I'm Not a Cafeteria Plan Specialist

[thepensionmaven]

I must confess, being a qualified plan TPA, I know next to nothing about HSAs or Section 125 plans.

My client has inquired about updating their 125 plan document; are these two plans, an HSA and a 125?

Stupidity is not excuse.

[QDROphile]

Yes, but ignorance can be OK as long as the ignorant one recognizes it and the limitations it imposes under the circumstances.  Active ignorance is another discussion.

An HSA is a separate arrangement from a 125 (cafeteria) plan, but the cafeteria plan can connect to the HSA by allowing contributions by the employee to the employee's HSA by elective deferrals of the employee.  This is essentially the same as a 125 plan connecting with an employer health plan to allow employees to pay premiums to the health plan for the employee's share of the cost of health coverage.

Some people picture the 125 plan as an umbrella, under which the eligible benefit arrangements (health plan, HSA, dependent care plan, etc) operate and receive funding from the employee through the umbrella 125 plan.  The employer is not required to provide for the opportunity to fund other benefit arrangements by elective deferral under the 125 plan.  An HSA is not automatically connected to a 125 plan.  The terms of the 125 plan govern the funding of other eligible benefit arrangements.

You get into more complexity as you look at the documentation of the plans.  It is possible to have a master document that includes the terms of the 125 plan and the participating plans, bound together with one (big) staple.  It is possible to have a bunch of  plan documents separate from the 125 document and have the 125 document identify and refer to the separate participating plans, each of which has ts own staple. 

The essence of a 125 plan is the ability of an employee to elect salary deferrals to fund participating eligible benefit arrangements, but more can be going on under the documents, such as employer funding of benefits.

[leevena]

What is a cafeteria plan?

Below is a cut and paste from IRS site.  They are 2 different plans.

 

A cafeteria plan is a separate written plan maintained by an employer for employees that meets the specific requirements of and regulations of section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pretax basis. Participants in a cafeteria plan must be permitted to choose among at least one taxable benefit (such as cash) and one qualified benefit.

A qualified benefit is a benefit that does not defer compensation and is excludable from an employee’s gross income under a specific provision of the Code, without being subject to the principles of constructive receipt. Qualified benefits include the following:

• Accident and health benefits (but not Archer medical savings accounts or long-term care insurance)
• Adoption assistance
• Dependent care assistance
• Group-term life insurance coverage
• Health savings accounts, including distributions to pay long-term care services

The written plan must specifically describe all benefits and establish rules for eligibility and elections.

A section 125 plan is the only means by which an employer can offer employees a choice between taxable and nontaxable benefits without the choice causing the benefits to become taxable. A plan offering only a choice between taxable benefits is not a section 125 plan.

[MRestum]

You need to advise this client to hire someone who is an expert in welfare benefits.

[Bob the Swimmer]

We have been calling the 125 plan a simple vehicle or a conduit for many years now.

Especially since the 5500 guidance on it came out many years ago from DOL.

[thepensionmaven]

Thank you all.