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Cafeteria Plan Responsibilities for Employers under Section 125 of the Internal Revenue Code

Posted By Administration, Thursday, June 1, 2017
Updated: Tuesday, May 30, 2017

Cafeteria Plan Responsibilities for Employers under Section 125 of the Internal Revenue Code

By: Cory Jorbin, HUB International

 

A cafeteria plan is much what it sounds like; a cafeteria of sorts that employers can use to help employees pay for certain expenses. Instead of food and drinks, this cafeteria is stocked with benefits like health, dental and vision insurance and flexible spending accounts (medical and dependent care). These plans are attractive to both employers and employees as they offer tax benefits. Employees can use pre-tax dollars to pay for benefits, giving them more take-home pay. Lower taxable income for employees means lower payroll taxes for employers. Here are a few of the potential issues employers should consider when creating and maintaining a cafeteria plan.

 

Writing Requirement

Under Section 125(d) the cafeteria plan must be in writing. These are often referred to as Premium Only Plan or POP documents. In the case of a Flex Spending Arrangement, a separate FSA document would be used. This mirrors the ERISA requirement that plans have a written plan document and serves a dual purpose. First, it provides a record for both the employer and employee of what benefits and provisions are actually contained within the plan. Second it allows for pre-tax payment of benefits. Failure to properly maintain a POP document can result in the plan losing its tax advantaged status.

 

Plan Adoption

Once the POP document is created and finalized, it should be formally adopted by the entity.  Adoption of a plan should generally follow the same process that an entity uses for other major business actions. For a corporation this may mean approval by the board of directors, but this can vary between entities. The Articles of Incorporation, Bylaws or other governing documents as applicable should be referenced to determine the appropriate means of adoption. Failure to properly adopt the POP document can lead to potential issues later on.

 

Plan Selection

Employers have some flexibility as to which benefits employees may pay for with pre-tax dollars. Typically employers include medical, dental and vision plans as these tend to have the highest cost and thus provide the greatest tax benefits. Voluntary benefits such as STD, LTD, accident and critical illness coverage may potentially be paid for pre-tax as well. Voluntary benefits pose a unique dilemma for employers since amounts paid out under these policies are generally taxable to the employee when an employee pays for them with pre-tax dollars. As a result of this, many employers do not include these in their pre-tax benefits. The idea being that an employee who receives payments under a disability policy receives a greater benefit when these payments aren’t taxed than they would from pre-tax premium deduction. Employers should review individual plan inclusion with their attorney or CPA.

 

Plan Changes

Cafeteria plan elections are generally only allowed to be changed once per year, during the plan’s annual open enrollment period. There are two exceptions to this rule, changes when HIPAA Special Enrollment Rights are triggered, and changes under the IRS Permitted Election Changes under Treasury Regulation 1.125-4. While HIPAA Special Enrollment rights are required where applicable, plans have flexibility to adopt all, some or none of the permitted election changes. Plans that adopt these changes must allow participants to change their cafeteria plan elections mid-year when one of these changes is triggered. Whether a permitted change is triggered often depends on small details, which requires employers to pay special attention to these items.

 

On a final note, plans must obtain an annual authorization (signed or electronic) from employees consenting to their payroll deductions. Cafeteria plans can provide great benefits for employers and employees. Plans should take these and other important items into consideration when establishing a plan and its continued maintenance.

 

 

Cory Jorbin is a Compliance Officer with HUB International focusing on ERISA, ACA, Cafeteria Plans, HIPAA, FMLA and related matters.

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