Jump to content

Cafeteria plan with 2 components -- payment of health insurance premiums and HSA contributions.


katieinny
 Share

Recommended Posts

An employer has an existing cafeteria plan for the payment of health insurance premiums. Beginning in 2006, he is adding an HSA component. We know that the premiums can't be paid with HSA dollars, but as long as the employer keeps a separate accounting, is there any problem with having the 2 components under the same cafeteria plan?

Link to comment
Share on other sites

I'm wondering whether you mean to say FSA instead of HSA? Is the employer adopting a flexible spending arrangement to reimburse employees for eligible, out-of-pocket medical expenses? An HSA is a Health Savings Account under I.R.C. Sec. 223 -- something very different from an FSA.

Lori Friedman

Link to comment
Share on other sites

The intention is for employees to be able to contribute to one portion of the cafeteria plan account (or FSA) for the HDHP premiums. The other component of the cafeteria plan (or FSA) will be used to make pretax HSA contributions.

Several of our clients have cafeteria plans with more than one component, such as medical expenses, health plan premium payments and dependent care expenses -- all under one cafeteria plan.

I just want to make sure that there is no prohibition against including the HDHP premium component under the same plan with the HSA component as long as the recordkeeping keeps the two separate.

Link to comment
Share on other sites

I am sorry, but it appears that you may be confused about this.

You can have both a caf. plan and hsa, but it does require some work so that you do it correctly. There needs to be detailed planning when you have both an unreimbursed medical fsa and a hsa. You cannot just put the two in together without this planning.

Employee premium contributions can always be run through the caf. plan and shown as pre-tax. It does not matter if these premiums are from a hdhp or not.

I don't understand the second part of the first paragraph 'The other component of the cafeteria plan (or FSA) will be used to make pretax HSA contributions". The employer can deduct an employees hsa contribution via payroll deduction. Is this what you are asking?

Link to comment
Share on other sites

katieinny,

Depending on the terms of the written plan document, a Sec. 125 plan can allow participants to purchase a variety of qualified taxable and/or nontaxable benefits. We're trying to pin down exactly which benefits will be available through your client's arrangement.

If I'm understanding you, the employer currently has a POP (premium conversion only) and wants to add a FSA. Is this correct? Or, is the employer trying to add a HSA benefit (or both an FSA and HSA)?

Lori Friedman

Link to comment
Share on other sites

I hope this is just an issue of semantics more than substance. The employer currently has what is often called a "premium only plan." In other words, employees are allowed to defer part of their salary into the plan on a pre-tax basis, and the money is used to pay their health insurance premiums. Since there are no other options for the employee to chose from, I guess calling it a cafeteria plan or flexible spending account doesn't quite fit the bill.

Beginning in 2006, the employer wants to add an HSA component, so it's no longer a POP. Employees would be allowed to defer into the health insurance premium component of the plan to pay the premiums for the HDHP, AND they would also be allowed to defer into the HSA component of the plan to pay those health care expenses up to their deductible amounts, all on a pre-tax basis.

It makes perfect sense to me, but maybe I'm making it too simple?

Link to comment
Share on other sites

Dear Katieinny

It does sound like substance, not semantics. A section 125 plan allows for an employee to pre-tax the amount of money they contribute towards their eligible premium. So, if I am required to pay $100 per pay period for my health coverage, I can make it pre-tax as opposed to post-tax. This is commonly referred to as a POP, or Premium Only Plan, because that is the only componenet of the plan in effect. You could also offer Flexible Speding Accounts, such as unreimbursed medical and dependent care.

By "adding a HSA component" it sounds like the employer will offer this type of a plan to the employees. If they employee needs to contribute towards the cost of that premium, they can use the POP. Your question states that it is no longer a POP. Is the employer eliminating the POP plan?

As for the contributions made to the "side fund" of the HSA to pay expenses up to the deductible, these are always made on a tax-deductible basis. The emploees need to open an account for these funds. The employer can payroll deduct the amounts or require the employees to deposit it themselves.

Link to comment
Share on other sites

I think katieinny asked a simple question, despite unfortunate and unintended reference to FSAs. The cafeteria plan that is used to fund the core health benefits (HDHP or otherwise) can accommodate the HSA arrangement as well, with the appropriate terms to account for the special rules that apply to HSAs under cafeteria plans.

Link to comment
Share on other sites

I'll take all the help I can get! I can't afford the luxury of hurt feelings when somebody tells me I'm not getting something.

I've been reading that employees can make HSA contributions through an employer's cafeteria plan, which is what this employer wants to permit. So far, so good. He will also continue to allow employees to defer salary to pay health insurance premiums.

I'm thinking that he can set up a 125 plan that will allow employee contributions for both purposes. It sounds like there could be a problem with that?

Link to comment
Share on other sites

katieinny, Please don't think that anyone wants to hurt your feelings. Some of us were simply trying to pin down your question so that we could give you some applicable, and accurate, information. We wouldn't help you by misinterpreting your question and providing off-base answers.

Lori Friedman

Link to comment
Share on other sites

Curiosity - since an HSA is already a tax-deductible plan it would not need to be run through a Sec 125 plan to achieve the tax savings, so is the purpose of combining just for ease so there is just one plan to deal with, or are there other reasons to do it this way, instead of having two separate tax advantaged plans?

Link to comment
Share on other sites

Seems to me that it is for ease.

Just a random thought... If the dollars are run through a cafeteria plan, would the HSA, in effect, become subject to the Sec. 125 nondiscrimination rules?

Lori Friedman

Link to comment
Share on other sites

Thanks to one and all for straigtening me out. It seems that I have been mistakenly interchanging the names Flexible Spending Accounts, Cafeteria Plan and Section 125 plan. I guess I need to research some definitions before I confuse more people.

The bottom line is that the employer can do what he has in mind as long as he finds somebody to amend his current plan to permit HSA contributions.

Link to comment
Share on other sites

Forgive my ignorance. I haven't kept up on HSAs guidance. Just read the statute when it came out. Thought that HSAs would have to be set up as separate individual accounts set up in the name of each employee similar to an IRA or individual 403(b)s -- so they are completely portable should the employee move on to another employer. Which would be a lot of administration. Has that changed?

Link to comment
Share on other sites

E as in Erisa: You are right--separate, IRA-like accounts are set up, usually at a bank. But there's nothing different for the employer to do, anymore than there would for a new insurance benefit. A monthly listing of participants and dollar elections sent to the bank each month. Much like an ins. carrier billing. The bank (or whichever qualified third party) does the "HSA thing" as far as reporting requirements, directly to the employees home address, just as a bank would when reporting interest on a savings account, etc. The employee uses that info to report on his personal tax return. So no big deal for the employer.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...