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Noncontributory Cafeteria Plan


Guest R Robertson

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Guest R Robertson

May an employer pay all the premiums in a cafeteria plan? My understanding is that the employee must contribute in order to the contribution to be pre-tax.

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A cafeteria plan could be designed to limit all contributions to be from the employer, provided that the employees each have the choice of tax-free benefits paid for with those employer contributions or cash/other taxable benefit. Those employees that choose tax-free benefits will have no taxable income by reason of those contributions, or by reason of having the choice provided that the plan complies with IRC sec 125.

If the employees do not have a choice of cash/other taxable benefit, then it would not be a 'cafeteria plan' as described in IRC sec 125, and observance of the requirements of IRC sec 125 would not be necessary for the employer contributions and tax-free benefits to be tax-free.

By the way, whether IRC sec 125 applies or not, ERISA might apply and need to be complied with.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Guest R Robertson

Thank you for the response. I'm still not clear on how this will work, probably because I have never seen it done. We are a professional corporation that has historically paid all benefit premiums (via a fully-insured plan) for full-time employees (no cafeteria plan, no employee contributions). I proposed implementing a cafeteria plan to offset rising health insurance premiums, but the owners of the PC still want to continue paying the premiums under the cafeteria plan, with NO employee contributions. So, I'm not certain why we should even bother to set up the cafeteria plan in this situation. In addition, it is my understanding that we may also be required to compensate employees who opt-out of the cafeteria plan in a sum comparable to the premium payments. Hope I'm making sense.......I appreciate your suggestions.

A cafeteria plan could be designed to limit all contributions to be from the employer, provided that the employees each have the choice of tax-free benefits paid for with those employer contributions or cash/other taxable benefit. Those employees that choose tax-free benefits will have no taxable income by reason of those contributions, or by reason of having the choice provided that the plan complies with IRC sec 125.

If the employees do not have a choice of cash/other taxable benefit, then it would not be a 'cafeteria plan' as described in IRC sec 125, and observance of the requirements of IRC sec 125 would not be necessary for the employer contributions and tax-free benefits to be tax-free.

By the way, whether IRC sec 125 applies or not, ERISA might apply and need to be complied with.

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I'm still not clear on how this will work

I'm not certain why we should even bother to set up the cafeteria plan in this situation.

In addition, it is my understanding that we may also be required to compensate employees who opt-out of the cafeteria plan in a sum comparable to the premium payments.

You're on the right track. The way it would work in that scenario is each employee would have a chuck of cash to choose what to do with, they could use it to elect benefits under the cafeteria plan or take it as cash. That's the catch, the law says they have to have the option to take it as cash. So unless your bosses want employees to take cash, then it's bad idea.

The cafeteria plan won't help offset any costs as long as the employer insists on paying the full cost of coverage. BUT, if they ever decide to have the employee pay part of the cost, then you would set up a 'premium only plan' or POP cafeteria plan. In a POP, the employee elects to put cash equal to amount of their premiums into the plan and that lets them pay the premiums with pre-tax money. The employer still pays its part outside the plan, just as they are now (preventing the employee from taking it as cash instead of coverage).

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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Guest R Robertson

Thank you. So, if I'm understanding this correctly, it would mean that if we implement the plan and have employee's pay 1/2 the premiums, the employee may elect coverage under the plan and sign the salary reduction agreement, or opt-out and continue receiving his/her regular pay, correct? I think I was confused by Rev. Rul. 2002-27 regarding the amount of the the opt-out. We need not pay a lump sum payout, do we?

I'm still not clear on how this will work

I'm not certain why we should even bother to set up the cafeteria plan in this situation.

In addition, it is my understanding that we may also be required to compensate employees who opt-out of the cafeteria plan in a sum comparable to the premium payments.

You're on the right track. The way it would work in that scenario is each employee would have a chuck of cash to choose what to do with, they could use it to elect benefits under the cafeteria plan or take it as cash. That's the catch, the law says they have to have the option to take it as cash. So unless your bosses want employees to take cash, then it's bad idea.

The cafeteria plan won't help offset any costs as long as the employer insists on paying the full cost of coverage. BUT, if they ever decide to have the employee pay part of the cost, then you would set up a 'premium only plan' or POP cafeteria plan. In a POP, the employee elects to put cash equal to amount of their premiums into the plan and that lets them pay the premiums with pre-tax money. The employer still pays its part outside the plan, just as they are now (preventing the employee from taking it as cash instead of coverage).

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If the ER will pay all the premiums for the health insurance, and those EEs that might decline coverage receive no additional pay or any other taxable benefit in lieu of the coverage, then no section 125 plan need be established or operated. Your arrangement would likely yet be governed by ERISA and in addition to the group health policy document, you might need an ERISA 'wrap' document to comply.

If the EE will have the option of 'cashing out' as additional pay any part of the ER's contribution should the EE not take the health insurance coverage and/or if the ER is paying just part and you want to make the EE's payment of the rest tax-free, then you'll need a section 125 plan.

If the ER will pay part but not allow an EE waiving coverage to 'cash out' the contribution towards the premiums that the ER would otherwise be making, then the ER's contribution is better handled outside of the design/operation of the section 125 plan--as masteff pointed out. This is so even if the balance of the premiums paid by EEs choosing coverage would be handled in the context of the section 125 plan in order to make it tax-free.

If you allow EEs to 'cash out' as additional pay all or any portion of the ER's contribution, it need only be added to those EEs paychecks ratably. That is, it could be done on a monthly basis, it doesn't need to be paid in lump sum for the year. That should be spelled out in the section 125 plan document you would need.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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R Robertson--Your second post (6/24 2:42 pm) is the correct assumption. You are doing a simple "salary reduction", premium only plan (POP), not a more complicated "flex credits" plan. (Keep it Simple Sweetie).

You won't do a "lump sum payout".

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Guest Quicksilver
May an employer pay all the premiums in a cafeteria plan? My understanding is that the employee must contribute in order to the contribution to be pre-tax.

Some more thoughts

If a cafeteria plan provides both salary

reduction and Employer contributions, the Employer contribution

need not be convertible to cash since the plan does contain a cash

component (i.e., the ability to reduce salary). It is not clear if Employer

contributions not subject to cash are taken into account when

performing the 25% concentration test of Section 125(b)(2).

The majority of those plans which provide for Employer contributions

make the contributions available pro rata each pay period

If the full amount is available at the beginning of the

plan year, those participants who elected cash and then terminated

employment in the middle of the year would have received a

windfall gain.

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  • 1 month later...

If the employer pays the premiums for the following benefits: Life, AD & D, Long Term Disability, and a cafeteria plan does NOT exist, would a Form 5500 with related Schedule A information have to be filed if the benefits have over 100 participants?

If filing is required, and a cafeteria plan document does not exist, what plan number do you put on Form 5500?

I'm getting confused about filing a Form 5500 and Schedule a information for benefits in a cafeteria plan as opposed to welfare benefits plan not covered under a cafeteria plan.

Can someone please clarify this for me?

Thank You

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  • 3 weeks later...

Jala:

Answers: 1) Yes

2) Probably plan #501, for a "wrap" plan (which incorporates all the H&W plans you referenced.)

3) Cafeteria plans (for the premium only part of a 125 plan) no longer require 5500 form filing. If there is an FSA under the 125 plan with more than 100 participants, yes, it would require a filing. If there was already a plan #501 in place, you might see a plan #502 for the FSA portion, although it could also be incorporated in plan #501.

There are a number of factors pro and con as to whether an employer would want to do a "wrap" plan or file a separate plan # for each H&W benefit, or for various combinations of benefits.

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Guest taxesquire
Jala:

Answers: 1) Yes

2) Probably plan #501, for a "wrap" plan (which incorporates all the H&W plans you referenced.)

3) Cafeteria plans (for the premium only part of a 125 plan) no longer require 5500 form filing. If there is an FSA under the 125 plan with more than 100 participants, yes, it would require a filing. If there was already a plan #501 in place, you might see a plan #502 for the FSA portion, although it could also be incorporated in plan #501.

There are a number of factors pro and con as to whether an employer would want to do a "wrap" plan or file a separate plan # for each H&W benefit, or for various combinations of benefits.

are you sure e/r-provided life insurance is subj to ERISA? The IRC, yes, but I'm not sure about ERISA. If not, then no 5500.

Also, I think that whether the other benefits are subj goes to the question of whether the payment is a flat dollar amount or if it is a reimbursement of expenses.

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  • 2 weeks later...

The DOL takes the position that an employer funded insurance arrangement is automatically considered to be an ERISA plan if it does not meet the first criterion set forth in DOL Reg. 2510.3-1(j) ("no contributions are made by the employer")--this is a regulatory safe harbor for certain voluntary plans.

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  • 7 months later...
Guest R Robertson

I have a related question to my original post several months ago. Can we set up a Section 125 plan with different benefits for exempt and non-exempt employees? Will this create discrimination problems or other issues? Thank you in advance for your assistance.

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While we're on the subject, if the employer has a section 125 plan, with all contributions made by the employees, are there any discrimination requirements for a medical benefits plan if:

1. Participation is voluntary, and

2. Benefits vary in direct proportion to contributions made, less claims incurred.

Don Levit

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Don

Maybe some hypothetical figures etc might help us to understand how "Benefits vary in direct proportion to contributions made, less claims incurred." would work.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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George:

Thanks for your question.

I am thinking of a VEBA, in which 2 health benefits are available.

First, from an individual savings account, and second, from a pooled account, which the VEBA insurer would pay from.

For example, let's assume that a person has $5,000 in his individual savings account.

He is paying premiums to the pooled account, which will match his dollars in his savings acvount, for qualified claims.

If the match from the VEBA's pooled account is $4 that year, the individual has $25,000 of total coverage ($5,000 from his individual account and $20,000 from his pooled account).

If he uses $15,000, he still has $10,000 remaining.

I am thinking there would be no discrimination here, for there is an objective standard for calculating benefits.

Don Levit

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