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INITIATIVES
CAFETERIA PLANS:
AN EMPLOYER GUIDE
TABLE OF CONTENTS
What is a Cafeteria Plan?
1
Are All Cafeteria Plans the Same?
1
Is a Plan Document Required?
1
What Information is Included in the Plan Document
2
What if There is No Plan Document?
3
What Actions Could Jeopardize a Cafeteria Plan?
3
What is a Cafeteria Plan’s Plan Year?
3
Who Can Participate in a Cafeteria Plan?
3
Who is a Section 105(b) Dependent?
4
Who Can Not Participate in a Cafeteria Plan?
5
Are There Disclosure Requirements for a Cafeteria Plan?
6
Is the Cafeteria Plan Subject to ERISA?
6
Can a Cafeteria Plan Favor Highly Compensated Employees?
6
What Benefits Can a Cafeteria Plan Provide?
7
What Benefits Can a Cafeteria Plan Not Provide?
7
Individual Insurance Policies
How Are Cafeteria Plan Benefits Funded?
Employer Contributions and Affordability
8
8
9
How Do Employees Make Elections Under a Cafeteria Plan?
9
When Are Elections and Election Changes Effective?
10
Can Employees be Automatically Enrolled in a Cafeteria Plan?
10
Are Evergreen Elections Permitted?
10
Can New Hires Receive Benefits on a Retroactive Basis?
11
Can Employees Change their Pre-Tax Elections During the Year?
11
What Events Will Allow Employees to Change Their Elections?
11
IRS Expands Change In Election Rules
Does the Election Change Have to Be Consistent with the Event?
12
13
How Long Does the Employee Have to Make an Election Change?
14
How Are Election Changes Documented?
14
How Should FMLA Leave Be Administered Under the Cafeteria
Plan?
14
How are Benefits Paid During FMLA Leave?
15
Prepay Option
15
Pay-As-You-Go Option
16
Catch-Up Option
16
What Are the Reporting Requirements for a Cafeteria Plan?
17
DCSA Reporting
17
Form 5500 Filing
17
What is a Simple Cafeteria Plan?
17
What are the Requirements for a Simple Cafeteria Plan?
18
Eligibility and Participation Requirement
18
Minimum Contribution Requirement
19
APPENDIX
Glossary of Abbreviations
20
Cafeteria Plan Checklist
21
Change in Election Form
23
Non-Discrimination Testing Chart
27
Updated: July 2015
RELATED EMPLOYER GUIDE AND TOOLS



ERISA Reporting: An Employer Guide
ERISA Disclosure: An Employer Guide
Spending Accounts: An Employer Guide
WHAT IS A CAFETERIA PLAN?
Cafeteria plans provide a special exception to general federal income tax rules applicable to an employee’s
income. Cafeteria plans allow employees to select among a variety of nontaxable benefits and cash.
Generally, this choice takes the form of allowing employees to purchase benefits, such as health insurance,
with pretax dollars. This allows employees to have more take-home pay. Cafeteria plans are governed by
Section 125 of the Internal Revenue Code (IRC).
ARE ALL CAFETERIA PLANS THE SAME?
While all cafeteria plans must meet certain requirements of Section 125, not all cafeteria plans are the
same. The simplest form of cafeteria plan is a premium only plan. This type of cafeteria plan allows
employees to pay for their share of premiums with pre-tax dollars. An employer can also combine the
premium payment feature with a health care spending account (HCSA, also known as a health flexible
spending account) and/or a dependent care spending account (DCSA). A HCSA is used to pay for certain
medical expenses that are not reimbursed elsewhere. A DCSA is used to reimburse certain dependent
care expenses, such as child care expenses, that allow the employee and his or her spouse to be gainfully
employed.
Additional information about spending accounts can be found in Spending Accounts: An Employer
Guide.
IS A PLAN DOCUMENT REQUIRED?
A "cafeteria plan" must satisfy several conditions. Regulations are clear that any failure to operate in
accordance with the terms of the plan or the requirements of Section 125 will disqualify the plan (it will not
be a cafeteria plan) and result in gross income to participants. In other words, if the cafeteria plan fails to
follow the rules anyone participating in the plan will lose the tax benefits he or she would have otherwise
received.
The first condition that the cafeteria plan must satisfy is that it must be established pursuant to a written
plan instrument. The rules are clear that cafeteria plans, and any amendments to them, must be set out in
writing.
This document may or may not be an Employee Retirement Income Security Act of 1974 (ERISA) plan
document, depending on the benefit options. For example, a cafeteria plan with a HCSA will be subject to
ERISA, but other cafeteria plans will not be. If the plan is subject to ERISA, it must satisfy the ERISA
disclosure and reporting obligations (e.g., summary plan descriptions). Even if the cafeteria plan is not
subject to ERISA, the component benefit options may be ERISA plans.
Whether subject to ERISA or not, a cafeteria plan document must describe plan terms, election rules, and
plan administration procedures. These provisions generally will constitute the "contract" between
employer/plan sponsor and the employees. In addition, the IRS will examine the plan document in the event
of an audit.
This plan document must describe the maximum amount of employer contributions available to any
individual by stating the maximum amount of elective contributions available to any employee under the
plan. The term "elective contributions" refers to amounts contributed to a cafeteria plan through salary
reduction. For this purpose, the plan may state the maximum as a flat dollar amount or a percentage of
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compensation, or the plan may simply state the method used to determine the maximum dollar or
percentage limit.
The cafeteria plan must be adopted and effective on or before the first day of the plan year to which it
relates. Any amendments to the cafeteria plan can only be effective for periods after the later of the
adoption date or the effective date of the amendment. The terms of the plan must apply uniformly to all
participants. The plan document may be comprised of multiple documents.
Tip: While there are many decisions that must be made when setting up a cafeteria plan, the
following are the basic steps:
1. Decide on the design features of the cafeteria plan such as eligibility, which premiums can be
paid on a pre-tax basis, will employees receive cash if they waive benefits, etc.
2. If there will be a HCSA or DCSA, decide who will administer the benefits (e.g., pay claims,
etc.).
3. Prepare plan documents.
4. Adopt the plan through board resolution (adoption of a cafeteria plan generally requires the
same kind of documentation that an entity uses for other major business actions).
5. Distribute communication materials to employees.
6. Obtain employee elections.
7. Set up payroll to take pre-tax elections.
WHAT INFORMATION IS INCLUDED IN THE PLAN DOCUMENT?
According to the regulations, a cafeteria plan document must contain the following information:
•
A specific description of each of the benefits available through the plan as well as the periods of
coverage (the periods during which the benefits are provided);
•
The plan’s rules governing participation;
•
The procedures governing employees’ elections under the plan, including the period when elections
may be made, the periods with respect to which elections are effective, and providing that elections
are irrevocable (except to the extent that the change in status rules (as discussed below) are
included in the plan);
•
The manner in which employer contributions may be made under the plan;
•
The maximum amount of employer contributions available to any employee through the plan. This
is accomplished by stating the maximum amount of salary reduction (elective) contributions
available under the plan, and, if the cafeteria plan permits contributions to 401(k) plans, the
maximum amount of elective deferrals available.
•
The plan year;
•
If the plan offers paid time off, the required ordering rule for the use of non-elective and elective
paid time off;
CAFETERIA PLAN EMPLOYER GUIDE
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•
If the plan includes HCSAs, a grace period, or distributions from a HCSA to employees’ Health
Savings Accounts (HSAs), the plan’s provisions complying with the specific requirements of those
benefits.
WHAT IF THERE IS NO PLAN DOCUMENT?
The Internal Revenue Service (IRS) has always characterized pre-tax deductions from income in the
absence of a cafeteria plan document as impermissible and the regulations make this abundantly clear.
Without a plan document, the IRS takes the position that the employer has under-withheld the taxes for
participating employees. Such under-withholding could lead to payroll tax underpayment and IRS penalties.
The rules provide that if there is no cafeteria plan document, if the document does not satisfy each of the
plan document requirements, or if the plan fails to operate in accordance with the terms of the plan or
Section 125 rules, the plan is not a cafeteria plan and an employee’s election between taxable and nontaxable benefits results in gross income to the employee.
WHAT ACTIONS COULD JEOPARDIZE A CAFETERIA PLAN?
If the plan fails to operate in accordance with the terms of the plan or Section 125 rules, known as an
operational failure, then it could jeopardize the cafeteria plan’s preferential tax treatment. Examples of
operational failure include, but are not limited to:
•
Offering benefits under the plan other than those permitted;
•
Operating to defer compensation;
•
Allowing employees to revoke or make new elections, except as provided under the rules and/or
terms of the plan;
•
Reimbursing ineligible expenses in a HCSA or DCSA; or
•
Failing to comply with the substantiation requirements for a HCSA or DCSA.
WHAT IS A CAFETERIA PLAN’S PLAN YEAR?
The plan document must specify the plan year and the plan year must be twelve consecutive months,
unless there is a short plan year (i.e., a plan year that is less than 12 months). The plan year can begin on
any day of any calendar month but, if the plan year is not the calendar year, it must end on the preceding
day in the immediately following year. The plan year can be changed and a short plan year of less than
twelve consecutive months is permitted but only for a valid business purpose. Usually, the plan year is the
coverage period for benefits provided through the cafeteria to which annual elections for these benefits
apply.
WHO CAN PARTICIPATE IN A CAFETERIA PLAN?
All individuals eligible to participate in a cafeteria plan must be employees. Although former employees
may participate, a cafeteria plan may not be established or maintained predominantly for the benefit of
former employees.
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In all cases where the employee is actually participating in the cafeteria plan, spouses and other family
members can be provided tax-favored qualified benefits under the cafeteria plan if they meet certain tax
code requirements and also meet the plan’s dependent eligibility requirements. Individuals who are
identified in IRC Section 105(b) are eligible for nontaxable health benefits. The individuals identified in
Section 105(b) include the employee, of course, and the employee’s spouse. Those individuals also
include, for a calendar year, any of the employee’s children who will have not attained age 27 by the end of
the year, as well as any of the employee’s Section 105(b) dependents.
Note: Per Revenue Ruling 2013-17, the term spouse, as used in this Employer Guide,
includes an individual married to a person of the same sex if the couple is lawfully married
under state law. Under the ruling, the IRS will treat two same-sex individuals as one another’s
spouses if their marriage was legal in the state, territory or foreign country where it occurred
even if they live in a state that does not recognize same-sex marriages.
For a same-sex marriage to be recognized, it must have occurred in a state, territory or foreign
country that authorized same-sex marriages at the time. Couples that have entered into other
similar relationships (e.g., domestic partnerships and civil unions) will not be treated as
spouses for federal tax purposes.
While these individuals may receive cafeteria plan benefits as plan beneficiaries, they do not have election
rights (they may not choose the benefits or change elections). The spouse or dependents of employees
may not be participants in a cafeteria plan unless they are also employees.
WHO IS A SECTION 105(B) DEPENDENT?
This group includes any individuals that an employee can claim as dependents on an income tax return
plus a few individuals who do not qualify as tax dependents for reasons specified in Section 105(b).
Applying the Section 105(b) modifications to the definition of tax dependent results in a Section 105(b)
dependent being anyone who is either a Section 105(b) child or a Section 105(b) relative.
An individual generally is an employee’s “Section 105(b) child” for the year if ALL SIX of the following
requirements are met:
1. The individual is the employee’s child, sibling or step-sibling, or is a descendant of the
employee’s child, sibling or step-sibling
An employee’s child is the son, daughter, stepson or stepdaughter of the employee, with these
children including both legally adopted children and children placed for adoption. A child also
includes an “eligible foster child,” defined as an individual who is placed with the employee by
an authorized placement agency or by judgment, decree or other order of any court of
competent jurisdiction.
2. The individual has the same principal abode as the employee for more than one-half of the year
3. At the end of the year, the individual is less than 19 years old (24, if a “student”) or is
permanently disabled
CAFETERIA PLAN EMPLOYER GUIDE
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Tip: A student must be full-time for at least 5 calendar months or pursuing full-time onfarm training under prescribed supervision.
4. The individual does not provide more than one-half of his or her own support for the year
5. The individual has not filed a joint tax return (other than for a refund claim) with his or her
spouse for the year
6. The individual is a citizen or national of the United States, or a resident of the United States or
of a country contiguous to the United States
Tip: A special residency/citizenship rule applies to a child who has been legally adopted
or lawfully placed for adoption.
An individual is not a qualifying child of any other taxpayer “if the individual’s parent (or other
person with respect to whom the individual is defined as a qualifying child) is not required by
section 6012 to file an income tax return and (i) does not file an income tax return, or (ii) files an
income tax return solely to obtain a refund of withheld income taxes.”
An individual generally is an employee’s “Section 105(b) relative” if ALL FOUR of the following
requirements are met:
1. The individual is the employee’s relative by either blood or marriage, or has the same principal
abode as the employee and is a member of the employee’s household for the tax year.
An employee’s relative is any of the following: (1) the employee’s child, stepchild, foster child or
descendant of any of these; (2) the employee’s brother, sister, stepbrother or stepsister; (3) the
employee’s father or mother, or an ancestor of either; (4) the employee’s stepfather or
stepmother; (5) the son or daughter of the employee’s brother or sister; (6) the brother or sister
of the employee’s father or mother; (7) the employee’s son-in-law, daughter-in-law, father-inlaw, mother-in-law, brother-in-law, or sister-in-law.
2. The employee provides over one-half of the individual’s support for the year.
3. The individual is not, for the taxable year, anyone’s “qualifying child” as defined above.
4. The individual is a citizen or national of the United States, or a resident of the United States or
of a country contiguous to the United States.
WHO CAN NOT PARTICIPATE IN A CAFETERIA PLAN?
Independent contractors, sole proprietors, partners, non-employee directors (those solely serving on a
corporation’s board of directors), and those owning more than two percent of an S corporation are considered
self-employed, and they may not participate in a Section 125 plan. In some cases, self-employed individuals’
family members are also ineligible due to ownership attribution rules, even if the family members are also
employees of the employer. Of course, the businesses owned by these self-employed persons can maintain a
cafeteria plan for their employees.
CAFETERIA PLAN EMPLOYER GUIDE
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ARE THERE DISCLOSURE REQUIREMENTS FOR A CAFETERIA
PLAN?
The IRC does not impose specific requirements as to what information must be disclosed to participants.
ERISA disclosure rules (which would require a summary plan description or a summary of material
modifications) do not apply to premium only plans or DCSAs (although the rules that apply to DCSAs
require that “[r]easonable notification of the availability and terms of the program shall be provided to
eligible employees.”) Other benefits offered under the cafeteria plan may also be subject to ERISA. For
example, a HCSA is generally subject to ERISA requirements.
IS THE CAFETERIA PLAN SUBJECT TO ERISA?
A stand-alone premium only cafeteria plan is not an ERISA welfare plan. However, since employee
contributions to a premium-only cafeteria plan are considered contributions to the underlying medical or
other ERISA plan they are deemed ERISA "plan assets." The contributions become plan assets "as of the
earliest date on which such contributions can reasonably be segregated from the employer’s general
assets." According to Department of Labor (DOL) regulations, this time period is a maximum of 90 days.
However, the DOL mandates a shorter period if it can be demonstrated that an employer's payroll system is
able to segregate contributions more quickly. Once contributions become plan assets, all persons who have
discretion or control over the contributions are subject to the fiduciary standards of ERISA with respect to
those amounts.
In applying the ERISA fiduciary standards, however, the DOL recognizes the special status of cafeteria
plans, and provides a policy of non-enforcement as to one fiduciary obligation (holding plan assets in trust)
and certain ERISA reporting requirements. Under the policy, the DOL will not assert a violation, or assess a
civil penalty, solely because of failure to hold participant contributions in trust or to comply with certain
ERISA reporting requirements for plans receiving participant contributions.
CAN A CAFETERIA PLAN FAVOR HIGHLY COMPENSATED
EMPLOYEES?
A cafeteria plan must meet certain nondiscrimination requirements to maintain its tax-advantaged features.
A plan sponsor needs to assure that the cafeteria plan is not discriminatory in favor of key employees
and/or highly-compensated employees. Discrimination generally will not jeopardize Section 125 plan status;
although egregious violations might cause a plan to be "disqualified." In most cases discrimination problems
usually cause only the value of taxable plan benefits to become taxable income to the affected key or
highly-compensated employees — still a very unpopular result. Discrimination also could cause employee
relations problems at all levels.
The plan must generally meet the following three nondiscrimination requirements:
1.
2.
3.
The cafeteria plan must not discriminate in favor of highly compensated individuals as to ability to
participate;
The cafeteria plan must not discriminate in favor of highly compensation participants as to
contributions or benefits paid; and
Contributions under the cafeteria plan must satisfy a concentration test that looks at the contributions
made by key employees.
CAFETERIA PLAN EMPLOYER GUIDE
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A cafeteria plan must meet all of these tests to avoid creating taxable income for highly compensated
employees.
WHAT BENEFITS CAN A CAFETERIA PLAN PROVIDE?
Only qualified benefits can be offered under a cafeteria plan. A benefit will be a "qualified benefit" for
purposes of Section 125 of the IRC if:
•
The benefit (with an important exception) does not defer the receipt of compensation; and
•
The benefit is excludable from gross income by reason of
one of several specified IRC sections.
Qualified benefits include:
Tip: Paying premiums for
disability plans on a pre-tax
basis will result in the benefits
received being subject to income
tax.
•
Health plans (including HCSAs) (IRC Sections 105 and
106)
•
Disability income plans (including long-term disability and short-term disability) (IRC Sections 105
and 106)
•
Accident plans (including accidental death and dismemberment) and business travel and accident
plans (IRC Sections 105 and 106)
•
Dependent care assistance (IRC Section 129)
•
Group-term life insurance (IRC Section 79)
•
Section 401(k) plan contributions (an exception to the
rule on no deferral of income).
•
Paid time off buy and sell plans
•
Adoption assistance plans
•
Premiums for COBRA continuation coverage (if
excludible under Section 106) under the accident and
health plan of the employer sponsoring the cafeteria
plan or premiums for COBRA continuation coverage of
an employee of the employer sponsoring the cafeteria
plan under an accident and health plan sponsored by
a different employer
•
Contributions to Health Savings Accounts (HSAs)
Tip: Section 79 allows an employer to
provide each of its employees up to
$50,000 in tax-free term life insurance
coverage. Group life insurance is a
qualified benefit even if the total
coverage amount exceeds $50,000.
Group-term life insurance that is
combined with permanent benefits
cannot be included in a cafeteria plan.
Employers must consider imputed
income issues for amounts over
$50,000 when all or a portion of the
insurance is provided through a
cafeteria plan.
WHAT BENEFITS CAN A CAFETERIA PLAN NOT PROVIDE?
Regardless of whether such benefits are purchased with after-tax employee contributions, the following
benefits are “nonqualified benefits” and may not be offered in a cafeteria plan:
•
Archer medical savings accounts (IRC Section 220)
•
Group term life insurance on the life of any individual other than the employee (e.g. employerprovided dependent life insurance benefits)
CAFETERIA PLAN EMPLOYER GUIDE
7
•
Benefits under qualified tuition reduction programs (IRC Section 117)
•
Educational assistance programs (IRC Section 127)
•
Certain fringe benefits (IRC Section 132)
•
Elective deferrals to Section 403(b) plans
•
Long-term care insurance or services
•
Employer-provided meals and lodging (Section 119)
•
Health reimbursement arrangements (HRAs) that provide reimbursements up to a maximum dollar
amount for a coverage period and that all or any unused amount at the end of the period is carried
forward to increase the maximum reimbursement amount in subsequent coverage periods
INDIVIDUAL INSURANCE POLICIES
IRS Notice 2013-54 and accompanying Q&A and other guidance make clear the agency’s position that
arrangements designed to fund the purchase of individual insurance policies with pre-tax employee
contributions via a cafeteria plan or tax-preferred reimbursement with employer contributions are not
permitted on or after the first day of the 2014 plan year. The Department of Labor (DOL) has issued
comparable guidance in the form of technical release 2013-03.
Affected by this guidance is any employer-based arrangement that facilitates the payment or
reimbursement of premiums for individual coverage, named “employer payment plans”, regardless of:
• Whether the arrangement pays the premium directly to the carrier or reimburses the individual,
• Whether the arrangement pays or reimburses other expenses, and
• Whether or not the individual coverage is part of a public exchange.
Also affected by this guidance would be any defined contribution reimbursement arrangements such as
HRAs and health care spending accounts (HCSAs).
The agencies advised that an employer payment arrangement (whether an ERISA plan or not) which
reimburses employees for the cost of an individual health insurance policy or other form of health coverage
(either purchased through the Marketplace or obtained outside of the exchanges) fails to satisfy PPACA
market reforms, regardless of whether:
•
The employer contributions are provided by operation of a cafeteria plan or outside of a cafeteria
plan; or
•
The contributions are made on a pre-tax or a post-tax basis.
HOW ARE CAFETERIA PLAN BENEFITS FUNDED?
Under IRC Section 125, participants may make an election between benefits and otherwise taxable
compensation. While the cost of coverage is typically paid by employees through salary reductions,
employers are permitted to contribute to the cost of benefits.
Employees may reduce salary on a pre-tax basis (i.e., salary reduction) or be permitted to contribute aftertax dollars (i.e., payroll deduction) to pay for benefits. Employers may offer participants credits or
contributions toward the purchase of cafeteria plan benefits. The employer contributions can take a variety
of forms such as a match on employee contributions or as “seed money.” They may also be discretionary
credits allocated by employees toward elected benefits or, in some cases, cashed out. Finally, an employer
may make additional contributions for employees who forgo certain “core” benefits. These contributions can
CAFETERIA PLAN EMPLOYER GUIDE
8
be used to fund other benefits and in some cases may also be received as additional taxable
compensation.
Employers may utilize one or more of these funding mechanisms to achieve the desired result.
EMPLOYER CONTRIBUTIONS AND AFFORDABILITY
Under PPACA individual mandate requirements, an employee is exempt from having to obtain minimum
essential coverage or pay a penalty if the cost of the employee’s employer-sponsored health coverage
exceeds 8% of the employee’s household income (subject to indexing), based on the lowest cost self-only
coverage for the employee and the lowest cost family coverage for the employee’s spouse and dependents.
The IRS has issued guidance that addresses how certain “collateral” employer contributions to employee
health benefits affect the affordability of an employee’s health plan contributions for individual mandate
purposes.
If an employer contributes to a cafeteria plan, the amount of those contributions is viewed as lowering the
amount of the employee’s contribution to the employee’s health coverage under the employer’s primary
health plan for purposes of determining the affordability of that coverage, if:
•
•
•
The employee cannot take those employer contributions as a taxable benefit (either as cash or a
benefit provided under the cafeteria plan that is taxable to the employee);
The employer contributions may be used by the employee to purchase MEC; and
The employee may only use the employer contributions to pay for medical care (within the meaning
of IRC Section 213).
In the view of the IRS, if an employee’s nontaxable employer contributions to a cafeteria plan are not limited to
medical expenses, it cannot be assumed that the employee will use those contributions to purchase minimum
essential coverage.
The IRS guidance was specific to the affordability requirements for purposes of the individual mandate. The
regulations do not address how employer contributions that an employee may elect to use for health coverage
are treated under the employer shared responsibility provisions. In order to avoid penalties under health care
reform’s employer shared responsibility provisions, applicable large employers (i.e., those with 50 or more fulltime employees, including full-time equivalent employees, during the preceding year) must offer minimum
essential coverage that is of minimum value and affordable. Coverage is deemed affordable for an employee
if the employee’s required contribution does not exceed 9.5% (subject to indexing adjustments) of the
employee’s household income.
HOW DO EMPLOYEES MAKE ELECTIONS UNDER A
CAFETERIA PLAN?
To be a cafeteria plan, employees must be permitted to make elections for the plan year among the
permitted taxable benefits and qualified benefits offered under the plan. Elections must be made before the
earlier of the date when the taxable benefits are currently available to the employee or the first day of the
plan year. Subject to certain exceptions, such annual elections are irrevocable for the plan year. These
exceptions are discussed in more detail below.
Elections are not required to be in writing. Under the rules, new elections and election changes may be
made electronically (e.g. via the telephone or computer). The rules under which pension plans must
administer certain electronic notices and elections (Treas. Reg. Section 1.401(a)-21) apply to cafeteria
plans as a safe harbor for valid electronic cafeteria plan elections.
CAFETERIA PLAN EMPLOYER GUIDE
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WHEN ARE ELECTIONS AND ELECTION CHANGES
EFFECTIVE?
The plan document must address the timing of participant elections and when they are effective.
Employees may never make Code Section 125 plan elections that defer compensation already earned. In
other words, cafeteria plan elections may never take effect retroactively.
The same cafeteria plan rules apply for mid-year election changes. Retroactive elections (and election
changes) are generally not permissible except for certain new hires (explained below) and the retroactive
special enrollment right under HIPAA that applies to a child’s birth, adoption, or placement for adoption. For
example, if an employee has a baby and returns an election form within 30 days, coverage will be effective
back to the baby’s date of birth (although contributions for the coverage will only take effect for payroll
periods after an election form is received and processed by HR).
The rules do not specify as to when a requested election change must be effective but due to the general
prohibition on retroactive elections, unless there is a special exception (such as for medical coverage of a
new born baby under HIPAA) the election change will be effective as soon as the election form is received
and processed by HR.
CAN EMPLOYEES BE AUTOMATICALLY ENROLLED IN A
CAFETERIA PLAN?
The IRS first officially approved automatic enrollment procedures (e.g. default elections) for cafeteria plans
in Revenue Ruling 2002-27. The proposed regulations confirm that default elections are permissible (but
not required).
It is permissible for an employer plan to automatically provide each employee with employee-only coverage
under Section 125 as long as the employee has the choice to take the coverage or opt out of coverage and
receive taxable cash in lieu of the benefit. Employers who use this type of election method must provide
adequate notice to employees. The procedures include providing employees with notice at the time of hire
and before the beginning of each plan year with:
•
An explanation of the plan’s automatic enrollment process and the employee’s right to decline
coverage;
•
The amounts that will be reduced from the employee’s salary;
•
An explanation about how employees can decline coverage;
•
Information about when elections must be made;
•
The effective period for elections; and
•
An explanation of the employee’s existing coverage, if any.
ARE EVERGREEN ELECTIONS PERMITTED?
The proposed regulations also confirm that automatic or “evergreen” elections are permitted. These are
elections that continue from plan year to plan year unless the employee makes an election to not participate
CAFETERIA PLAN EMPLOYER GUIDE
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in the plan (or to change his or her current election). Open enrollment materials must be distributed each
year to all participants and the use of evergreen elections should be disclosed to participants (in the plan
summary, in open enrollment materials, etc.).
CAN NEW HIRES RECEIVE BENEFITS ON A RETROACTIVE
BASIS?
Generally, elections and election changes must be made on a prospective basis (meaning that the election
must be made before the first day of the coverage period (e.g., plan year) for which the benefits are to be
provided). An exception exists for elections or election changes due to birth, adoption, or placement for
adoption. The regulations also allow retroactive coverage for new hires. A cafeteria plan can give new
hires a 30-day grace period following their date of hire to make an election under the cafeteria plan. This
rule does not extend to rehires or employees who are newly eligible. Although the election can be effective
as of the employee’s date of hire, pre-tax deductions for that coverage cannot be effective with respect to
compensation that is available on the date of the election (salary reductions to pay for elected benefits must
be taken from compensation that is not yet currently available when the election is made).
CAN EMPLOYEES CHANGE THEIR PRE-TAX ELECTIONS
DURING THE YEAR?
In general, an employee’s election for the year is irrevocable. However, an employee may be eligible to
make a mid-year change in election upon the occurrence of certain qualifying events. The IRS does not
require any plan sponsor to allow cafeteria plan election revocations. Instead, plan sponsors are permitted
to adopt cafeteria plan provisions that allow changes. The employer is free to disregard some change-instatus events. The employer also can impose stricter consistency requirements, or it can disallow certain
election changes. Many employers wish to allow all of the changes that the IRS permits to give participants
the maximum available flexibility. Other employers prefer to only allow legally-mandated election changes
to simplify plan administration. The plan document should specify which qualifying events it will recognize
and should be consulted when questions arise.
WHAT EVENTS WILL ALLOW EMPLOYEES TO CHANGE THEIR
ELECTIONS?
The following are qualifying events that may allow an employee to change his or her election mid-year:
1.
2.
3.
4.
5.
6.
Change in employee’s legal marital status (e.g., marriage, divorce, death of spouse, etc.)
Change in number of employee’s dependents (e.g., birth, adoption, or placement for adoption of a
child of the employee)
A dependent satisfies or ceases to satisfy the dependent eligibility requirements (e.g., due to
attainment of age, student status, or any similar circumstance). For purposes of a dependent care
election, this would include a change in the number of dependents whose care can be reimbursed
on a tax-favored basis
Change in employment status of the employee, spouse or dependent (e.g., termination or
commencement of employment, strike or lockout, change in worksite, commencement or return
from an unpaid leave of absence)
Change in residence of employee, spouse or dependent
Reduction in hours (see details below)
CAFETERIA PLAN EMPLOYER GUIDE
11
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Enrollment in Marketplace/Exchanges (see details below)
COBRA qualifying events
With respect to adoption assistance elections (provided through a cafeteria plan), the start or
ending of an adoption proceeding.
Change in cost that results in automatic increases/decreases in elective contributions
A significant change in cost
Tip: A pay cut does not trigger
the change in cost rules.
The addition or significant improvement of a benefit package option
A coverage change made under the plan of another employer (e.g., an election change made
during the open enrollment of an employee’s spouse)
A change in an employee’s, spouse’s or dependent’s entitlement (gain or loss) for Medicare or
Medicaid
A loss of group health coverage sponsored by a governmental or educational institution
Significant coverage curtailment (overall reduction), with or without a loss of coverage
HIPAA Special Enrollment Rights
Judgments, decrees or orders (including Qualified Medical Child Support Order) resulting from
divorce, legal separation, annulment or change in legal custody
FMLA leaves of absence
401(k) election changes (a cafeteria plan can permit a participant to modify or revoke an election of
contributions under a qualified cash or deferred arrangement as permitted or required under the
terms of the Section 401(k) plan)
Tip: No mid-year election change should be allowed due to a change-in-status unless the
employer can answer "yes" to three questions:
•
Has a change-in-status event occurred?
•
Did that change-in-status event affect the eligibility of the employee, spouse, or
dependent for an employer’s plan? (In the case of a dependent care election: did that
change-in-status event affect the employee’s dependent care expenses that meet IRS
requirements for tax-favored treatment? In the case of an adoption assistance election:
did that change-in-status event affect the employee’s adoption expenses that meet IRS
requirements for tax-favored treatment?)
•
Is the election change the employee is requesting on account of and corresponding with
the change-in-status event?
For specific information on what changes can be made (and how the rules apply to certain benefits), please
see the "Mid-Year Election Change Chart" located on Willis Essentials.
IRS EXPANDS CHANGE IN ELECTION RULES
In Notice 2014-55, the IRS expands upon the events that will allow an employee to change his or her pretax elections. Note that the guidance below does NOT impact health flexible spending account elections.
The rules were expanded to allow participants to revoke their pre-tax elections due to a reduction in hours
and due to enrollment in the Marketplace/Exchange.
CAFETERIA PLAN EMPLOYER GUIDE
12
•
•
Reduction in hours. If an employee had been reasonably expected to average at least 30 hours of
service per week, but there was a later change in the employee’s status so that the employee
actually averages fewer than 30 hours of service per week, then, even if the reduction does not
result in the employee ceasing to be eligible under the group health plan, the employee may revoke
coverage. The revocation is only permitted if the individuals losing coverage because of the
revocation receive coverage under another plan that provides minimum essential coverage, and the
new coverage must be in place by the first day of the second month following the month in which
the prior coverage is revoked. The cafeteria plan may rely on the employee’s reasonable
representation that he or she (and any related individuals who are revoking coverage) has enrolled
or will enroll in another health plan that provides minimum essential coverage within the required
timeframe.
Enrollment in the Marketplace/Exchange. If an employee qualifies for a Special Enrollment Period
to enroll in the Marketplace/Exchange, OR if an employee chooses to enroll in the
Marketplace/Exchange during the Exchange’s annual open enrollment, then the group health plan
coverage may be revoked for the employee and his/her dependents, and the individual(s) may
enroll in the Marketplace/Exchange and may choose coverage that is effective no later than the day
immediately following the last day of the prior coverage that was revoked. A cafeteria plan may rely
on the employee’s reasonable representation that the employee and any related individuals who
are revoking coverage have enrolled or will enroll in coverage through the Marketplace within the
required timeframe.
This guidance was effective on September 18, 2014 and applies on a prospective basis to revocations of
coverage after September 18, 2014 (plan sponsors may not permit employees to retroactively revoke
coverage).
Employers choosing to broaden their cafeteria plan change-in-election rules must amend their existing
cafeteria plan documents to allow the above flexibility. The guidance provides for a special window of
opportunity that allows implementation of this guidance in 2014 as long as the cafeteria plan is amended
on/before the last day of the plan year that begins in 2015. After 2015, the amendment must be adopted
on/before the last day of the plan year in which the changed elections are permitted, and the plan
amendment may be effective retroactively to the first day of the plan year. As always, employers must
inform plan participants of this plan change.
DOES THE ELECTION CHANGE HAVE TO BE CONSISTENT
WITH THE EVENT?
Any changes in election must be consistent with, and on account of, the qualifying event. For example, if
an employee has family coverage under the medical plan and later has a baby, dropping from family to
employee-only coverage would not be consistent with the addition of a dependent. The “on account of”
requirement is intended to address the timing of an election change; a request to make a new election six
months after the birth of a child would not be on account of that change in status. All changes must be as a
result of the qualifying event.
Example A: An employee has family coverage for himself, his spouse, and his dependent under
the medical plan. Dependent children are eligible under the medical plan until they turn age 26.
Under this scenario, a change in status occurs when the child turns age 26. A prompt change from
family to employee plus spouse coverage is consistent with and on account of the change in status
because the dependent is no longer eligible to be covered under the plan. However, if the
dependent turns age 26 in May, a change in election in October would be too long after the date of
the event to be considered “on account of” the change in status. Additionally, had the dependent
CAFETERIA PLAN EMPLOYER GUIDE
13
not been covered under the medical plan when eligible, his turning age 26 would not have been a
qualifying event that would allow the employee to make an election change.
Example B: An employer offers the choice between a medical PPO or indemnity plan. An
employee is currently enrolled in the PPO. If the employer adds an HMO option, a change in
coverage will occur to the employee. A prompt change in coverage to the new HMO is consistent
with and on account of such coverage change. However, a change from the PPO to the indemnity
plan would not be consistent with the addition of the HMO.
The plan administrator has discretion in determining whether a qualifying event has occurred, and the
extent to which an election change is permissible, consistent with Code Section 125.
HOW LONG DOES THE EMPLOYEE HAVE TO MAKE AN
ELECTION CHANGE?
The rules do not address how long a participant has after a permitted event to request a change of election.
However, in order to comply with the “on account of and
consistent with” rules the election request should not be too far
Tip: Many plans give participants
removed from the event. The amount of time a participant has
30 or 31 days to submit an election
to submit an election change request should be addressed in the
change request.
plan document.
HOW ARE ELECTION CHANGES DOCUMENTED?
IRS regulations do not address what kind of documentation employers must maintain to substantiate
election adjustments. For many plans, the participant merely fills out a "change form" indicating the reason
for the change, with no attached documentation at all. Other plans require the same type of proof that an
insurance carrier might request: marriage certificate, birth certificate, divorce decree, death certificate, or
other written proof. Because the law does not specify what constitutes acceptable proof, plan sponsors
have some latitude to establish policies on acceptable proof for plan purposes.
At a minimum, plan sponsors should require that appropriate plan forms are completed and signed
whenever a request is made to change a Section 125 election. The form should briefly describe the
situation and require the employee’s signature attesting to the accuracy of the event. The plan sponsor
might also require that documentation be attached to the form (for example, a marriage certificate)
depending on the event. The plan sponsor, of course, must treat all participants in a uniform fashion and,
for each type of event, should require the same documentation from each person who submits a status
change request based on that event. The IRS does examine documentation of election changes in cafeteria
plan audits.
A sample Cafeteria Plan Change in Election Form is included in the Appendix.
HOW SHOULD FMLA LEAVE BE ADMINISTERED UNDER THE
CAFETERIA PLAN?
CAFETERIA PLAN EMPLOYER GUIDE
14
When a participant is on an unpaid leave of absence, like the Family Medical Leave Act (FMLA), there is no
longer a way for the employer to collect employee contributions for the benefit plans or spending accounts.
However, under FMLA employers must allow the employee to maintain coverage.
A basic tenet of cafeteria plans is the irrevocability of plan elections. As discussed above, the IRS does
recognize exceptions to this rule and will permit revocations due to certain changes-in-status. The IRS
FMLA regulations recognize, however, that the FMLA gives employees taking unpaid FMLA leave an
independent right to revoke their elections (distinct from any change-in-status), as well as a right to
reinstatement of their elections upon returning from FMLA leave. (Employees taking paid FMLA leave do
not have this independent right to revoke their elections or discontinue health coverage during FMLA
leave.)
The rules allow an employer to choose between:
(1) offering employees taking unpaid FMLA leave the option to discontinue their health coverage
during the leave, and
(2) requiring employees taking unpaid FMLA leave to continue receiving health coverage during the
leave, but offering such employees the option to discontinue making any contributions during the
leave and pay required premiums upon returning from the leave.
If the employees terminate plan participation at any time during the FMLA period, the employer can require
the employees to reinstate their health coverage upon return from FMLA leave, provided employees
returning from non-FMLA leave are also required to resume participation upon their return.
HOW ARE BENEFITS PAID DURING FMLA LEAVE?
IRS regulations contain rules governing arrangements for payment of health insurance costs while an
employee is on unpaid FMLA leave. (These payment regulations do not apply in situations where the
employee takes paid FMLA leave. During paid leave, the employee’s share of the premiums would be paid
by the method normally used during any other paid leave.)
The regulations authorize three methods for employees who are making premium payments under a
cafeteria plan to make their required contributions while on unpaid leave. A cafeteria plan may, on a
nondiscriminatory basis, offer up to three payment options.
For more information on FMLA, please see FMLA Administration: Employer Guide available on Willis
Essentials.
PREPAY OPTION
Under the prepay option, a cafeteria plan may permit an employee to pay, prior to commencement of the
FMLA leave period, the amounts that will be due for coverage during the FMLA leave period. The IRS
warns that under the DOL’s FMLA regulations, employers may not mandate that employees prepay the
amounts due for the leave period. The regulations also indicate that the prepay option can never be the
only option available to employees on FMLA leave.
Contributions under the prepay option may be made, for any portion of the leave that will be completed in
the then-current cafeteria plan year, on a pretax salary reduction basis from any taxable compensation. As
an example of taxable compensation, the IRS cites the "cashing-out" of unused sick pay or vacation time
CAFETERIA PLAN EMPLOYER GUIDE
15
(when permitted by the employer) as an appropriate way to fund the prepayment of group health plan
premiums or health care spending account contributions. The rules also permit the prepayment of these
amounts on an after-tax basis. Employees may not use the prepay option for leave periods extending into
another plan year. This would be a violation of the deferred compensation rule.
The IRS regulations address what happens when an employee’s FMLA leave covers parts of two different
plan years. In that situation, the cafeteria plan cannot operate in a way that would enable employees to
defer compensation from one cafeteria plan year to the next.
Example: An employee, Adam, elects health coverage under a calendar year cafeteria plan.
Adam’s premium for health coverage is $100-per-month. Adam takes 12 weeks of FMLA leave
commencing on October 31 (after already paying 10 months of premiums, or $1,000). Adam
chooses to use the "prepay" method of paying for his coverage during the leave by cashing in his
unused sick days. Under the prepay method, Adam may prepay the premiums due in November
and December on a pretax basis, but Adam would not be allowed to prepay his January payment
in the same way. If allowed to do so, he would be deferring compensation into the next cafeteria
plan year. If Adam chooses to participate in the cafeteria plan for the next year, he must use
either the pay-as-you-go or catch-up option to pay premiums for January.
PAY-AS-YOU-GO OPTION
Under the "pay-as-you-go" option, an employee on FMLA leave may pay his share of the premium
payments on the same schedule as payments would ordinarily be made if the employee were not on leave.
The IRS regulations also approve of other payment schedules permitted by FMLA regulations (such as
payment schedules for COBRA participants). An employer also may use premium payment schedules
already in place that govern contributions by employees in unpaid leave situations, and any other system
voluntarily established between the employer and employee that is consistent with applicable regulations.
Contributions under the pay-as-you-go system generally are made by the employee on an after-tax basis.
However, pretax payments are permitted to the extent that the contributions are made from taxable
compensation that is payable to the employee during the leave period (such as sick pay or vacation pay),
and provided all cafeteria plan requirements are satisfied.
If the pay-as-you-go option is offered to employees on non-FMLA unpaid leave, a cafeteria plan cannot
offer employees on FMLA leave a choice of either the prepay option or the catch-up option without also
offering the pay-as-you-go option.
Example: A participant has a baby on July 1. Under FMLA she is entitled to 12 weeks of
unpaid leave. She is enrolled in the medical plan and contributes $100 per month. If she is on
leave for July, August and September, she will have a total of $300 due. She may either send in
a check each month for $100, or she may have her employer withhold all $300 from her last
paycheck in June.
CATCH-UP OPTION
The catch-up option generally applies to two situations. First, an employee may elect to use this alternative
to fund his cafeteria plan payments while on FMLA leave. Second, the employer may use this method to
recoup premium payments it has made on behalf of the employee.
CAFETERIA PLAN EMPLOYER GUIDE
16
Under the catch-up option, the employer assumes responsibility for advancing payment of the premium on
the employee’s behalf during the FMLA leave with the mutual understanding that advanced amounts must
be repaid by the employee when he returns from the FMLA leave.
An employer also may use the catch-up method to recoup payments advanced without the employee’s
express consent. The IRS regulations reiterate that an employer is not required to continue the health
coverage of an employee who fails to make the required premium payments while on FMLA leave. Yet, an
employer must reinstate an employee to exactly the same level of benefits he had prior to FMLA leave. An
employer may find itself caught in the difficult position of persuading an insurance carrier to restore
coverage to original levels after a lapse in coverage. As a result, an employer will often pay for the
continuation of benefits during the leave period when an employee fails to make required contributions.
The catch-up option may be the sole choice offered to employees on FMLA leave if it is the only payment
arrangement an employer offers to employees in any unpaid leave situation. Contributions under the catchup option may be made on a pretax, salary reduction basis when the employee returns from FMLA leave.
Contributions under the catch-up option also may be made on an after-tax basis.
The regulations also permit employers to voluntarily waive, on a nondiscriminatory basis, the requirement
that employees who elect to continue health coverage while on FMLA leave pay the amounts the
employees would otherwise be required to pay for coverage during the leave period.
WHAT ARE THE REPORTING REQUIREMENTS FOR A
CAFETERIA PLAN?
DCSA REPORTING
The Plan Administrator shall furnish to each participant on or before January 31 each year a written
statement showing the amounts paid to the participant during the previous calendar year. In addition,
employee’s DCSA contributions must be reported on Section 10 of the W-2 Form.
FORM 5500 FILING
IRS Notice 2002-24 indefinitely suspended the requirement to file the Schedule F along with the Form
5500. The Schedule F had long been an IRS filing obligation for cafeteria plans, adoption assistance
programs and educational assistance plans. That means that cafeteria plans, along with educational and
adoption assistance plans, do not have a direct filing obligation (not since April 4, 2002).
Plan sponsors should note that, even though the IRS filing requirement for cafeteria plans has been
eliminated, the DOL requirement for “welfare benefits plans” remains in place. In other words, plan
sponsors must still file the Form 5500 for any welfare benefit plans that they offer (e.g., medical (including
HCSAs), dental, life insurance, disability, and vision plans), unless their plan qualifies for a DOL-recognized
filing exemption.
WHAT IS A SIMPLE CAFETERIA PLAN?
CAFETERIA PLAN EMPLOYER GUIDE
17
The health care reform law promotes the use of cafeteria plan programs to encourage small employers to
offer tax-free benefits to employees – particularly health insurance coverage benefits. The law does so by
relaxing applicable nondiscrimination tax rules. Specifically, a “safe harbor” from the nondiscrimination
requirements for cafeteria plans (described later in this guide), as well as from the nondiscrimination
requirements for specified qualified benefits offered under a cafeteria plan, is made available for qualified
small employers.
The definition of a “small employer” for simple cafeteria plan sponsorship is an employer that employed an
average of 100 or fewer employees on business days during either of the two preceding years. A year may
only be taken into account if the employer was in existence throughout the year. Start-up companies can
use the average number of employees reasonably expected to be employed in the current year.
If the employer maintained a simple cafeteria plan for its employees for a year, then, for each subsequent
year during which the employer continues, without interruption, to maintain the cafeteria plan, the employer
is deemed to be an eligible small employer until the employer employs an average of 200 or more
employees on business days during any year preceding any such subsequent year.
Controlled group rules, where all members of the controlled group are treated as a single employer, will
apply for determination of whether an employer is an eligible small employer.
WHAT ARE THE REQUIREMENTS FOR A SIMPLE CAFETERIA
PLAN?
A simple cafeteria plan must meet two requirements:
•
A minimum eligibility and participation requirement; and
•
A minimum contribution requirement.
A plan that satisfies both requirements for a plan year will be treated as meeting the following applicable
nondiscrimination requirements for the year:
•
The cafeteria plan nondiscrimination requirements specified in Code Section 125(b);
•
The nondiscrimination requirements for employer provided group term life insurance specified in
Code Section 79(d);
•
The nondiscrimination requirements for dependent care assistance programs under Code Section
129(d); and
•
The nondiscrimination requirements for self-insured health benefits in Code Section 105(h).
ELIGIBILITY AND PARTICIPATION REQUIREMENT
An employer satisfies the minimum eligibility and participation requirement of a simple cafeteria plan if:
•
All employees with at least 1,000 hours of service for the preceding plan year are eligible to
participate; and
•
Each employee eligible to participate may elect any benefit available under the plan (subject to
terms and conditions that apply to all participants).
CAFETERIA PLAN EMPLOYER GUIDE
18
A simple cafeteria plan may exclude employees who:
•
Have not attained age 21 before the close of a plan year;
•
Have not completed one year of service with the employer as of any age during the plan year;
•
Are covered under a collective bargaining agreement pursuant to which benefits provided by the
cafeteria plan were the subject of good faith bargaining between employee representatives and the
employer; or
•
Certain nonresident aliens working outside the U.S.
MINIMUM CONTRIBUTION REQUIREMENT
To qualify as a simple cafeteria plan, the plan must require the employer to make a minimum contribution to
provide benefits under the plan on behalf of each qualified employee, whether or not the employee makes
salary reduction contributions to the plan. A qualified employee is any employee who is not a highly
compensated employee (HCE) (within the meaning of Code Section 414(q)) or a key employee (as defined
in Code Section 416(i)).
Under the minimum contribution the employer provides a minimum contribution for each non-highly
compensated employee in addition to any salary reduction contributions made by the employee. The
minimum contribution must be available for application toward the cost of any qualified benefit (other than a
taxable benefit) offered under the plan.
The minimum contribution on behalf of each qualified employee may be calculated under either a
nonelective contribution method or a matching contribution method, but the same method must be used for
all qualified employees.
•
The nonelective minimum contribution must equal a uniform percentage (not less than 2%) of each
eligible employee's compensation for the plan year, determined without regard to whether the
employees makes any salary reduction contribution under the cafeteria plan.
•
The minimum matching contribution must be 1) the lesser of 100% of the amount of the salary
reduction contribution elected to be made by the employee for the plan year, or 2) 6% of the
employee's compensation for the plan year.
A simple cafeteria plan is permitted to provide for matching contributions in addition to the minimum
required, but only if matching contributions, with respect to salary reduction contributions, do not
discriminate in favor of highly compensated employees. Nothing in this provision prohibits an employer from
providing qualified benefits under the plan in addition to the required contributions.
CAFETERIA PLAN EMPLOYER GUIDE
19
APPENDIX
GLOSSARY OF ABBREVIATIONS
AD&D:
ADEA:
CHIPRA:
COBRA:
DCSA:
DMO:
DOL:
EBSA:
EFAST:
EIN:
EOB:
ERISA:
FMLA:
FSAs:
GINA:
HCE:
HCI:
HCSA:
HDHP:
HIPAA:
HMO:
HRA:
HSA:
IRC:
IRS:
LTD:
NMHPA:
MHPAEA:
MSP:
PPACA:
PHI:
PPO:
QMCSO:
SAR:
SMM:
SPD:
STD:
USERRA:
VEBA:
WHCRA:
Accidental Death and Dismemberment
Age Discrimination in Employment Act
Children’s Health Insurance Program Reauthorization Act
Consolidated Omnibus Budget Reconciliation Act of 1985
Dependent Care Spending Account
Dental Maintenance Organization
Department of Labor
Employee Benefit Security Administration (formerly PWBA)
ERISA Filing Acceptance System
Employer Identification Number
Explanation of Benefits
Employee Retirement Income Security Act of 1974
Family and Medical Leave Act of 1993
Flexible Spending Accounts
Genetic Information Nondiscrimination Act
Highly-Compensated Employee
Highly-Compensation Individual
Health Care Spending Account
High Deductible Health Plan
Health Insurance Portability and Privacy Act of 1996
Health Maintenance Organization
Health Reimbursement Arrangement
Health Savings Account
Internal Revenue Code
Internal Revenue Service
Long Term Disability
Newborns and Mothers Health Protection Act
Mental Health Parity and Addiction Equity Act
Medicare Secondary Payer
Patient Protection and Affordable Care Act
Private Health Information
Preferred Provider Organization
Qualified Medical Child Support Order
Summary Annual Report
Summary Material Modifications
Summary Plan Description
Short Term Disability
Uniformed Services Employment and Reemployment Rights Act
Voluntary Employee’s Beneficiary Association
Women’s Health and Cancer Rights Act of 1998
CAFETERIA PLAN EMPLOYER GUIDE
20
Cafeteria Plan Checklist
1. Are you taking pre-tax or after-tax salary deductions for the following programs:
PreTax
AfterTax
•
Medical
□
□
•
Dental
□
□
•
LTD
□
□
•
STD
□
□
•
Life Insurance
□
□
•
Health Care Spending Account (HCSA)
□
□
•
Dependent Care Spending Account (DCSA)
□
□
•
Other voluntary plans
□
□
Yes
No
2. Do you have a Section 125 Plan under which the above benefit options are included
and where premiums are paid on a pre-tax basis?
□
□
3. Do you have a plan document for:
(One document is sufficient for all 3 plans if applicable.)
□
□
•
Premium Only Plan
□
□
•
HCSA
□
□
•
DCSA
□
□
4. Do you provide a SPD for your HCSA?
□
□
5. Are only employees participating in the cafeteria plan?
□
□
6. Are you properly imputing income for those individuals who are receiving benefits
but are not entitled to tax-free benefits (i.e., Section 105(b) dependents)?
□
□
7. Does the cafeteria plan not favor highly compensated employees?
□
□
8. Does the plan adhere to the mid-year election change rules?
□
□
9. What qualifying events, that would allow a mid-year election change, does the plan
recognize?
•
Change in employee’s legal marital status (e.g., marriage, divorce, etc.)
□
□
•
Change in number of employee’s dependents (e.g., birth, adoption or
placement for adoption)
Dependent satisfies (or ceases to satisfy) the requirements of dependent
coverage due to attainment of age, student status, or any similar
circumstance as provided in the underlying benefit plan
□
□
□
□
•
CAFETERIA PLAN EMPLOYER GUIDE
21
•
•
•
A change in the employment status of the employee, the employee’s
spouse or employee’s dependent
- Termination of employment (or commencement of employment)
- Strike or lockout of the participant, or the participant’s spouse or
dependent
- Change in worksite
- Commencement of or return from an unpaid leave of absence
Change in residence of the employee, or the employee’s spouse or
dependent
With respect to adoption assistance elections, the start or ending of an
adoption proceeding
□
□
□
□
□
□
•
A change in cost that results in automatic increases/decreases in elective
contributions
□
□
•
A significant change in cost
□
□
•
Addition or significant improvement of benefit package option
□
□
•
□
□
□
□
□
□
•
Change in coverage under another employer’s plan (e.g., an election
change made during the open enrollment of a participant’s spouse)
Change in employee’s, spouse’s or dependent’s entitlement (gain or loss)
for Medicare or Medicaid
Loss of group health coverage sponsored by a governmental or educational
institution
Significant coverage curtailment (with or without a loss of coverage)
□
□
•
HIPAA special enrollment rights
□
□
•
•
COBRA qualifying events
Changes in 401(k) contributions
□
□
□
□
•
•
•
•
Judgments, decrees or orders
FMLA leaves of absence
Reduction in hours
Enrollment in Exchange coverage
□
□
□
□
□
□
□
□
10. Have you disclosed the reasons for permitted changes in enrollment elections in
your SPD? (This information may also be disclosed on enrollment forms and plan
documents.)
□
□
11. Are all elections and election changes, except for those involving birth, adoption and
placement for adoption, made effective on a prospective basis?
□
□
12. Are election changes documented?
□
□
13. If you are a small employer, do you comply with the requirements for a simple
cafeteria plan?
□
□
•
•
Notes:
CAFETERIA PLAN EMPLOYER GUIDE
22
[Insert name of Company]
Section 125
Change in Election Form/Salary Reduction Agreement
Applicable to Premium Pre-Tax Only, Not Spending Account Changes
Name: ________________________________________________ SS# ________________________
Address:
____________________________________________________________________________________
Part I.
1. Election Change Requested (Check applicable Boxes)

Revocation of an Existing Election
1
Effective _______________________________, I wish to REVOKE my Existing Election under
the [Insert name of Company] Premium Payment Plan.
Type of coverage being revoked (my prior election for all other types of coverage remains in effect):

Medical Insurance
o Myself
o Spouse
o Dependent(s) ________________________________________________

Dental
o
o
o

Vision
o Myself
o Spouse
o Dependent(s)__________________________________________________

New Election
2
Effective ______________________________, I hereby make a new election as specified on the
attached election Form/Salary Reduction Agreement for the Plan.
Insurance
Myself
Spouse
Dependent(s)_________________________________________________
1
In no event may the revocation/new election be effective prior to the first day of the month beginning
after this Form is completed and returned to the Administrator, unless a new Dependent is being added
to medical coverage pursuant to HIPAA Special Enrollment rights, in which case the new election may
be consistent with the new medical insurance election, as applicable.
2
In no event may the revocation/new election be effective be effective prior to the first day of the month
beginning after this Form is completed and returned to the Administrator, unless a new Dependent is
being added to medical coverage pursuant to HIPAA Special Enrollment rights, in which case the new
election may be consistent with the new medical insurance election, as applicable.
CAFETERIA PLAN EMPLOYER GUIDE
23
Part II
2. The Change in Election Event(s) on which my request is based is/are:
Check Applicable Box(es) to indicate the Change in Election Event(s) that apply to your situation.
Election changes generally cannot be retroactive and must be consistent with the change in election
Event, as described in Part III of this Form.
A. Changes in Status
1. Change in Marital Status
 Marriage
 Divorce or annulment
 Legal separation
 Death of Spouse
2. Change in Number of Dependents
 Birth
 Adoption or placement for adoption
 Death of dependent
3. Change in Employment Status That Affects Eligibility
You
Termination of employment
Commencement of employment
Part-time to full-time
Full-time to part-time
Strike or lockout
Commencement of unpaid leave of absence
Return from unpaid leave of absence
Change in worksite
Other (salaried to hourly, union to non-union, etc.)









Your Spouse
Or Dependent









Provide details _______________________________________________________________
4. Change in Dependent’s Eligibility Under an Employer’s Plan
Lost eligibility (due to age, student status, marital status)

Gained eligibility (due to age, student status, marital status)

CAFETERIA PLAN EMPLOYER GUIDE
24
5. Change in Residence Affecting Eligibility
You
Your Spouse
Or Dependent


B. Special Enrollment Rights Under HIPAA (applies to Premium Payment Benefits only)
(Employee must provide notice within 30 days of following events)

Loss of other group health plan coverage
Acquired new Spouse or Dependent (birth, marriage, adoption, placement
for adoption)



(Employee must provide notice within 60 days of following events)
Gained state premium assistance under CHIPRA


Loss of eligibility under Medicaid or CHIP


C. Certain Judgments, Decrees and Orders
Order resulting from divorce, legal separation, annulment, or change in
custody requiring coverage for Dependent

D. Medicare or Medicaid
Became eligible for Medicare or Medicaid
Lost eligibility for Medicare or Medicaid


E. Change in Cost
Significant cost increase in coverage
Significant cost decrease in coverage


F. Change in Coverage
Significant curtailment of coverage
Addition or significant improvement of Plan option
Loss of group health coverage under plan of governmental or
educational institution
Change in coverage under another employer’s plan


G. Employee Reduction in Hours

H. Employee Enrollment in Marketplace/Exchanges







Part III
3. Consistency of Change in Election Event With My Requested Election Change
Explain below how the election change(s) that you checked in Section 1 is/are consistent with the change in
election event(s) that you checked in Section 2. You must explain why your requested change is necessary
or appropriate as a result of the event you checked in Section 2. The Administrator of the Plan has final
discretion to determine whether the consistency requirement has been satisfied.
CAFETERIA PLAN EMPLOYER GUIDE
25
I understand that I may be required to provide the appropriate documentation for any of the changes that I
have checked above. The status and participation changes must comply with the Plan, and the
Administrator has sole discretion to make this determination. If I am requesting an election change to
cancel or reduce coverage because (a) I or my family member has become eligible for new or improved
coverage (including coverage at a reduced cost) under an employer’s plan or under Medicare/Medicaid, or
(b) a judgment, decree or order requires an individual other than me to provide accident or health coverage
for my child. I certify that such new, improved or court-ordered coverage has already been obtained or is in
the process of being obtained for the applicable person.
If Approved, I Hereby Elect the Change(s) Noted on the Attached Election Form/Salary Reduction
Agreement and Attest That the Change Is Made on Account of and Is Consistent With the Change in
Election Event.
_______________________________________
Employee’s Signature
__________________________
Date
Accepted and Agreed to:
__________________________________
Administrator’s Signature
CAFETERIA PLAN EMPLOYER GUIDE
_________________________
Date
26
NONDISCRIMINATION TESTING CHART
Type of Plan
Self Funded
Medical



Insured, NonGrandfathered
Health Plans



Eligibility
Test
70% of all
employees, OR
80% of eligible
employees if 70%
of all employees are
eligible, OR
Non-discriminatory
classification
70% of all
employees, OR
80% of eligible
employees if 70%
of all employees are
eligible, OR
Non-discriminatory
classification
Benefits
Test
1
Benefits to HCIs must
be provided on same
basis to other
participants.
1
Benefits to HCIs must
be provided on same
basis to other
participants.
Concentration
Test
None
None
Group
Term Life
Insurance
 70% of all
employees, OR
 85% of participants
are not Key
employees, OR
 Non-discriminatory
classification
Benefits to Key
employees must be
available to all other
participants.
None
Cafeteria
Non-discriminatory
classification
Benefits or
contributions cannot
favor HCIs in
availability or actual
selection; an alternative
test applies for cafeteria
plans that provide
health benefits.
No more than
25% of total
nontaxable
benefits to Key
Employees.
Penalty
HCI must include
excess
reimbursement in
taxable income.
Effective date
delayed until
agencies release
guidance.
For each day that
the plan is
discriminatory, the
plan is subject to
excise taxes or civil
money penalties of
$100 per day per
individual
discriminated
against.
Key Employees
must include in
taxable income the
greater of IRS
Table I or actual
cost of all
employer-provided
Group Term Life
Insurance.
HCIs or Key
Employees must
include in taxable
income the highest
aggregate value of
taxable benefits
that could have
been chosen for
the year,
regardless of actual
elections.
_________________________________
1
HCIs: Highly Compensated Individuals
CAFETERIA PLAN EMPLOYER GUIDE
27
Type of Plan
Dependent
Care
Assistance
Eligibility
Test
Non-discriminatory
classification
Educational
Assistance
Non-discriminatory
classification (Tax
Reform rules)
VEBAs
Non-discriminatory
classification
Benefits
Test
Benefits or
contributions cannot
2
favor HCEs Average
Non-HCEs benefits
must be > 55% of
average benefit for
HCEs.
None
Same benefits in each
class for all
employees, or uniform
percentage of pay for
life, disability,
severance or
unemployment
benefits.
Concentration
Test
No more than 25%
Employer’s cost
for 5% owners (or
their spouses or
dependents).
No more than 5%
of employer’s cost
for 5% owners (or
their spouses or
dependents).
None
Penalty
HCEs must include
all benefits as
taxable income.
All employees must
include benefits as
taxable income.
VEBA loses tax
exempt status,
possible 100%
excise tax on
employer for post
retirement medical
and life insurance
benefits.
_________________________________
2
HCEs: Highly Compensated Employees
(Links review: 12/18/2014)
CAFETERIA PLAN EMPLOYER GUIDE
28