Is It Time to Update Your Cafeteria Plan?

Written by Eva A. Rasmussen

Employers who offer their employees the opportunity to pay their share of premiums for health coverage with pre-tax dollars must offer this benefit through a written Premium Conversion Plan established under Section 125 of the Internal Revenue Code in order to comply with IRS rules. Premium Conversion Plans are frequently combined with Flexible Benefit Accounts that allow participants to pay out of pocket medical and dependent care expenses with pre-tax dollars although the two types of benefits may be offered under separate plans. These cafeteria plans should be reviewed to determine if they need to be updated to reflect several new developments.

I. PREMIUM CONVERSION PLANS

Generally, participants in a Premium Conversion Plan may not change their elections mid-year unless they have a change in family circumstances or other prescribed events. The IRS has recently issued Notice 2014-55 which expands the circumstances under which a participant may make a mid-year revocation of his election to participate in an employer sponsored health plan and elect coverage under a plan offered on the Health Insurance Exchange. The two additional events that will allow a mid-year change are:

  • Reduction in Hours. If an employee's hours are reduced so that it is expected that he will work less than 30 hours per week, he may wish to elect subsidized health coverage under an Exchange even if he doesn't immediately lose coverage under his employer's plan. The new coverage purchased on the Exchange must become effective no later than the first day of the second month following the month in which the employer-provided coverage is revoked.
  • Participation in a Plan Offered on an Exchange. An employee may wish to drop employer provided coverage and purchase insurance on an Exchange as, if he is eligible for a subsidy, the subsidized coverage may be less expensive. This change is permitted if the employee is eligible to elect coverage on an Exchange either during a special enrollment period or during the Exchange's annual enrollment period (which ends on February 15). The new coverage must be effective on the day after the prior coverage was revoked.

The expansion of the modification rules does not apply to elections under flexible spending accounts. In order to take advantage of the expanded exceptions, the cafeteria plan must be amended by the last day of the plan year in which the changes are permitted, except that they may be effective during the 2014 plan year if they are adopted by the end of the 2015 plan year. Retroactive revocation of a cafeteria plan election will not be permitted.

II. FLEXIBLE SPENDING ACCOUNTS

By now, all cafeteria plans that include Flexible Spending Accounts (?FSAs?) should have been amended to limit salary reduction contributions to $2,500. For plan years beginning in 2015, the cap on salary reduction contributions has increased to $2,550. (See Rev. Proc. 2014-61). If the plan automatically increased the cap to the maximum permitted by law, no amendment is needed but participants should be informed of the higher limit. If the plan included a $2,500 dollar cap with no automatic adjustment and the employer wishes to increase the cap, the plan must be amended.

III. ALL CAFETERIA PLANS

All cafeteria plans should be reviewed to reflect the Federal recognition of same sex-marriages. Same sex-spouses offered coverage must be permitted to pay health insurance premiums on a pre-tax basis in the same manner as opposite-sex spouses. Disbursements for medical expenses incurred by a same-sex spouse may be reimbursed under a health FSA.

Finally, employers should consider allowing a $500 carry over for a health FSA for contributions that are not reimbursed in the plan year in which deducted (and any applicable grace period). Carryover amendments must be adopted before the end of the plan year from which the amounts are carried over. Carryovers are only permitted if the plan does not include or is amended to eliminate a grace period.

If you have any questions or would like assistance in determining if your plan documents comply with the cafeteria plan rules, please contact Eva Rasmussen (earasmussen@cbdm.com) or Richard Muser (rkmuser@cbdm.com), lead attorneys at CB&D's Employee Benefits, Executive Compensation and ERISA Litigation Group.

About the Author
Eva A. Rasmussen
Benefits Counsel
Eva A. Rasmussen concentrates on the design, implementation and communication of qualified plans and deferred compensation arrangements as well as...
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