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Requirements for Premium Only Plan?


Guest ANON-MD
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Guest ANON-MD

I am new to benefits administration, so I apologize in advance for my ignorance. We are a small company with only 80 poeple and I am fairly certain that we have some shortcomings when it comes to "plan documents" and employee communication. I am in the process of cleaning this area and have a few questions.

- Do I need an SPD for a POP and can I do my own year end testing? IF yes on the testing, what do I need to do?

As I research the requirements regarding Sect. 125 and Preimum Only Plans, I've been getting different answers. I've had some say that I need a plan document for a POP. I've had others tell me no plan doc is needed because it is for tax savings only. Which is it? Our company has also has an FSA (both medical and dependent care), so I believe my year end testing might be different than if I simply had POP. Can someome please help me deteremine what I need to have in order to be in compliance?

Thanks.

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I am new to benefits administration, so I apologize in advance for my ignorance. We are a small company with only 80 poeple and I am fairly certain that we have some shortcomings when it comes to "plan documents" and employee communication. I am in the process of cleaning this area and have a few questions.

- Do I need an SPD for a POP and can I do my own year end testing? IF yes on the testing, what do I need to do?

Yes, you need an SPD for a POP for your small company.

If you know how to do the testing, you can do it.

As I research the requirements regarding Sect. 125 and Preimum Only Plans, I've been getting different answers. I've had some say that I need a plan document for a POP. I've had others tell me no plan doc is needed because it is for tax savings only. Which is it?

You need a plan document. It's right there in IRC section 125(d)(1), and ERISA applies and ERISA section 401(a)(1) requires a written document too. The source of your advice that you do not need it is not knowledgeable in this area.

Our company has also has an FSA (both medical and dependent care), so I believe my year end testing might be different than if I simply had POP. Can someome please help me deteremine what I need to have in order to be in compliance?

You have complex testing issues given that you have a premium only plan and flex accounts. Best that you find a professional that knows about these matters to advise you on this--probably not the source that said you do not need documents.

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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ANON-MD:

Sometimes we wait for multiple responses to our postings, but that is not necessary here. If you read these boards regularly, you know that Mr. Simmons gives good advice, and I doubt that anyone will be disagreeing with what he says above.

You also need to consider (and may already have) any notices that you may be required to provide to participants, e.g., Women's Health and Cancer, Materinity Coverage Length of Stay, etc. One approach is to use a wrap document for your SPD, which would give you one document that summaries your welfare plans (POP and FSA), ERISA rights, COBRA, HIPAA, FMLA, USERRA, eligibility, claims procedures, etc. and also contains the required notices.

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Guest ANON-MD
ANON-MD:

Sometimes we wait for multiple responses to our postings, but that is not necessary here. If you read these boards regularly, you know that Mr. Simmons gives good advice, and I doubt that anyone will be disagreeing with what he says above.

You also need to consider (and may already have) any notices that you may be required to provide to participants, e.g., Women's Health and Cancer, Materinity Coverage Length of Stay, etc. One approach is to use a wrap document for your SPD, which would give you one document that summaries your welfare plans (POP and FSA), ERISA rights, COBRA, HIPAA, FMLA, USERRA, eligibility, claims procedures, etc. and also contains the required notices.

We are in fact the process of creating a wrap document.

To give a little background.....We were with Paychex for payroll and our FSA administration. About 1.5 years ago, we switched to ADP for Payroll and FSA Admin. When we switched, I assumed that our plan docs and testing for POP & FSA were included with the new ADP service. As it turns out, it was not. ADP was only doing FSA testing and we had no SPD for our POP, only FSA.

In the process of trying to correct this issue and also preparing for the eventual need to file Form 5500s for our benefits (when we go over 100), we have elected to create a wrap document. Mercer is our benefits broker and they have been contracted to do the wrap document.

Because we have an SPD provided by ADP for FSA, Mercer won't be including the FSA in the wrap document (does this make sense?)

One other question about the wrap document. Our company offers AFLAC (100% employee paid) . Those deductions come out of the paycehcks on a pre-tax basis, so they are a part of Sect 125. Do I include AFLAC in the wrap document? IF yes, to what extent?

I appreciate any and all the asistance provided.

Thank you!

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It's easiest for you and most convenient for participants to have as much as possible in the one wrap document. It's OK to have a separate SPD for the FSA, as long as you have an SPD for the FSA.

I'd include the AFLAC plan in the wrap document if Mercer will do it.

When you get the wrap document from the broker, read it over carefully to see that it correctly describes how your plans work. For example, is enrollment automatic or do participants need to file a form to apply? Is eligibility described correctly? and things like that. I would expect that a wrap document from your benefits broker will generally be just fine, but sometimes you have to make minor corrections.

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I am afraid that I will have to be the one who disagrees with J Simmons on this, but only slightly and only on a technical point:

While Code Section 125 requires a cafeteria plan to have a plan document, there is NO requirement to have or to distribute an SPD for a POP.

A POP merely a mechanism that permits participants to pay for qualified benefits on a pre-tax salary reduction basis. It is not, in and of itself, subject to ERISA, which is the law that requires distribution of SPDs.

The underlying health benefits offered under a POP, including a health FSA, ARE subject to ERISA and DO require an SPD, which is why, in all practical sense, most cafeteria plans have an SPD. So, your medical, dental, vision, etc. plans should be part of one or more documents that comprise an SPD, in addition to the health FSA. Hence your wrap plan/SPD.

I would be hesitant to include the AFLAC policies in your cafeteria plan. While it is not entirely settled, it is possible that offering such plans in your cafeteria plan will take these policies outside the DOL safe harbor from ERISA.

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While Code Section 125 requires a cafeteria plan to have a plan document, there is NO requirement to have or to distribute an SPD for a POP.

A POP merely a mechanism that permits participants to pay for qualified benefits on a pre-tax salary reduction basis. It is not, in and of itself, subject to ERISA, which is the law that requires distribution of SPDs.

I think your point may be more theoretic than technical, because it is not practical given the exemption from ERISA. DoL Reg § 2510.3-1(j)(3) limits the involvement of the employer, for the exception to apply, to

--without endorsing the program [of group or group-type insurance], to permit the insurer to publicize the program to employees or members, and

--to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer.

So, who is handling the cafeteria plan elections (making sure they are timely), mid-year status changes (but no other mid-year changes to make sure that they are generally irrevocable), other health plan notices (like COBRA, HIPAA), and other administrative chores inherent in the POP for an 80 employee group? For example, how is the employer going to maintain the plan for the benefit of its employees (who decides if a worker is an employee or an independent contractor for plan purposes) and that the POP "is operated in compliance with the requirements of section 125 and the regulations" (Prop Treas Reg § 1.125-1(a)(1))? As a practical matter, this requires more employer involvement to achieve the tax break than is permitted to achieve the exemption from ERISA.

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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I guess I didn't make clear that my post was actually addressing two separate points.

1-My first point was that although ERISA requires applicable plans to have a summary plan description, the POP mechanism isn't an ERISA plan. So, while you need to describe eligibility, claims procedure, etc. for the underlying plans, technically or theoretically, you DON'T need an SPD to describe that participants can pay their premiums on a pre-tax basis through the cafeteria plan.

2-I agree with you with respect to my second, unrelated, comment. If an employer permits participants to pay for AFLAC benefits on a pre-tax basis through a cafeteria plan, the AFLAC benefits are likely to be considered part of an ERISA plan because there is too much employer involvement. (I seem to recall that there was conflicting case law on this issue but I haven't checked recently to see if a consensus was established.) If there is too much involvement, COBRA, HIPAA, SPD and 5500 requirements (I know, no Form 5500 required for this employer), etc. attach to these voluntary benefits because the plans now become ERISA plans.

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I guess I didn't make clear that my post was actually addressing two separate points.

1-My first point was that although ERISA requires applicable plans to have a summary plan description, the POP mechanism isn't an ERISA plan. So, while you need to describe eligibility, claims procedure, etc. for the underlying plans, technically or theoretically, you DON'T need an SPD to describe that participants can pay their premiums on a pre-tax basis through the cafeteria plan.

Still disagree. For tax savings, the "POP mechanism" involves either the ER paying the premiums (no chance of exemption from ERISA--DoL Reg § 2510.3-1(j)(1)) or IRC § 125 (i.e., "cafeteria plan"). Thus for possible exemption from ERISA (and the SPD requirement), the POP is either a cafeteria plan or part of one. In either event, to comply with IRC § 125 requires the employer's involvement in an ongoing administrative scheme beyond what DoL Reg § 2510.3-1(j)(3) permits, ergo, an ERSIA plan for which an SPD is required.

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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I still see a distinction between the underlying health benefit, which of course is subject to ERISA and the payment mechanism. It's not worth discussing any longer and you may be right but I have never heard anyone use that argument before. Two quick follow-ups: (1) ERISA 2510.3-1(a)(2) states the term "welfare benefit plan" only includes "plans which provide benefits described in Section 3(1(A)" of ERISA. What are the benefits that the POP provides that are described in section 3(1)(A) and that are different than the benefits provided under the underlying plans? (2) Are you saying an employer will have to file a Form 5500 for BOTH the underlying plans and the POP?

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Two quick follow-ups: (1) ERISA 2510.3-1(a)(2) states the term "welfare benefit plan" only includes "plans which provide benefits described in Section 3(1(A)" of ERISA. What are the benefits that the POP provides that are described in section 3(1)(A) and that are different than the benefits provided under the underlying plans?

"The terms' employee welfare benefit plan' and 'welfare plan' mean any plan, fund, or program which ... was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits... ." ERISA § 3(1) (emphasis added).

(2) Are you saying an employer will have to file a Form 5500 for BOTH the underlying plans and the POP?

Not if the health insurance is specified to be a benefit of and a part of the POP rather than the health insurance itself dubbed a "plan"--then just one Form 5500 will do, provided that you've not already in documents ascribed different 501 et seq number to each group health policy and filed separate Forms 5500 for it.

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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But the POP was not established for the purpose of providing medical, surgical, or hospital care or benefits.

The medical plan was, but not the POP.

The POP provides the medical benefits "through the purchase of insurance".

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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A POP is a section 125 cafeteria plan.

As such, it requires a written agreement/plan document.

This written agreement/plan document must made available and conveyed to the employees. A simple way of doing this is to provide a Summary, hence, a Summary Plan Document or SPD.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Sorry to keep revisiting this.

J Simmons (can I call you "J"?) -- What are your thoughts on DOL Adv. Op. 96-12A?

http://www.dol.gov/ebsa/programs/ori/advisory96/96-12a.htm

In this opinion, the DOL stated

"[T]he function of the Pre-Tax Plan is to provide a method by which employees may receive tax-favored treatment of contributions that are in any case required under the Group Health Plan. The provision of this tax-favored treatment, however, is not the equivalent of the provision of a benefit enumerated under section 3(1), and it does not appear that the Pre-Tax Plan itself provides any enumerated benefit. It is therefore the position of the Department that the Pre-Tax Plan, as currently structured, does not constitute, in itself, a separate employee welfare benefit plan within the meaning of section 3(1)."

To me, that agrees with my point that a POP is not an ERISA plan (although the underlying plan is).

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Hi, Chaz,

There are DoL advisory opinions along the lines you have pointed out one. But there is more to the analysis than the limited reach of those advisory opinions.

Please e-mail me (see address in my signature below), and I will then reply e-mail with the more detailed analysis.

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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  • 11 months later...

You mentioned that ADP took over or created an FSA after leaving Paychex? It would be highly unusual for a full FSA to not included language for the premium conversion to pre-tax benefits under the FSA and would not traditionally require a seperate POP plan document. However testing would or should need to be performed. As you are under 100 employees there is no requirement to file or report the tests to the IRS and if you understand or can perform the test in-house you certainly can do it yourself but document and stick in the file in the event you are audited in the future.

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