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HSA & 401K Without a Cafeteria Plan?


Guest Terrie
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Guest Terrie

I work for a very small company in Ohio. We only have 9 employees. We have a high deductible insurance plan with an HSA, and we have 401k.

The company pays 100% of premiums for single insurance, but deducts a portion of the premium from payroll for family coverage.

I recently had to add my son to my coverage, which means that for the first time since I started here I have a payroll deduction for insurance coverage.

My insurance deduction is being taken POST TAX. The person who does our payroll tells me that this is because our company does not have a cafeteria plan. She is not a payroll person per-se, she set it up based on instructions from our payroll company and our insurance broker and I fear that she has been given inaccurate information.

What I don't understand is how I can have 401k deferrals taken out pre-tax, and HSA contributions taken out pre-tax, but my insurance has to be post-tax. CAN we have 401k and HSA without having a cafeteria plan?

I'm a Payroll Manager with 10+ years Payroll experience (benefits are NOT my strong suit though). My company does administrative work for other companies. So, while I'm paying 3000+ people for our customer companies, I don't do the payroll for the nine of us. I've never heard of medical insurance being post-tax, but then again I've never done payroll for a company as small as we are so I could be entirely wrong.

Any advice or direction toward documentation would be greatly appreciated.

Terrie

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Yes, you would have to have a Section 125 plan to take the premiums pretax. This is completely unrelated to the 401k which while it can be included as part of a Section 125 does not have to be. A stand alone 401k plan is still pretax. I am not familar with HSAs at all, so I don't know if those require a Sec 125 to be pretax.

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Yes, in order for HSA contributions to be made on a pre-tax salary reduction basis, the employer would have to set up a cafeteria plan. It appears that your employer (i) has a cafeteria plan but just for HSA contributions or (ii) is not in compliance with Code Section 125.

Either, you should try to convince your employer to establish a cafeteria plan for employee health plan contributions. In addition to the benefit to employees, the employer will save on its share of payroll taxes for the amounts taken pre-tax. These amounts will probably offset the costs in setting up the plan.

Many brokers will prepare documentation establishing a cafeteria plan at no extra cost to their employer-clients. (It is always a good idea to have counsel review the documentation, however.)

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I am not familar with HSAs at all, so I don't know if those require a Sec 125 to be pretax.

HSA's are IRS Code Section 223.

But you need to have a Sec 125 Plan (with the HSA contribution as a benefit choice) in order to have them taken out pre-tax from employee's pay.

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Guest jackmo

Agree with Marymm. They can't take the HSA contributions pre-tax unless there is a 125 plan in place allowing it. Furthermore, you don't have to put in another 125 plan to pre-tax the health deductions. All that is necessary is to amend the current plan to include health insurance contributions as an eligible benefit.

However, it appears they don't know they're operating a pre-tax plan illegally (without a Board Resolution, documents, etc.)

401-k contributions are allowable pre-tax (after FICA, before Federal) because Section 401-k of the IRC authorizes it (I'm assuming they have a board resolution, documents, etc. for this plan).

Health insurance and HSA contributions are pre-taxable (before Federal and before FICA) because Section 125 of the IRC authorizes it.

An employer can have one plan and not the other, or both.

But your folks are definitely confused.

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  • 4 weeks later...
Guest BrianP

I'm confused a bit here too. The section 125 Cafeteria Plan is only required if the EMPLOYEE want's to make contributions to the plan pre-tax. However, isn't it also possible to set up an HSA plan that ONLY allows the EMPLOYER to make contributions to respective HSA plan(s) without requiring the section 125 election? My understanding is that the potential issue with an EMPLOYER only contribution plan outside of the section 125 election is being sure they aren't discriminatory (which is a separate animal all together).

Am I understanding this correctly - or am I missing something?

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I'm confused a bit here too. The section 125 Cafeteria Plan is only required if the EMPLOYEE want's to make contributions to the plan pre-tax. However, isn't it also possible to set up an HSA plan that ONLY allows the EMPLOYER to make contributions to respective HSA plan(s) without requiring the section 125 election? My understanding is that the potential issue with an EMPLOYER only contribution plan outside of the section 125 election is being sure they aren't discriminatory (which is a separate animal all together).

Am I understanding this correctly - or am I missing something?

I think your analysis is correct. The above presumes that the employer permits employees to contribute to HSAs on a pre-tax salary reduction basis.

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  • 1 month later...

The HSA is subject to the A/D rules of section 223, if it is run outside of the 125 plan. Most employers are not familiar with this. Even if only the employer is making contributions to the HSA, I would put it in as an eligible benefit under the 125 plan for 2 reasons:

1) employees could voluntarily make additional HSA contributions (up to the limits)

2) once the HSA is under the 125 plan, the 223 A/D rules go away, and only the 125 A/D rules apply, which more employers are familiar with.

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The HSA is subject to the A/D rules of section 223, if it is run outside of the 125 plan. Most employers are not familiar with this. Even if only the employer is making contributions to the HSA, I would put it in as an eligible benefit under the 125 plan for 2 reasons:

1) employees could voluntarily make additional HSA contributions (up to the limits)

2) once the HSA is under the 125 plan, the 223 A/D rules go away, and only the 125 A/D rules apply, which more employers are familiar with.

Thanks for the response! What does A/D mean? Also, can you elaborate on the rules of 223 - or point me to a good resource for those rules?

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A/D means anti-discrimination, in connection with anti-discrimination testing.

I use the EBIA reference manuals on "Cafeteria Plans" and "Consumer Driven Health Care".

Basically, the A/D rules under 223 will not allow an unequal employer contribution level to it's employees. For instance, an employer might want to contribute more to some employees' HSAs than others. That will not likely be possible under the A/D rules of 223. But if the HSA is under a 125 plan, the 223 rules no longer apply. So an employer could likely vary contributions by class of employee, etc., and still be able to easily pass the 125 A/D tests.

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  • 11 months later...

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