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Nondiscrimination Rules - Benefits for certain former employees


David Olive
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Employer wants to encourage longevity, is looking at offering benefits to certain retired employees that meet certain requirements.  

Example: A Cafeteria Plan is amended to allow only active group health insurance plan participants who are at least 60 years of age but younger than 65 (i.e. Medicare eligibility) AND have a minimum of 10 years of GSB service to participate in the Plan after retirement would that be allowed?  I'm looking at 1.125-7(b)(2), which requires any "employee" (and I believe, would also include former employees) with 3 years of employment to participate in the Plan.  Can any further service requirements for former employees be added?

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The Section 125 cafeteria plan's purpose is to act as a safe harbor from the doctrine of constructive receipt.  It's a payment mechanism to permit employees to make a choice between taxable cash income and nontaxable cafeteria plan benefits, including to make a salary reduction election to pay for health and welfare benefits on a pre-tax basis, and not be subject to taxable income on the cash the employee could have received.

None of that is going to apply in the retiree context.  In other words, the cafeteria plan is not relevant for individuals who are not making an election between taxable cash and non-taxable benefits.

There are currently no nondiscrimination rules in effect for fully insured health plans.  The ACA provides that insured group health plans will be subject to rules “similar to” the nondiscrimination requirements that have long applied to self-insured plans under Internal Revenue Code §105(h).  The insured plan rules technically were originally to apply at the same time as the first wave of the ACA market reforms (the first plan year beginning on or after September 23, 2010).

However, the IRS issued Notice 2011-1 at the end of 2010, which provided that employers are not required to comply with the new nondiscrimination rules for insured plans until the Departments issue regulations or other administrative guidance.  The DOL and HHS indicated their agreement with the IRS to delay enforcement.  The Notice further states that any such guidance will not apply until plan years beginning a specified period after issuance (e.g., it may not apply until the first plan year beginning on or after six months following the regulatory issuance date).

Note that you will want to be absolutely certain that the insurance carrier(s) approve adding retiree coverage.

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I am presuming it's not really the "cafeteria plan" that you want to offer as a new benefit to certain retirees, but some subset of the underlying coverages (group health plan, dental, vison, etc.).  If so, then you certainly could do that, but as BG says you don't do that through the cafeteria plan and you need to make sure the ICs are OK with it (if not, they could rescind the coverage and the employer could be on the hook for big bills).

The employer does now have a OPEB plan that may require an actuarial valuation depending the level of seriousness the employer's books are kept, whether it's material, etc.

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Just to clarify the point about ACA and non-discrimination: It is indeed true that the ACA incorporated new “105(h)-like” non-discrimination rules for fully insured primary health plans that have yet to be enforced. However, what is often missed in that conversation is that those rules only involve primary health plans and do NOT apply to health insurance plans that fall under the definitions of Excepted Benefits (which includes plans such as hospital indemnity, critical illness and “similar supplemental” expense reimbursed plans that sit on top of your primary health plans). Given their excepted status, you can, in fact, continue to offer those coverages on a select basis to specific classes of employees, including for some available products groups of retirees. Would be happy to provide more information if you are interested. 

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