Effective date in a Plan

[Guest kimb]

A client of mine has both hourly/union employees and salaried employees that are eligible to participate in their Cafeteria Plan. Their plan documents are VERY confusing to me and I would like your interpretation of them please. The Plan Doc state:

“ELIGIBILITY (Section 2.1)

Any eligible employee shall be eligible to participate hereunder as of the date he satisfies the eligibility conditions for the Employer’s group medical plan.” (which I’m told is the day of hire for the hourly/union employees.)

“EFFECTIVE DATE OF PARTICIPATION (Section 2.2)

An eligible employee who is classified as an hourly/union employee shall become a participant effective as of the date on which he satisfies the requirements of section 2.1. An eligible employee who is classified as a salaried employee shall become a participant effective as of the first day of the month coinciding with or next following the date on which he met the eligibility requirements of Section 2.1.”

“APPLICATION TO PARTICIPATE (Section 2.3)

An employee who is eligible to participate in this plan shall, during the applicable election period, complete an application to participate and election of benefits form which the administrator shall furnish to the employee. ……

An eligible employee shall also be required to execute a salary redirection agreement during the election period for the plan year during which he wishes to participate in this plan. Any such salary redirection agreement shall be effective for the first pay period beginning on or after the employee’s effective date of participation pursuant to Section 2.2.”

Their SPD has this:

“What are the eligibility requirements for our plan?

You will be eligible to join the plan once you have satisfied the conditions for coverage under our group medical plan. …..

When is my entry date?

If you are an hourly/union employee, you can join the plan on the day you meet the eligibility requirements. If you are a salaried employee, your entry date will be the first day of the month coinciding with or following the date you met the eligibility requirements.

What must I do to enroll in the plan?

Before you can join the plan, you must complete an application to participate in the plan. The application includes your personal choices for each of the benefits which are being offered under the plan. You must also authorize us to set some of your earnings aside in order to pay for the benefits you have elected.”

My problem is this – since their group medical plan states the hourly/union employees are eligible on the first day of hire and the same for their entry date, my client is saying the employee should be effective in the Cafeteria plan on that same date and it doesn’t matter what date the employee completes their Salary Redirection Agreement form. I’m saying they’re not effective in the Cafeteria Plan until they’ve signed the Salary Redirection Agreement form.

Who’s right and if I am, can you give me some ammo to convince them of this. I’ve been fighting this battle for several years now and would like to have it resolved.

I apologize for the length of this but I wanted to be sure you had all the needed info to help me. Thank you in advance.

[LRDG]

The effective date is the date the election form is signed. Using the employer's interpertation could present a problem if claims are honored that pre-date the election/enrollment form, it would be an IRS violation. If the employer insist on eligibility and enrollment being the same, it can be done, but could raise suspitions in the event of a IRS plan audit. It's administratively highly unlikely (impossible?) for every election form date to coincide with the effective date.

[jsb]

LRDG wrote: It's administratively highly unlikely (impossible?) for every election form date to coincide with the effective date.

For the vast majority of our employees, their first day of work is "New Employee Orientation", where they also sign up for benefits. We receive about 98% of enrollment forms on this first day of work. Our plan rules have elections and coverage effective the first day of the month following eligibiltiy and enrollment. If we had a similar rule with hourly employees as does kimb, most would be enrolled and effective on their first day of employment.

I agree with LRDG that the effective date cannot preceed the election; the election MUST come first.

[GBurns]

To become covered under the medical plan the employee must first enroll. To enroll they must fill out the required forms. Among these forms should be the 125 election and SRA. That way the enrollment and the 125 election are done at the same time or not at all.

The medical plan will not cover retroactively and the 125 election cannot be retroactive.

[Guest kimb]

Thank you everyone for your replies. You are confirming what I've thought all along.

Thanks again!

[LRDG]

i'm thinking Sec. 125 constructive receipt violations. Correct me if I'm worng, but constructive receipt does not apply to the medical insurance plan benefits or premiums. if i becamse eligible for medical benefits on the 1st of the month, complete and date the enrollment form for medical benefits on the 5th of the month, my medical plan will pay benefits as of the 1st of the month even if billed or paid at the end of the month or retro-actively.

pre-tax deduction of the health insurance premium is a seperate mechanisim, and if executed as outlined in the example above, would violate the prohibited constructive receipt provisions.

[Guest kimb]

I've continued to do research on this and found the following in the EBIA Cafeteria Plans book:

Section XIII (3)(a) Initial Elections Must Be Prospective - In the past, conservative employers have required that elections be filed before the beginning of the first pay period that is affected by the election - in other words, participants must make their elections before earning any pay that will be salary reduced to pay for the elected coverage. However, IRS Revenue Ruling 2002-27 seems to slightly relax the prohibition on retroactive elections, at least for cafeteria plans using automatic enrollment. This derives from a comment made in connection with a plan design discussed in the Revenue Ruling using automatic enrollment for employee-only indemnity coverage. The Revenue Ruling states that for a new hire, an election to receive cash or to have family coverage instead is "effective if made when the employee is hired or within a resonable period ending before the compensation for the first pay period is due." This appears to mean that the IRS would permit an election during the first payroll period, at least for a plan using automatic enrollment - in other words, an employee who is hired on January 1 and makes an election on January 14 (one day before the January 15 pay period ends) should be able to pay for benefits in effect from January 1-14 with pre-tax dollars. ......

My client does have automatic enrollment for their insurance benefits so it looks like as long as the employee signs their election form before the end of their first pay period, they can pre-tax the premium for the full pay period. This is going to be hard to except because it goes against everything I've learned over the past 7 years!