logging in or signing up Cafeteria- Plans aSGuest62226 Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINT lite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: (To copy code, click on the text box) Embed: URL: Thumbnail: WordPress Embed Customize Embed The presentation is successfully added In Your Favorites. Views: 321 Category: Entertainment License: All Rights Reserved Like it (0) Dislike it (0) Added: August 21, 2010 This Presentation is Public Favorites: 0 Presentation Description No description available. Comments Posting comment... Premium member Presentation Transcript Slide 1: This Employer Webinar Series program is presented by Spencer Fane Britt & Browne LLPin conjunction with United Benefit Advisors The Basics of Cafeteria Plans : Copyright 2010 The Basics of Cafeteria Plans Presented by Kenneth A. Mason Lawrence Jenab Presenters : Copyright 2010 Presenters Ken Mason kmason@spencerfane.com 913-327-5138 Larry Jenab Ljenab@spencerfane.com 913-327-5125 What Is a Cafeteria Plan? : Copyright 2010 What Is a Cafeteria Plan? Choice between taxable benefits (e.g., cash) and non-taxable benefits (e.g., health care coverage) Section 125 is the exclusive means by which employer can offer a choice without the choice itself resulting in taxable income to the employee (under “constructive receipt” doctrine) A plan offering a choice between only taxable benefits (cash or paid time off), or only non-taxable benefits (e.g., a “flex plan”) is not a cafeteria plan Qualified Benefits : Copyright 2010 Qualified Benefits Employer-provided health coverage Health flexible spending account (“FSA”) Dependent care FSA (“DCAP”) Group-term life insurance AD&D insurance STD and LTD insurance Adoption assistance HSA contributions 401(k) contributions PTO Impermissible (but Tax-Favored) Benefits : Copyright 2010 Impermissible (but Tax-Favored) Benefits Scholarships Educational assistance benefits Dependent life insurance Long-term care insurance Fringe benefits 403(b) deferrals Heath reimbursement arrangement (“HRA”) Medical savings account (“Archer MSA”) Eligibility : Copyright 2010 Eligibility Current employees Former employees (so long as plan is not maintained predominantly for them) But not: Self-employed individuals Sole proprietors Partners Directors 2% shareholders of S-corporations Written Plan Document : Copyright 2010 Written Plan Document Must have a written 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 Any amendments must be made through formal written instrument No Deferral of Compensation : Copyright 2010 No Deferral of Compensation Prohibition on deferred compensation does not apply to the following: 401(k) contributions HSA contributions Grace period (up to 2 ½-months after end of plan year) LTD policy Advance payments for orthodontia Salary reduction at end of one year to pay premiums for beginning of next year Value to Employees : Copyright 2010 Value to Employees Advantages for employees: No federal income tax No FICA or Medicare tax Generally, no state or city tax Allows choice among benefits (or cash) Increased take-home pay (vs. after-tax payment) Disadvantages for employees: Irrevocable elections “Use-it-or-lose-it” rule Possibly lower Social Security benefits Value to Employers : Copyright 2010 Value to Employers Advantages for employers: No FICA or Medicare tax Cushion blow of premium increases (if cafeteria plan is introduced at the same time) Non-comparable employer HSA contributions Disadvantages for employers: Set-up and administration costs “Uniform coverage” rule (under health FSAs) IRS Guidance : Copyright 2010 IRS Guidance Final Regulations: 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 IRS Guidance : Copyright 2010 IRS Guidance Proposed Regulations were issued in 2007, incorporating decades of sporadic guidance Expected to be finalized at any moment May be relied upon in the interim Election Rules : Copyright 2010 Election Rules General Rule: Elections must be made – and irrevocable – before beginning of coverage period (generally, 12 months) Several exceptions specified in IRS regulations Exceptions apply only if also set forth in plan document Exception: Change in Status Event : Copyright 2010 Exception: Change in Status Event Change in status events E.g. -- Birth, adoption, marriage, divorce, leave of absence, strike, lockout, change of worksite Election change must be “consistent with” change in status Limits who may add or drop coverage Also requires timely request to change (though no specific deadline) Exception: Special Enrollment : Copyright 2010 Exception: Special Enrollment HIPAA special enrollment events Substantial overlap with status changes Two new events under “CHIPRA”: Loss of eligibility for CHIP or Medicaid Entitlement to premium subsidy under either program May allow even unaffected dependents to be enrolled at same time (i.e., no “consistency” requirement) Specific timeframes for enrollment Generally must request change within 30 days 60 days for CHIPRA events Exceptions: Cost or Coverage Changes : Copyright 2010 Exceptions: Cost or Coverage Changes Cost changes If “insignificant,” may automatically adjust pre-tax premiums If “significant,” may allow election change Note: Not applicable to FSAs Coverage changes If “significant,” may allow move to other option If change amounts to “loss of coverage,” may allow revocation of election Note: Not applicable to FSAs Example : Copyright 2010 Example Employer sponsors health plan with HMO and PPO options, along with an FSA. PPO has $500 annual deductible. Employer amends PPO mid-year to raise deductible to $2000. Employees in PPO option may elect to change to HMO option. But may not drop coverage entirely, because not a “loss of coverage.” And may not modify FSA elections, even though desirable to cover higher deductible. Exception: Court Order : Copyright 2010 Exception: Court Order May allow employee to add dependent child or foster child if employee is ordered to cover child May also allow employee to drop child from coverage if other parent is ordered to cover child (and in fact does so) Exceptions: Medicare or Medicaid : Copyright 2010 Exceptions: Medicare or Medicaid Employee may be allowed to drop coverage for self or dependent upon becoming entitled to Medicare or Medicaid Similarly, employee or dependent who loses Medicare or Medicaid coverage may be allowed to enroll in employer plan Exceptions: 401(k) or HSA : Copyright 2010 Exceptions: 401(k) or HSA If 401(k) contributions are made through a cafeteria plan (not recommended), 401(k) election change rules apply to that benefit If HSA contributions are made through a cafeteria plan, employees must be allowed to change their HSA elections monthly In neither case, however, may these election changes affect elections in effect with respect to other benefits (other than cash) Other Enrollment Rules : Copyright 2010 Other Enrollment Rules “Negative” elections are permitted May be “automatic” -- if enrolled in health plan, premiums must be pre-tax May be “default” – if enrolled in health plan, premiums will be pre-tax, unless employee elects after-tax, instead May be “evergreen” -- renewed from year to year unless changed (less common with FSAs, though also permissible) New hires may be allowed to make initial elections within 30 days, retroactive to date of hire (although all pre-tax amounts must be taken from future pay) Electronic elections are specifically authorized Nondiscrimination: HCEs : Copyright 2010 Nondiscrimination: HCEs Cafeteria plans may not discriminate in favor of “highly compensated individuals” as to eligibility, contributions, or benefits “Highly compensated individuals” include Officers, 5% shareholders, and Employees earning at least the HCE amount (currently, $110,000) in the current or prior year Regulations incorporate certain Section 410(b) rules (applicable to retirement plans) Nondiscrimination: Key Employees : Copyright 2010 Nondiscrimination: Key Employees “Key employees” may not receive more than 25% of the plan’s total non-taxable benefits “Key Employees” include 5% shareholders, 1% shareholders earning more than $150,000, and officers earning more than $160,000 Particularly problematic for owners of small employers Other Nondiscrimination Rules : Copyright 2010 Other Nondiscrimination Rules “Safe harbor” rule for premium-only plans (need only satisfy eligibility nondiscrimination rule, regardless of actual utilization) Safe harbor for health benefits -- but probably too complicated to use All tests are to be conducted on last day of plan year Effect of Discrimination : Copyright 2010 Effect of Discrimination Under a discriminatory cafeteria plan, highly compensated individuals or key employees (as applicable) are taxed on the maximum taxable benefit they could have elected to receive Generally, this will be their full salary, denying them any tax exclusion for health or other benefits Flexible Spending Accounts : Copyright 2010 Flexible Spending Accounts Health FSAs – may reimburse medical expenses, but not insurance premiums Dependent Care Assistance FSAs – may reimburse dependent care expenses (for which no credit is claimed) Adoption Assistance FSAs – may reimburse adoption expenses (for which no credit is claimed) Special FSA Rules : Copyright 2010 Special FSA Rules All types of FSAs are subject to “use-it-or-lose-it” rule, although Dependent care and adoption assistance FSAs may allow for “spend-down,” and Any FSA may allow for 2 ½-month “grace period” Health FSAs are subject to “uniform coverage” rule All FSAs are subject to substantiation requirements FMLA Leave Alternatives : Copyright 2010 FMLA Leave Alternatives Employees on FMLA leave must be allowed to continue health coverage at active-employee premium And employees on unpaid FMLA leave must be allowed to revoke coverage (or receive it at employer’s cost, subject to employer’s later recapture of premiums) Employer may waive employee premium payments while on unpaid leave (on a nondiscriminatory basis) FMLA Leave Alternatives : Copyright 2010 FMLA Leave Alternatives Alternatively, employer may choose to allow employee premium payments under one of three options: “Prepay” (generally pre-tax) “Pay-as-you-go” (generally after-tax, unless employee receives vacation or sick pay while on leave) “Catch-up” (generally pre-tax) Special HSA Considerations : Copyright 2010 Special HSA Considerations Payroll deduction HSA contributions may be made on a pre-tax basis only through a cafeteria plan Although employees may claim a deduction for after-tax contributions, those contributions would be subject to FICA tax This deduction is not subject to the 7.5% (soon to be 10%) AGI threshold HSA election changes must be allowed on monthly basis (though they cannot affect other elections) Exception to prohibition on deferred compensation (i.e., even though HSA account balances may be carried from year to year, and may be used to pay medical premiums) Common Mistakes : Copyright 2010 Common Mistakes Failure to have a plan document Allowing impermissible mid-year election changes (especially for FSAs) Violating the nondiscrimination rules (especially by small employers with owner or key employees) Not allowing monthly HSA elections Health Care Reform: FSAs, HSAs, HRAs : Copyright 2010 Health Care Reform: FSAs, HSAs, HRAs New restrictions on reimbursements from FSAs, HSAs, and HRAs No reimbursements for OTC drugs (other than insulin) unless prescribed by a physician Effective in 2011 New limit on FSA contributions Annual salary-deferral limit of $2,500 (indexed for inflation) Effective in 2013 Increased tax on nonqualified HSA distributions Tax increases from 10% to 20% For Archer MSAs, tax increases from 15% to 20% Effective in 2011 Reform: Safe Harbor for “Simple” Plans : Copyright 2010 Reform: Safe Harbor for “Simple” Plans “Simple” cafeteria plans deemed to satisfy: The cafeteria-plan nondiscrimination rules; and The nondiscrimination rules for certain component benefits, such as: Group-term life insurance Self-insured medical coverage Dependent care assistance To be eligible, employer must: Have employed average of 100 or fewer employees during past two years Make minimum non-elective contribution for each eligible employee Available in 2011 Reform: Health Care Exchanges : Copyright 2010 Reform: Health Care Exchanges Affordable Care Act creates state clearinghouses (“exchanges”) for qualified health plans General rule: qualified health plans cannot be offered through a cafeteria plan Exception: certain small employers can offer employees the opportunity to enroll in a qualified health plan through an exchange Slide 36: Copyright 2010 Questions and Answers Slide 37: Thank you for your participation in the Employer Webinar Series. To obtain a recording of this presentation, or to register for future presentations, contact your local UBA Member Firm. You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.
Cafeteria- Plans aSGuest62226 Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINT lite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: (To copy code, click on the text box) Embed: URL: Thumbnail: WordPress Embed Customize Embed The presentation is successfully added In Your Favorites. Views: 321 Category: Entertainment License: All Rights Reserved Like it (0) Dislike it (0) Added: August 21, 2010 This Presentation is Public Favorites: 0 Presentation Description No description available. Comments Posting comment... Premium member Presentation Transcript Slide 1: This Employer Webinar Series program is presented by Spencer Fane Britt & Browne LLPin conjunction with United Benefit Advisors The Basics of Cafeteria Plans : Copyright 2010 The Basics of Cafeteria Plans Presented by Kenneth A. Mason Lawrence Jenab Presenters : Copyright 2010 Presenters Ken Mason kmason@spencerfane.com 913-327-5138 Larry Jenab Ljenab@spencerfane.com 913-327-5125 What Is a Cafeteria Plan? : Copyright 2010 What Is a Cafeteria Plan? Choice between taxable benefits (e.g., cash) and non-taxable benefits (e.g., health care coverage) Section 125 is the exclusive means by which employer can offer a choice without the choice itself resulting in taxable income to the employee (under “constructive receipt” doctrine) A plan offering a choice between only taxable benefits (cash or paid time off), or only non-taxable benefits (e.g., a “flex plan”) is not a cafeteria plan Qualified Benefits : Copyright 2010 Qualified Benefits Employer-provided health coverage Health flexible spending account (“FSA”) Dependent care FSA (“DCAP”) Group-term life insurance AD&D insurance STD and LTD insurance Adoption assistance HSA contributions 401(k) contributions PTO Impermissible (but Tax-Favored) Benefits : Copyright 2010 Impermissible (but Tax-Favored) Benefits Scholarships Educational assistance benefits Dependent life insurance Long-term care insurance Fringe benefits 403(b) deferrals Heath reimbursement arrangement (“HRA”) Medical savings account (“Archer MSA”) Eligibility : Copyright 2010 Eligibility Current employees Former employees (so long as plan is not maintained predominantly for them) But not: Self-employed individuals Sole proprietors Partners Directors 2% shareholders of S-corporations Written Plan Document : Copyright 2010 Written Plan Document Must have a written 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 Any amendments must be made through formal written instrument No Deferral of Compensation : Copyright 2010 No Deferral of Compensation Prohibition on deferred compensation does not apply to the following: 401(k) contributions HSA contributions Grace period (up to 2 ½-months after end of plan year) LTD policy Advance payments for orthodontia Salary reduction at end of one year to pay premiums for beginning of next year Value to Employees : Copyright 2010 Value to Employees Advantages for employees: No federal income tax No FICA or Medicare tax Generally, no state or city tax Allows choice among benefits (or cash) Increased take-home pay (vs. after-tax payment) Disadvantages for employees: Irrevocable elections “Use-it-or-lose-it” rule Possibly lower Social Security benefits Value to Employers : Copyright 2010 Value to Employers Advantages for employers: No FICA or Medicare tax Cushion blow of premium increases (if cafeteria plan is introduced at the same time) Non-comparable employer HSA contributions Disadvantages for employers: Set-up and administration costs “Uniform coverage” rule (under health FSAs) IRS Guidance : Copyright 2010 IRS Guidance Final Regulations: 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 IRS Guidance : Copyright 2010 IRS Guidance Proposed Regulations were issued in 2007, incorporating decades of sporadic guidance Expected to be finalized at any moment May be relied upon in the interim Election Rules : Copyright 2010 Election Rules General Rule: Elections must be made – and irrevocable – before beginning of coverage period (generally, 12 months) Several exceptions specified in IRS regulations Exceptions apply only if also set forth in plan document Exception: Change in Status Event : Copyright 2010 Exception: Change in Status Event Change in status events E.g. -- Birth, adoption, marriage, divorce, leave of absence, strike, lockout, change of worksite Election change must be “consistent with” change in status Limits who may add or drop coverage Also requires timely request to change (though no specific deadline) Exception: Special Enrollment : Copyright 2010 Exception: Special Enrollment HIPAA special enrollment events Substantial overlap with status changes Two new events under “CHIPRA”: Loss of eligibility for CHIP or Medicaid Entitlement to premium subsidy under either program May allow even unaffected dependents to be enrolled at same time (i.e., no “consistency” requirement) Specific timeframes for enrollment Generally must request change within 30 days 60 days for CHIPRA events Exceptions: Cost or Coverage Changes : Copyright 2010 Exceptions: Cost or Coverage Changes Cost changes If “insignificant,” may automatically adjust pre-tax premiums If “significant,” may allow election change Note: Not applicable to FSAs Coverage changes If “significant,” may allow move to other option If change amounts to “loss of coverage,” may allow revocation of election Note: Not applicable to FSAs Example : Copyright 2010 Example Employer sponsors health plan with HMO and PPO options, along with an FSA. PPO has $500 annual deductible. Employer amends PPO mid-year to raise deductible to $2000. Employees in PPO option may elect to change to HMO option. But may not drop coverage entirely, because not a “loss of coverage.” And may not modify FSA elections, even though desirable to cover higher deductible. Exception: Court Order : Copyright 2010 Exception: Court Order May allow employee to add dependent child or foster child if employee is ordered to cover child May also allow employee to drop child from coverage if other parent is ordered to cover child (and in fact does so) Exceptions: Medicare or Medicaid : Copyright 2010 Exceptions: Medicare or Medicaid Employee may be allowed to drop coverage for self or dependent upon becoming entitled to Medicare or Medicaid Similarly, employee or dependent who loses Medicare or Medicaid coverage may be allowed to enroll in employer plan Exceptions: 401(k) or HSA : Copyright 2010 Exceptions: 401(k) or HSA If 401(k) contributions are made through a cafeteria plan (not recommended), 401(k) election change rules apply to that benefit If HSA contributions are made through a cafeteria plan, employees must be allowed to change their HSA elections monthly In neither case, however, may these election changes affect elections in effect with respect to other benefits (other than cash) Other Enrollment Rules : Copyright 2010 Other Enrollment Rules “Negative” elections are permitted May be “automatic” -- if enrolled in health plan, premiums must be pre-tax May be “default” – if enrolled in health plan, premiums will be pre-tax, unless employee elects after-tax, instead May be “evergreen” -- renewed from year to year unless changed (less common with FSAs, though also permissible) New hires may be allowed to make initial elections within 30 days, retroactive to date of hire (although all pre-tax amounts must be taken from future pay) Electronic elections are specifically authorized Nondiscrimination: HCEs : Copyright 2010 Nondiscrimination: HCEs Cafeteria plans may not discriminate in favor of “highly compensated individuals” as to eligibility, contributions, or benefits “Highly compensated individuals” include Officers, 5% shareholders, and Employees earning at least the HCE amount (currently, $110,000) in the current or prior year Regulations incorporate certain Section 410(b) rules (applicable to retirement plans) Nondiscrimination: Key Employees : Copyright 2010 Nondiscrimination: Key Employees “Key employees” may not receive more than 25% of the plan’s total non-taxable benefits “Key Employees” include 5% shareholders, 1% shareholders earning more than $150,000, and officers earning more than $160,000 Particularly problematic for owners of small employers Other Nondiscrimination Rules : Copyright 2010 Other Nondiscrimination Rules “Safe harbor” rule for premium-only plans (need only satisfy eligibility nondiscrimination rule, regardless of actual utilization) Safe harbor for health benefits -- but probably too complicated to use All tests are to be conducted on last day of plan year Effect of Discrimination : Copyright 2010 Effect of Discrimination Under a discriminatory cafeteria plan, highly compensated individuals or key employees (as applicable) are taxed on the maximum taxable benefit they could have elected to receive Generally, this will be their full salary, denying them any tax exclusion for health or other benefits Flexible Spending Accounts : Copyright 2010 Flexible Spending Accounts Health FSAs – may reimburse medical expenses, but not insurance premiums Dependent Care Assistance FSAs – may reimburse dependent care expenses (for which no credit is claimed) Adoption Assistance FSAs – may reimburse adoption expenses (for which no credit is claimed) Special FSA Rules : Copyright 2010 Special FSA Rules All types of FSAs are subject to “use-it-or-lose-it” rule, although Dependent care and adoption assistance FSAs may allow for “spend-down,” and Any FSA may allow for 2 ½-month “grace period” Health FSAs are subject to “uniform coverage” rule All FSAs are subject to substantiation requirements FMLA Leave Alternatives : Copyright 2010 FMLA Leave Alternatives Employees on FMLA leave must be allowed to continue health coverage at active-employee premium And employees on unpaid FMLA leave must be allowed to revoke coverage (or receive it at employer’s cost, subject to employer’s later recapture of premiums) Employer may waive employee premium payments while on unpaid leave (on a nondiscriminatory basis) FMLA Leave Alternatives : Copyright 2010 FMLA Leave Alternatives Alternatively, employer may choose to allow employee premium payments under one of three options: “Prepay” (generally pre-tax) “Pay-as-you-go” (generally after-tax, unless employee receives vacation or sick pay while on leave) “Catch-up” (generally pre-tax) Special HSA Considerations : Copyright 2010 Special HSA Considerations Payroll deduction HSA contributions may be made on a pre-tax basis only through a cafeteria plan Although employees may claim a deduction for after-tax contributions, those contributions would be subject to FICA tax This deduction is not subject to the 7.5% (soon to be 10%) AGI threshold HSA election changes must be allowed on monthly basis (though they cannot affect other elections) Exception to prohibition on deferred compensation (i.e., even though HSA account balances may be carried from year to year, and may be used to pay medical premiums) Common Mistakes : Copyright 2010 Common Mistakes Failure to have a plan document Allowing impermissible mid-year election changes (especially for FSAs) Violating the nondiscrimination rules (especially by small employers with owner or key employees) Not allowing monthly HSA elections Health Care Reform: FSAs, HSAs, HRAs : Copyright 2010 Health Care Reform: FSAs, HSAs, HRAs New restrictions on reimbursements from FSAs, HSAs, and HRAs No reimbursements for OTC drugs (other than insulin) unless prescribed by a physician Effective in 2011 New limit on FSA contributions Annual salary-deferral limit of $2,500 (indexed for inflation) Effective in 2013 Increased tax on nonqualified HSA distributions Tax increases from 10% to 20% For Archer MSAs, tax increases from 15% to 20% Effective in 2011 Reform: Safe Harbor for “Simple” Plans : Copyright 2010 Reform: Safe Harbor for “Simple” Plans “Simple” cafeteria plans deemed to satisfy: The cafeteria-plan nondiscrimination rules; and The nondiscrimination rules for certain component benefits, such as: Group-term life insurance Self-insured medical coverage Dependent care assistance To be eligible, employer must: Have employed average of 100 or fewer employees during past two years Make minimum non-elective contribution for each eligible employee Available in 2011 Reform: Health Care Exchanges : Copyright 2010 Reform: Health Care Exchanges Affordable Care Act creates state clearinghouses (“exchanges”) for qualified health plans General rule: qualified health plans cannot be offered through a cafeteria plan Exception: certain small employers can offer employees the opportunity to enroll in a qualified health plan through an exchange Slide 36: Copyright 2010 Questions and Answers Slide 37: Thank you for your participation in the Employer Webinar Series. To obtain a recording of this presentation, or to register for future presentations, contact your local UBA Member Firm.