HEB Chapt25 cafeteria plans

Question 1

Cafeteria plan advantage and disadvantage to the employer

Answer 1

1. Advantages to the employer
   
   1. 1 employer does not pay FICA or FUTA tax on amounts contributed
   2. 2 not considered wages, so expenses tied to payroll are reduced
   3. 3 help employees gain awareness of the value
   4. 4 may lead to wise EE decisions and greater appreciation of benefits
2. Disadvantages to employer
   
   2. 1 ongoing cost of administration and operation
   3. 2 Full amount of benefit must be available during entire year
   4. 3 adverse selection of benefits
   5. 3 subject to complex coverage and nondiscrimination testing

Question 2

Cafeteria plans general legal requirements

Answer 2

1. Governing law
   
   1. 1 IRS governs cafeteria plans
   2. 2 ERISA may govern welfare benefits included within cafeteria plans
   3. 3 cafeteria plans may also be subject to: COBRA, FMLA, HIPAA, others
2. To be considered qualified, the written plan must include
   
   2. 1 a specific description of each benefit
   3. 2 rules governing eligibility and participation
   4. 3 procedures for making elections
   5. 4 the manner in which contributions shall be made
   6. 5 the maximum ER contributions available
   7. 6 the plan year
   8. 7 nondiscrimination testing rules

Question 3

Cafeteria plans qualified benefits, taxable benefits, and non-permitted benefits

Answer 3

1. Qualified benefits in a cafeteria plan
   
   1. 1 acc or health cov, group term life, a 401k plan, contributions to an HSA
2. Taxable benefits in a cafeteria plan
   
   2. 1 cash, paid vacation days, group term life in excess of $50,000
3. Non-permitted benefits: educational assistance, MSAs, athletic facilities, LTC

Question 4

Cafeteria plan administration

Answer 4

1. Coverage and nondiscrimination testing/cafe plan tests
   
   1. 1 eligibility test: classification, length service, participation
   2. 2 contributions and benefits test: non discrimination with respect to availability and utilization of contributions and benefits
   3. 3 key EE concentration test: key EEs less eq to 25% of agg. benefits
   4. 4 if fail testing, highly compensated and key EEs are taxed
   5. 5 Additional tests for underlying benefits (e.g. FSAs)
2. Taxation: qualified benefits are not taxable
3. Trust requirements
4. ERISA
   
   4. 1 Reporting, disclosure, and fiduciary requirement
5. Simple cafeteria plans
   
   5. 1 PPACA allows small ERs (less than 100 EEs) to establish these
   6. 2 Advantages
      
      5. 2.1 Plan not subject to nondiscrimination testing of cafeteria plans
      6. 2.2 Lower admin costs
      7. 2.3 Avoid tax consequences if nondiscrimination tests unfavorable

Question 5

Cafeteria Plan contributions, benefit elections, and changes

Answer 5

1. May pay for plan through EE contributions, ER contributions, or a combination
2. Negative and evergreen elections
3. Prior to start of plan year, EE must make elections
4. Changes during the year
   
   4. 1 generally, a participant cannot change their coverage within the plan year
   5. 2 permitted to change participant’s account: changes in marital status, number of dependents, changes I work status, spouse’s employment
   6. 3 permit to change dependent’s account: changes in marital status, number of dependents, changes in work status m, spouse’s employment
   7. 4 may revoke if participant becomes entitled to Medicare or Medicaid

Question 6

Cafeteria plan advantage and disadvantage to the employee

Answer 6

1. Advantage to employee
   
   1. 1 can select benefits most appropriate to heir personal needs
   2. 2 savings because benefit expenses are paid on tax-favored basis
   3. 3 not subject to federal income, FICA, or FUTA tax
2. Disadvantage to employee
   
   2. 1 benefit elections are made beginning of year and are irrevocable
   3. 2 “Use-it-or-lose-it” rule
   4. 3 may be unfavorable to pay for dependent care

Question 7

Cafeteria Plan - Health Care FSA

Answer 7

1. Defined as a plan that meets requirements under code section 105
2. Pays for qualified medical expenses
3. Funds not used during period of coverage are forfeited
4. Under PPACA medicines may only be reimbursed under FSA if:
   
   4. 1 prescribed by Doctor, or
   5. 2 is OTC medicine and individual obtains a prescription, or
   6. 3 the medicine in insulin