Jump to content

Flexible Benefits Plan


Belgarath
 Share

Recommended Posts

This isn't a direct cafeteria plan question, but tis question was asked, and I don't know the answer. 

As part of an employer's overall benefit program, is it allowable to allocate (X) dollars per employee of employer contributions, which the employee can then use to choose among various option. For example, if an employer allocates $5,000 per employee. The employee can then choose to have the employer direct portions of this to the HRA, the Section 127 plan, the Health Insurance, the Cafeteria plan, etc.?

The employee would NOT be able to receive any of this in cash. So "use it or lose it" in the various benefit plans.

IF this is allowable, are there any tax ramifications?

Since an approach like this seems too easy, I'm guessing there are problems with it!

I'm going to refer the client to their benefits counsel, but thought I'd see if anyone knows a "general answer" to this. Thanks.

Link to comment
Share on other sites

There's a lot there, so a few points to keep it simple:

  • What you're describing are non-cashable flex credits run through a Section 125 cafeteria plan.
  • Only Section 125 qualified benefits can be allocated through flex credits.
  • HRAs are not a Section 125 qualified benefit.  An HRA cannot be funded directly or indirectly by a cafeteria plan.
  • ALEs need to make sure there are sufficient flex credits that qualify as a "health flex contribution" to ensure the plan meets the ACA affordability test.
  • Flex credits that can be allocated to the health FSA generally need to be cashable to avoid losing excepted benefit status.
  • Only cashable flex credits can be allocated to the 401(k).

 

For a list of qualified benefits, see slide 6 here: 2021 ABD Section 125 Cafeteria Plans Guide

For an overview of flex credit issues, see here: https://www.theabdteam.com/blog/how-aca-affects-flex-credits-2/

 

Here's a "health flex contribution" overview:

https://www.theabdteam.com/blog/how-the-aca-affordability-increase-to-9-83-affects-employers/

How Do Flex Credits Affect the Affordability Determination?

Flex credits will reduce the dollar amount of the employee-share of the cheapest plan option providing minimum value that is used to determine affordability if they meet a three-part test to qualify as a “health flex contribution”:

  1. The employee may not opt to receive the amount as a taxable benefit (i.e., it is not a cashable flex credit);
  2. The employee may use the amount to pay for minimum essential coverage (i.e., the employer’s major medical plan); and
  3. The employee may use the amount exclusively for medical/dental/vision coverage costs.

Action Item: If you offer a defined contribution-style flex credit approach to employees, make sure that a sufficient portion are designated as “health flex contributions” to qualify under an affordability safe harbor.  This will require at least some of the flex credits be non-cashable and designated for health plan purposes only.

 

Here's the guidance prohibiting any interaction between the cafeteria plan (including flex credits) and HRA funding:

IRS Notice 2002-45:

https://www.irs.gov/pub/irs-drop/n-02-45.pdf

IV. HRAs and Cafeteria Plans

Employer contributions to an HRA may not be attributable to salary reduction or otherwise provided under a § 125 cafeteria plan. An accident or health plan funded pursuant to salary reduction is not an HRA and is subject to the rules under § 125.

...

An arrangement is not treated as an HRA if the arrangement interacts with a cafeteria plan in such a way as to permit employees to use salary reduction indirectly to fund the HRA. Therefore, where an employee who participates in a reimbursement arrangement has a choice among two or more specified accident or health plans to be used in conjunction with the reimbursement arrangement (or a choice among various maximum reimbursement amounts credited for a coverage period) and there is a correlation between the maximum reimbursement amount available under the HRA for the coverage period (disregarding amounts carried forward from previous coverage periods) and the amount of salary reduction election for the specified accident and health plan, then the salary reduction is attributed to the reimbursement arrangement even if the amount of salary reduction election is equal to or less than the actual cost of the other accident or health coverage.

Link to comment
Share on other sites

No need for an HRA - simply have individuals allocate monies to their Health Flexible Spending Account (for current year expenses - limited FSA) and their Health Savings Account (for everything else, especially as a form of saving for post-retiremnt medical costs - Medicare Part B and D premiums, long term care insurance premiums and out of pocket medical, dental, vision, LTC costs). 

 So, I believe you can have a cafeteria plan with all the regular qualifying benefits (as outlined by Brian) where people can allocate their credits:
▪ Group Health Plan (Medical, Dental, Vision)
▪ Health FSA, Dependent Care FSA
▪ HSA
▪ Group Term Life ($50k coverage cap)
▪ AD&D
▪ Hospital Indemnity/Cancer Insurance
▪ Disability (generally contributions or benefits are
taxable)
▪ 401(k) Plan (cashable flex credits, uncommon)
▪ Adoption Assistance (no FICA exemption,
uncommon)
▪ PTO Buying/Selling (uncommon)plus Health Savings Accounts)
 

I am a believer in Health Savings Account capable health options, so, I often recommended migrating to "full replacement", multiple HSA-capable strategies. 

I wouldn't have those credits leak to the 401k nor to cash. 

I would be circumspect about pre-tax contributions for hospital indemnity and cancer coverage, and certain wellness incentives - See IRS Chief Counsel Memorandums 201622031, 201719025 and 201703013.

https://www.irs.gov/pub/irs-wd/201622031.pdf

http://hr.cch.com/PayNetNews/CCA201719025.pdf

https://www.irs.gov/pub/irs-wd/201703013.pdf

I would also avoid adoption assistance, PTO buying and selling as well.  If you want to have people sell PTO, the better option is to change the PTO schedule to reduce it to the minimum you want individuals to use each year, then, raise salary accordingly (because they will be working more hours), then whenever they want to use more, simply have them take an up to two week unpaid leave of absence - as scheduling permits and the immediate supervisor approves.  A major challenge is that many firms do not effectively track usage.  Structured in this way, it will be the supervisor's own budget that takes the hit for failure to recording absence.  We also ERISA-fied our PTO program, so that we didn't cash out unused vacation for individuals who separated within the first five years of employment.   Doing it that way ensured that the only way to avoid the extra hit on departmental budgets was to report actual usage.

In terms of LTD, you might consider an annual enrollment process that offers a choice of taxable benefits and tax-free benefits.  Where the individual pays the cost of LTD coverage with after-tax dollars, there is guidance that may enable the benefits to be paid out tax free - should they meet the definition of disabled.  Otherwise, where the employer contribution and/or employee pre-tax contributions are used, the disability income is taxable income.  Where the employee elects to pay the full cost with after-tax contributions, the individual could allocate the credits to other eligible benefits under the cafeteria plan. 

One option we also used was a taxable "benefit credit".  It would be recorded as a separate form of salary every payday.  It would be outside the cafeteria plan.  The added wages simply defrayed the cost of benefits not eligible under the cafeteria plan. We sometimes used this "benefit credit" functionality, a separate per payday amount of taxable income, recorded separately from regular salary and/or hourly wage for other purposes.  Sometimes we tied benefit credit awards to profitability, sometimes not.  Sometimes we used it as a transition strategy  with repswct to benefits integration after an acquisition.  WE did that a number of times when we acquired a firm that was spending much more on health coverage than we were.  Anyways, all it did was effectively raise wages and defray the impact of deferrals to the 401(k),or other taxable benefits (group term life > $50,000, etc.)_ 

With respect to Educational Assistance (IRC 127), we limited those employer-paid benefits to "job related" expenses, for personal development only (approved by the supervisor, related to the current or next most likely position with the employer).  And, where an individual left within a year of separation, we recouped those amounts (I know at least one firm that, at one time, delayed reimbursement until a year after course completion).  While recent legislation allows you to consider student loan debt payments as a qualifying expense through 2025, there are some innovative design options there as well for individuals who took classes that would qualify under your IRC 127 plan, but who have already repaid their student loans or those who never took on student debt - that is, if you want to do equity.    

With respect to IRC 132 transportation fringe benefits, it is a great benefit - however, given the diversity of commuting situations, access using pre-tax contributions may be all you need.  Again, this is another potential equity challenge - such as where the cost of parking far exceeds the cost of public transportation, etc. 

Lots of other permutations and opportunities here.  

Jack 

 

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...