Cafeteria Style Benefits: Qualifying Events | AEIS

Cafeteria Style Benefits: Qualifying Events and Changing Employee Elections

Each of your employees brings a unique personality and skill set to your business. You care about these individuals, and you hired them because you value their differences. Just as each personality brings something unique to your business, each of your employees has unique needs when it comes to their health care and insurance needs. Gretchen is concerned about adequate coverage in her golden years, as she is readjusting to life without her husband of 50 years. Pat and Dana are eager to start a family. Bryan has three little ones, and he wants to make sure they are taken care of if anything happens to him. Jessie is single and loves to travel, and she wants to maximize her income while still enjoying her trips around the globe.

Your employees are different, and just like their personalities are unique, they all need different things when it comes to health care and insurance.

These are the people cafeteria style benefits were created to help!

What are cafeteria style benefits?

Cafeteria style benefits allow employees to choose the benefits they want (prior to payroll taxes) from a list of predetermined options offered by you, their employer, and governed by the IRS. Employees are given a choice between a taxable benefit (cash) and two or more specified pre-tax qualified benefits, for example, health insurance. Employees are given the opportunity to pick and choose the benefits they want, just like an individual standing in the cafeteria line at lunch.

Employees are allowed to choose the benefits they want by making elections. Only the employee can make elections, but they can make choices that provide coverage for other individuals such as spouses or dependents. Employees must be considered eligible by the plan to make elections.

Tax incentives

One of the most obvious and sought-after benefits of these cafeteria style plans is the tax incentive. In the IRS Section 125 it is specified “cafeteria plans are exempt from the calculation of gross income for federal income tax purposes. No federal or Social Security taxes are deducted. However, some benefits—like group life insurance benefits that exceed $50,000 or adoption assistance benefits—require employers to withhold both Social Security and Medicare taxes.”

What is included in a cafeteria style plan?

So, what’s on the menu of these types of benefit plans? Cafeteria style plans provide many options for employees, which is what makes them so attractive. However, only certain benefits can be offered by cafeteria style benefits plan, and these include:

• Coverage under an accident or health plan (which can include traditional health insurance, health maintenance organizations (HMOs), self-insured medical reimbursement plans, dental, vision, and more);
• Dependent care assistance benefits or DCAPs
• Group term life insurance for employees
• Paid time off, which allows employees the opportunity to buy or sell paid time off
• 401(k) contributions
• Adoption assistance benefits, and;
• Health savings accounts or HSAs under IRS Code Section 223.

Does the cafeteria style plan have any limitations?

Cafeteria style plans do have limitations. For instance, some employers want to offer additional benefits through a cafeteria style plan, but this is prohibited.

Benefits which cannot be offered via a cafeteria style plan include: scholarships, group term life insurance for non-employees, transportation and other fringe benefits, long-term care, and health reimbursement arrangements (unless very specific rules are met by providing one in conjunction with a high deductible health plan). Benefits that defer compensation are also prohibited under cafeteria plan rules.

Other limitations of cafeteria style plans pertain to elections. Elections, with an exception for new hires, must be prospective. Cafeteria plan selections are considered irrevocable and cannot be changed during the plan year unless a permitted change in status occurs. There is an exception for mandatory two-year elections relating to dental or vision plans that meet certain requirements.

Another consideration is the Employee Retirement Income Security Act (ERISA). ERISA “is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.” Cafeteria plans as a whole are not subject to ERISA, but all or some of the underlying benefits or components under the plan can be. The Patient Protection and Affordable Care Act (ACA) has also affected aspects of cafeteria plan administration.

What happens to a cafeteria style plan if employees encounter lifestyle changes?

Plans may allow participants to change elections based on the following changes in status: Change in marital status or the number of dependents, change in employment status, change in residence or the commencement or termination of adoption proceedings.

Plans may also allow participants to change elections based on the following adjustments that are not a change in status but nonetheless can trigger an election change:

• Significant cost changes
• Significant curtailment (or reduction) of coverage
• Addition or improvement of benefit package option
• Change in coverage of spouse or dependent under another employer plan
• Loss of certain other health coverage (such as government provided coverage, such as Medicaid)
• Changes in 401(k) contributions (employees are free to change their 401(k) contributions whenever they wish, in accordance with the administrator’s change process)
• HIPAA special enrollment rights (contains requirements for HIPAA subject plans)
• COBRA qualifying event
• Judgment, decrees, or orders
• Entitlement to Medicare or Medicaid
• Family Medical Leave Act (FMLA) leave
• Pre-tax health savings account (HSA) contributions (employees are free to change their HSA contributions whenever they wish, in accordance with the their payroll/accounting department process)
• Reduction of hours (new under the ACA)
• Exchange/Marketplace enrollment (new under the ACA)

Together, the change in status events and other recognized changes are considered “permitted election change events.”

Are there limitations to changing a cafeteria style plan?

Common changes that do not constitute a permitted election change event numerous, such as a provider leaving a network (unless, based on very narrow circumstances, it resulted in a significant reduction of coverage), a legal separation (unless the separation leads to a loss of eligibility under the plan), commencement of a domestic partner relationship, or a change in financial condition.

There are some events that could allow an individual to make a mid-year election changes, such as a mistake by the employer or employee, or needing to change elections in order to pass nondiscrimination tests. To make a change due to a mistake, there must be clear and convincing evidence that the mistake has been made. For instance, an individual might accidentally sign up for family coverage when they are single with no children, or an employer might withhold $100 dollars per pay period for a flexible spending account (FSA) when the individual elected to withhold $50.

Plans are permitted to make automatic payroll election increases or decreases for insignificant amounts in the middle of the plan year, so long as automatic election language is in the plan documents. An “insignificant” amount is considered one percent or less.

Plans should consider which change in status events to allow, how to track change in status requests, and the time limit to impose on employees who wish to make an election.

Cafeteria plans are not required to allow employees to change their elections but plans that do allow changes must follow IRS requirements. These requirements include consistency, plan document allowance, documentation, and timing of the election change.

Contact our team to learn more about the following change in status events: scenarios involving employees or their spouses or dependents entering into domestic partnerships, ending periods of incarceration, losing or gaining TRICARE coverage, and cost changes to an employer health plan as limitations apply.

How can I learn more to see if a cafeteria style benefit plan is right for my employees?

Cafeteria style plans can be more complex and time consuming for administrators. For complete details on each of these aforementioned requirements request — UBA’s ACA Advisor, “Cafeteria Plans: Qualifying Events and Changing Employee Elections”.

Contact our team for expert guidance to provide your employees with the best cafeteria style benefits plan.

Disclaimer: Any information related to compliance or other subject matters in this blog is intended to be informational and does not constitute legal advice regarding any specific situation. The content of this blog is based on the most up-to-date information that was available on the date it was published and could be subject to change. Should you require further assistance or legal advice, please consult a licensed attorney.  

By Danielle Capilla
Originally published by www.ubabenefits.com