Brokers, HR Executives, CFOs, Producers: Employers are concerned and even confused by the current alphabet soup prevalent in the employee benefits marketplace. On "The Benefits Buzz: Inside Health Insurance in America" host Sharon Alt and her expert guests clear up some of that confusion by offering answers to the difficult questions in a clear, understandable manner.
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Things at Sharon Alt's company began to unravel after she and her 50-50 partner began having fundamental disagreements about the business' future direction. With no exit strategy, it took nearly a year of tense negotiations and the help of a mediator before the partnership was dissolved. Read More
Definition and General Implementation Requirements
A Cafeteria Plan is a written plan under which all participants are employees and may choose among (2) or more benefits. These benefits must include cash and other qualified benefits.
Employees must choose among the options prior to the effective date of the plan. Elections must be irrevocable, except in the event of a Family Status Change. The plan must comply with certain nondiscrimination rules and regulations.
The following pages offer an outline of each Topic regarding the Basic Flex Trac. See Training Classes for more information on a detailed seminar available to your organization.
Documentation
Plan Documentation:
There must be a written, signed, legal plan document, detailing the benefits offered under the plan.
Summary Plan Description:
Each eligible employee must be provided with a Summary Plan Description.
Salary Reduction Agreement:
Each eligible employee must be given the opportunity to participate.
Plan Administration
Premium Only Plan
Documentation
Salary Reduction Agreement
Non-Discrimination Testing
Status Change Forms
5500 Filing
Full Flexible Benefit Plan
Documentation
Educational Material / Group Enrollment Meetings
Salary Reduction Agreements
Non – Discrimination Testing
On-going management of payroll & Claims payment
Status Change Forms
Year End Statements
5500 Filing
Groups offering Dependent Care Reimbursement accounts should supply participants with the form 2441
Year End Compliance and Reporting Requirements
Form 5500
Who must file?
When Should Form 5500 Be Filed?
How do I determine whether to file a Form 5500 or a Form 5500 C/R?
Year End Compliance – (Non-discrimination Testing)
When Should Testing Be Done?
What Tests Should be Run?
Cafeteria Plan Nondiscrimination Rules
Medical Reimbursement Plan Nondiscrimination Rules
Dependent Care Assistance Plan Nondiscrimination Rules
Cobra/Hippa Requirements
Cobra
New Proposed Regulations (issued by the IRS on February 3, 1999) provide an exception from having to offer COBRA to some, but not all, Health FSA Participants.
If the Health FSA satisfies two conditions, then the Health FSA need only make COBRA available to a qualified beneficiary for the plan year in which the qualifying event occurs and not for subsequent years.
Hippa
Health FSAs funded entirely with employee salary reduction contributions will be exempt from HIPAA if other significant health coverage is available to participants. Health FSAs funded by employer contributions will generally not be exempt.
Health FSAs Must Satisfy Two Conditions To Be Exempt: Plan sponsors and administrators should review their Health FSAs to determine whether HIPAA applies. If HIPAA is applicable, HIPAA certificates of creditable coverage must be issued.
Status Change Regulations
General Rule – A Cafeteria Plan must provide that participant elections are irrevocable for the period of coverage (generally the plan year). There are certain exceptions to the irrevocability requirement.
New Regulations – On November 7, 1997, the IRS published the new change-in-status guidance in the form of temporary and proposed regulations 62 FR 60165 and 62 FR 60196. The new regulations are generally effective for plan years beginning after December 31, 1998.
Unlike the current regulations which merely provide examples of change in family status events, the new regulations seem to provide an exhaustive list of categories of permissible events. The IRS has indicated that if an event does not fall within of the enumerated categories it will no longer qualify as a change in family status event once the new regulations become effective.
On November 23, 1998 – IRS Announcement 98-105 said that it is delaying the effective date of the new change in status rules until the first day of the plan year that begins at least 120 days after the IRS releases further guidance. This means that the new rules would not be required until 2000 for a calendar year plan.
New rules apply to accident and health coverage and group term life insurance coverage. Note that dependent care assistance plans are excluded. The old rules will still apply to these plans.
Consistency Rule – If a change in status event occurs, employees are allowed to make changes consistent with the event. The new regulations clarify (and limit) the election changes that will be consistent with the event.
Eligible/Ineligible Benefits
Eligible Benefits
Coverage under an accident or health plan, to the extent that such coverage is excludable from income under Code 106
Benefits under a dependent care assistance plan under Code 129
Group term life insurance (GTL") Coverage
Paid vacation days
401 (k) deferrals
Certain contributions for post-retirement life insurance by covered employees of educational organizations
Adoption assistance under Code 137
Ineligible Benefits
General Rule – Code 125 prohibits cafeteria plans from offering any benefit that "provides deferred compensation."
Qualified Scholarships – Benefits under Code 117
Educational Assistance Programs – Benefits under Code 127
Fringe Benefit Programs – Benefits under Code 132
Dependent GTL Insurance – For plan years ending after December 31, 1991
Medical Savings Accounts
Long Term Care Insurance
Eligible/Ineligible Participants
Eligible Participants
Common-Law Employees
Controlled Group Rules – All employees who are treated as employed by a single employer under Code 414(b),(c) or (m)
Ineligible Participants
Self-Employed Individuals
Partners In a Partnership
A 2% More Shareholder in a Subchapter S Corporation
Outside Directors, Limited Partners, and Limited Liability Companies (LLCs)
Non-Compliance Consequences
The IRS has established the Industry Specialization Program (ISP) which held an Industry-wide meeting in October of 1998 in Dallas. They have established a preliminary draft of the IRS Examination Guidelines for Cafeteria Plans.
The IRS is frequently asked whether audits will be based on the Internal Revenue Code alone, or whether the terms of the proposed regulations will also apply. Based on the preamble to the 1989 proposed regulations, it is clear that the IRS will apply the proposed regulations in auditing cafeteria plans.
The IRS is increasing their awareness of cafeteria plan issues through increased training, undoubtedly, increased audit activity will follow.
The potential penalty for failing to comply with the Code 125 legal requirements could be egregious – including the imposition of income taxes against the employer and/or employees, employment taxes, and penalties for failing to withhold and report taxes properly.
The following is a list of violations:
Failure to adopt cafeteria plan
Noncompliance with Code 125 irrevocable election requirements
Inclusion of ineligible benefit
Failure to file Form 5500 required by Code 6039(d)
*Penalty of $25 per day (up to $15,000 per return)
Failure to pass non-discrimination requirements applicable under Code 125.
