Cafeteria Plans: How to Handle Participant Contributions
By Danielle Capilla
Chief Compliance Officer
United Benefit Advisors
Cafeteria plans, or plans governed by IRS Code Section 125, allow employees to pay for expenses such as health insurance with pre-tax dollars. Employees are given a choice between a taxable benefit (cash) and specified pre-tax qualified benefits, for example, health insurance. Employees are given the opportunity to select the benefits they want, just like an individual standing in the cafeteria line at lunch.
Only certain benefits can be offered through a cafeteria plan:
- 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
- Paid time off, which allows employees the opportunity to buy or sell paid time off days
- 401(k) contributions
- Adoption assistance benefits
- Health savings accounts or HSAs under IRS Code Section 223
Some employers want to offer other benefits through a cafeteria plan, but this is prohibited. Benefits that you cannot offer through a cafeteria 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.
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.
Employees are allowed to choose the benefits they want by making elections. Only the employee can make elections, but they can make choices that cover other individuals such as spouses or dependents. Employees must be considered eligible by the plan to make 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. Participants may only make election changes based on IRS provided changes in status, or certain triggering events as contained in the Health Insurance Portability and Accountability Act (HIPAA).
For all the best practices regarding participant contributions, including when participants are unable to pay their required contribution, request UBA’s new ACA Advisor, “Cafeteria Plans: Participant Contributions.”
To benchmark your health plan against others in your industry, region, and group size, be sure to pre-order the 2015 Health Plan Survey Executive Summary to get the most up to date information on premiums, employee/employer contributions, plan design trends and more.