Adding Employer Contributions to Cafeteria Plan

[Guest AEA]

I inherited an employer that, when the group health plan was discontinued, began simply paying employees a few hundred each month to "use" for premiums or medical expenses. The amount is subject to all taxes; the employer includes a line on the pay stub that says something like "medical". They have asked me to add this "benefit" to the existing cafeteria plan, which, currently, only provides a medical expense reimbursement plan.

I don't see how (or why) I would want to add this to the cafeteria plan and keep it an after-tax benefit. (Let me know if I am missing something!) It would appear to benefit both the employee and employer if this was a pre-tax benefit (no income or fica/futa withholding).

As a result, I have considered the following options: an HRA (limited to premiums or unlimited), an employer contribution to the MERP (understand can't reimburse for insurance), or a premium reimbursement plan (Rev. Rul. 61-146).

In addition to various other concerns that I have, I am hung up on how and whether COBRA and HIPAA apply. (Employer has 24 employees) I have tried reading the rules several times, as well as whatever commentary I can get my hands on, but am very confused.

Am I correct that no matter how much the employer contributes, COBRA and HIPAA will apply because the employer does not offer a group health plan that is subject to HIPAA? Are they already subject because they only offer a salary-reduction MERP currently?

If I am not, could I avoid COBRA by having the employer contribute $500 to an HRA for insurance premiums or reimbursements and an additional $500 to the FSA for reimbursements only? Would I need separate plan documents?

Any comments or suggestions would be greatly appreciated!!