Employer Contributions

[Guest dparks]

We have a client that has a cafeteria plan that provides a "benefit allowance" to each participant to help offset the cost of their benefits. Each participant makes their elections prior to the beginning of the plan year, but some of the benefits are pending approval by the insurance company. Please advise if there is any guidance anywhere on whether the participant should be allowed to use the "benefit allowance" toward other benefits if they are denied coverage for the benefits that they originally elected?

[papogi]

Tough one. I can find nothing that deals with this specifically, but pieces in the regs address parts of this. Since elections are really supposed to be made before the Section 125 plan year begins, I don't think that employees should be able to take the allowance and use it for another benefit, even if that benefit is only applied prospectively. I think that the allowance should simply be added to the employee's pay as taxable income, as well as any allowance that was allocated to the benefit early in the plan year before he/she learned that they would not be eligible for the benefit. A prime example of this would be optional additional life insurance that the employee doesn't end up eligible for.

[Guest Jeffrey N]

One may look into the remarks made by Harry Beker, IRS, Office of Chief Counsel at the May 1995 CLE Employee Benefits Inst in Minnesota, that an employer may allow for an employee to change the election if they failed the medical underwriting.

[Guest Jeffrey N]

Another side note, is this plan that the employee is not approved for a medical plan or another type of insurance? HIPPA prhibits underwriting on an employee for a group medical plan. Question ..does your plan use non-elective contributions? By this do you offer everyone the same dollar option and they keep any "leftover money" or is it a benefit amount up to and any thin leftover is lost.

[Guest lschaab]

Of the 'allowance' plans we administer, employees are advised during open enrollment that if a benefit is subject to underwriting and the employee is denied, the dollars allocated toward the benefit are lost, and a new election is not permitted. If a salary reduction/deduction is affected, an adjustment is made automatically. There isn't alot of guidance or discussion on these types of plans, you just have to take a step back and try to apply the rules in the most consistent and compliant manner possible.