods or vary the amount of contributions given to employees.
14 What about Opting Out of Coverage? Employers may also offer additional flex credits (money) to employees who do not take specified “core” benefits offered under the plan. This is the opt out provision or the cash in lieu component.Plans may use a dollar cap or limit the amount of cash that participants receive. (Helping to reduce adverse selection) (PEBB caps the opt out at $233)Plans may require opt out participants to enroll in a benefit.PEBB offers the Cash In Lieu Component – Eligible employees may opt out of medical coverage if they have another PEBB approved employer sponsored group medical coverage. Employees must take and pay for dental and employee life coverage (pre-tax). The remaining opt out balance is then added to the employees taxable wages.
15 PEBB’s Cafeteria Funding Structure PEBB’s Plan = Salary Reduction and Employer Contingent Contribution PlanPlan Components Include:Premium Conversion ComponentHealth FSA ComponentDCAP ComponentCash in Lieu ComponentNote: The state’s contribution is contingent on PEBB core benefits (Premium Conversion Component) elected by eligible employees. Employees not electing core coverage receive no cash in lieu of coverage and may not elect any PEBB Benefits.
17 IRS Section 125 Cafeteria Plan Non-Compliance Penalties Treasury Regulation (c)(6)and (7) states: A plan is not a cafeteria plan if the plan is not in writing, fails to operate in accordance with its terms, or fails to operate in compliance with Code 125 or the cafeteria plan regulations.In these cases the possible consequences can include the following:Require the plan comply with the Code and regulations;Disqualification from the cafeteria plan;Imposing employment tax withholding liability and penalties on the employer and the employee with regard to pre-tax salary reductions and elective employer contributions;Reversal of the transaction that triggered the non-compliance; andIn the case of failure to pass nondiscrimination test, inclusion in gross income all benefits elected by the prohibited group and imposition of tax liability and penalties
18 Other Possible Violations Plans can also violate ERISA, COBRA, HIPAA, and other federal and state group health plan laws. Resulting in possible legal court cases and possible fines.
19 Congratulations….You Just Finished Cafeteria Plans 101!