Cafeteria Plan Design & Admin Flashcards
Health Care Flexible Spending Account (FSA)
Overview
1. Defined as a plan that meets the qualification requirements set under Code Section 105
- Pays for qualified medical expenses during participant’s period of coverage
- Funds not used during period of coverage are forfeited by the employee
- Under PPACA, medicines may only be reimbursed under FSA if:
- Prescribed by a doctor with a formal prescription, or
- Is an over the counter (OTC) medicine and individual obtains a prescription, or
- The medicine is insulin
- NOTE: OTC without a doctor’s order is not an eligible FSA expense - Expenses incurred when provided care, as opposed to when expense is charged
- Uniform coverage requirement means the amount a participant elected must be available at all times during period of coverage
- Participants cannot receive payment from any other source for expenses reimbursed
- 2013 contributions capped at $2,500 and thereafter will be adjusted annually for inflation
Michelle’s Law
- Parents’ coverage must continue for college age students that have medically necessary leave from school
- Applies to FSA’s in cafeteria plans
- Does not apply to cafeteria plans without FSA’s and plans that are not subject to HIPAA
Dependent Care Assistance
- Must meet qualification requirements of Code Section 129
- Participant may only claim benefits if he/she pays dependent care expenses in order to be able to work
- Maximum benefit for dependent care is $5,000
- Employees have a choice of taking the dependent care assistance program or the dependent care tax credit on their returns
- They cannot use both
Paid Time Off
- Reflects combined vacation, sick leave, and personal days
- Participants in cafeteria plans may be offered an option to buy or sell paid time off
401 (k) Contributions
- Contributions expressed as a percentage of compensation
- Automatic enrollment is permitted (automatically enrolled to have 401(k) contributions deducted from paycheck unless you elect otherwise)
Adoption Assistance
- May be offered in a cafeteria plan
- In 2010, dollar limit is $13K per adoption
- Qualified expenses include attorney fees, travel expenses, and other expenses directly related to an adoption
- Benefit is phased out for those with high incomes
Health Savings Account
- Employers may contribute to HSAs but must comply with nondiscrimination rules
- Must be a high deductible plan, but preventive care may be covered without regard to deductible
Cash
- In order for a payment to be considered cash, benefit must not be prohibited by Section 125 and benefit must be provided on a taxable basis
Plan Administration
1. General
a. Procedures must be established with respect to plan’s ongoing operation and these policies must be properly communicated to participants
b. Most important administrative task is annual enrollment
c. Payroll and accounting issues must also be addressed
2. Grace periods
a. Following the end of each plan year, extends period for incurring expenses up to 2.5 months
b. Does not apply to paid time off or contributions to 401(k)
c. Contributions not used by end of grace period are forfeited
d. Coverage and nondiscrimination testing/cafeteria plan tests
(1) Eligibility test
- Consists of classification test and length-of-services test as well as a participation test
- Requires that no employee be required to complete more than three years of employment as a condition of eligibility
* All employees must be subject to uniform eligibility requirements
- Participation test
* Sometimes referred to as a “Facts and circumstances test”, “Safe harbor percentage test”, or “Unsafe harbor percentage test”
* Plan may not discriminate in favor of highly compensated individuals
* Defined as one who is a 5% owner, a highly paid person, or a spouse or dependent of an employee who meets one of these criteria
(2) Contributions and Benefits Test
- Tests nondiscrimination with respect to benefits and contributions with respect to availability and utilization
* Must give similarly situated participants same opportunity to elect benefits, and actual selection of benefits must not be disproportionately elected by highly compensated
* Must give similarly situated participants uniform election of employer contributions, and actual election of employer contributions must not be disproportionately utilized by highly compensated
- If plan provides health benefits, plan will not be discriminatory provided that contributions made on behalf of a participant are equal to either
- 100% of the cost of health benefits coverage under the plan of highly compensated participants or
- 75% of the cost of the most expensive health benefits elected by any similarly situated participant
(3) Key employee concentration test
- Requires that key employees do not exceed 25% of aggregate benefits provided to all employees
- Key employees are defined as all employees who are:
* An officer with pay > $160,000
* A 5% owner
* A 1% owner whose pay was more than $150,000
(4) If a cafeteria plan fails the nondiscrimination testing
- Highly compensated and key employees are taxed based on the value of their benefits
- There are no negative consequences for other employees in a discriminatory plan
(5) There are additional tests for the underlying benefits such as flexible spending accounts, dependent care assistance, and group term life
3. Simple cafeteria plans provide a “safe harbor” from nondiscrimination testing
a. PPACA allows small ERs to establish “simple cafeteria plans”
b. ER must qualify as an eligible small ER
- No more than 100 EEs during either of the 2 preceding years
c. Plan designed with specific eligibility and contribution requirements
d. Plan is exempt for other nondiscrimination testing that applies to cafeteria plans
e. Eligible EEs include all who were credited with at least 1000 hours of service preceding year
- However, plan may exclude certain classes of EEs
f. Advantages of safe harbor plans
- Lower admin costs
- Avoid consequences of taxing plan benefits if discrimination tests unfavorable
4. Taxation
a. Cafeteria plans that comply with the rules and regulations in the IRC are protected from “constructive receipt”
b.Means that qualified benefits are not taxable
c. As stated previously, cafeteria plans provide tax savings to both employees and employers
5. Trust requirements
a. Cafeteria plans are exempt from the requirement that plan assets be held in a trust until the IRS releases final regulations with respect to contributory welfare benefit plans
ERISA
- Reporting and disclosure
a. Filing requirement of Form 5500 and Schedule F was suspended - Fiduciary requirements
a. Cafeteria plan must be in writing and have a plan administrator, named fiduciary, and funding policy
HIPAA Coordination
Health care flexible spending accounts are not subject to HIPAA certification requirements and in many cases are exempt from coverage under COBRA
Summary Plan Description and Plan Communication
- All plans under ERISA must provide a summary plan description (SPD)
a. If plan does not include welfare benefit plans (like a health care flexible spending account), SPD is not required but it is still important to adequately communicate benefits
b. Communication can be categorized as:
- Plan announcement
- Education
- Enrollment
- Ongoing continuation communication
- PPACA refines internal appeals procedures and external appeals process for health care claims
- Will require updates to plan documents
