Automatic Linking of Pre-tax Election to GHP

[Guest erinf]

A company I work with is trying to reduce the paperwork required for administering their cafeteria plan, because currently they require an individual to both enroll in a group health plan and fill out a separate salary reduction agreement to elect to have their pay withheld pre-tax. The pitfall is that they have had individuals change their health coverage (for example, drop a spouse due to spouse's change in employment status that affects eligibility) and forget to fill out an election change form in order to change their status, and the person continues to have their same election taken out.

I understand that the most recent regs addressed automatic enrollment in a group health plan with a corresponding pre-tax election, but what about just an automatic linking of group health plan election and pre-tax election? Can the plan doc legally be drafted to state something like, "you will automatically enroll in the POP when you enroll in a GHP, and such election will be automatically adjusted if a change in enrollment in the GHP corresponds to a qualified change of status under Section 125 and the change of status regulations"? The choice between tax and benefits is essentially - choose the health plan (with pre-tax) or choose no health plan and get the increased salary (no opportunity for after-tax payment of health benefits). Thoughts?

[LRDG]

According to Sec. 125(d), a Cafeteria plan is a written plan:

(d) Cafeteria plan defined

For purposes of this section—

(1) In general

The term “cafeteria plan” means a written plan under which—

(A) all participants are employees, and

(B) the participants may choose among 2 or more benefits consisting of cash and qualified benefits.

According to Treasury Regulations/page 32:

§1.125-1 Cafeteria plans; general rules.

(a) Definitions. The definitions set forth in this paragraph (a) apply for purposes of section 125 and the regulations.

(1) The term cafeteria plan means a separate written plan that complies with the requirements of

Section 125 and the regulations, that is maintained by an employer for the benefit of its employees and

that is operated in compliance with the requirements of section 125 and the regulations.

The plan document must meet the standards of a legal document that describes and discloses to participants the provisions of Sec. 125 as it pertains to the benefits the plan provides. For example, it must include a defination of Sec. 125 non-discrimination requirements, HC and Key EEs; eligible EEs and dependents and IRS defination of dependents, cross referenced by code section; election provisions; possibility of forfeiture; and allocation of experience gains.

If the Sec. 125 plan includes GTL, Dental, and Medical and Dependent Care FSAs, or other eligible benefits, the plan document must include a legal description of these benefits as well.

Provided the Sec. 125 enrollment forms meet the legal standard of disclosure, that for example, the election is irrevocable and funds are subject to forfeiture; funds can't be applied toward individual income tax deductions or credits, and funds are not otherwise reimbursed or reimbursable, combining it with the GHP enrollment form for purposes of reducing paperwork might be acceptable.

Much of Sec. 125 is unrelated to the GHP and it's operation, and considering the emphasis by IRS & Treasury that it's a seperate plan in writing, using a single enrollment form for both GHP & Sec. 125 could be interperted as combining plans if two seperate signatures are not required, for example. A seperate enrollment form may be a better example of maintaining the standard of seperate plans that's emphasized.

http://www.law.cornell.edu/uscode/html/usc...25----000-.html

http://www.ustreas.gov/press/releases/reports/section125.pdf

[masteff]

Based on my experiences in several corporations and benefits departments (but I'm a retirement guy, not a H&W guy, so I don't know the exact mumbo jumbo of it), the election is health coverage via the 125 Plan, you don't have the option to take health coverage outside the 125 (ie as an after-tax benefit). So any election is a pretax election. A significant majority of companies use a single form; now whether they're doing by the text book manner or simply cutting a minor corner is beyond me but I don't see those companies going to DOL/IRS jail either.

[LRDG]

I worked for a few of the big players in the insurance industry. One organization in particular administered all benefits by their HR and Payroll departments. Several colleagues confided that they had a single EOB paid multiple times throughout the year from their Medical FSA; one of those same participants elected $10.5k in DCFSA benefits for several years. They realized something was up after I came on board w/my own enrollment material and after working on cases together that the IRS DCFSA maximum was $5k. The DCFSA participant was also an officer of the Co.

In addition to the Sec. 125 issues, the payroll dept., had a practice of 'hard coding' as much data as possible. Hard coding is programing repeditive data entry to a single key stroke, for exampe disability premium deduction of $25.92 accomplished with the lower case 'w' key stroke, eliminating 5 key strokes in the process, or 50k fewer key strokes for 10k participant employees. The problem was that $25.92 represented DI premium with a rider that included spouse coverage, applied for during open enrollment. The spouse rider was denied because it did not meet underwriting.

Excluding the spouse from coverage resulted in a reduction in premium, and lower payroll deduction. HR/payroll chose to not make DI premium adjustments for the excluded spouse because doing so violated their practice of 'hard coding'. One would think HR/Payroll was managed by Joe's Bait Shop, (no insult to Joe intended), not one of the top insurers in the country, covered heavily in media for their inovations in insurance such as medical tourism, who one would think had some levle of awarness of IRS and existence of state insurance law. But that was not the case.

This large organization had a rogue HR/PR/Benefits departent. Most organizations obey the law and maintain compliance than what is reflected in the info I posted. There are some who despite their large EE population, fit the example I provided.

[SLuskin]

You can write the Section 125 document as either the opt-in method (enrollment form) or opt-out method (waiver form). The docs and SPD need to be clear, and spell out the permissible status changes.

Someone in HR needs to monitor any changes, etc.

Hopefully, they have a Section 125 administrator that can answer any questions about the ability to make any changes to any of the pretax plans.

[LRDG]

The risk associated with overlooking or mis-handling a POP election status change increases exponentialy when paper work is reduced and plans are combined, particularly via a self admin POP.

That which the plan is attempting to achieve, reduce paper work, is exactly what will likely lead to overlooking or mis-handling a self admin POP. The possibility of keeping a self admin POP in compliance w/respect to election status change could work well if there is a payroll-clerk-for-life who is also conscientious of the POP.

A payroll administrator has many competing and conflicting priorities with those required for benefits admin and compliance. Compliance with a self admin POP with the objective to combine with the GHP and reduce the POPs presence is in many ways in conflice with compliance priorities.

Depending on turnover, imagine 5-6yrs, and 2 or 3 payroll clerks later, there's a strong possibility that when asked about the Sec. 125 POP, it may sound vagely familiar, but chances are no one will recall exactly what it is, what a change in status is or what the rules are. Few will recall a time when the premiums on the payroll system were not withheld pre-tax or why they are now. I don't see that adding to awarness of compliance. Particularly when combined w/GHP. Less so when self administration is involved.

A sudo-combination plan consisting of a GHP and self admin POP does nothing to improve the possibility for POP compliance, over the long term a plan is in effect. Based on my experience, it's not adding up to a good compliance outcome for most organizations. Not that there aren't organizations highly capable w/specialized awarness of complience, but I would not recommend it to many organizations. There may be a select few that are capable of combining, and administering with great deal of efficiency. Those that are capable I would not expect to see posting this type of question here.

Are there other premiums in addition to GHP premiums to be paid pre tax, or will there be in the future, and if so will all plans be 'combined'? For example, is there Dental, Vision, DI, or GTL and what are the consequences on the combo GHP + self-admin-POP?