Amending cafeteria plans to cover dependents under age 27

[Guest KHanvey]

Under the new health care act, Cafeteria Plans must be amended to cover dependents up to age 26. This change must be effective by 1/1/2011 for calendar year plans.

Guidance issued by the IRS (http://www.irs.gov/pub/irs-drop/n-10-38.pdf) indicates that Cafeteria Plans may be amended retroactively to include employees' children who have not attained age 27 by the end of the taxable year. However, this guidance states that such an amendment must be adopted by December 31, 2010 (and may be effective as early as March 30, 2010).

What is your understanding with respect to the general deadline to amend cafeteria plans if an employer does not wish to include dependents up to age 26 until required to do so by the healthcare act (for example, 1/1/2011 for a calendar year plan)? What have clients done in this regard?

[Guest Sieve]

Per proposed IRS regs, cafe plans cannot be amended retroactively (Prop. Treas. Reg. Section 1.125-1©(5)):

"Any amendment to the cafeteria plan must be in writing. A cafeteria plan is permitted to be amended at any time during a plan year. However, the amendment is only permitted to be effective for periods after the later of the adoption date or effective date of the amendment.

"

So, the IRS position is that the adult child amendment must be made before the start of the cafe plan's year. I wonder how many plans out there did not do it properly: 95%?

[LRDG]

This type of retroactive amendment from IRS has been limited but not unheard of with respect to Sec. 125. It would not be the first time IRS issued a change in Sec. 125 to take effect for a date irrespective of the plan year, along with a provision that plan docs be amended not later than the next anniversiary date of the plan.

Retroactive Sec. 125 amendments are prohibited unless otherwise directed by IRS under specific circumstances.

If I remember correctly, the most recent similar event involved IRS revoking eligibility of OTC drugs under Sec. 125, effective ?? May 2010?, w/plan documents amended no later than the next plan year anniversiary date. What was particularly unusual with the change in OTCs is it involved potential Medical FSA forfeitures for every participant who elected OTCs in a plan w/anniversiary dates later than May 2010?. Never before had IRS issued a similar amendment w/the potential for participant forfeiture, nor have plan sponsors been in a position to inform MFSA participants that OTCs would become ineligible, subject to forfeiture mid year if not claimed before the mid-plan-year effective date.

I would guess complience is much higher than 5%, primarily due to the high number of plans administered by 3rd party administrators. Even for small self administered 125 plans, compliance is likely higher than anticipated due to overlap w/insured Medical plan compliance.

Edited to add:

Prohibiting retroactive 125 amendments applies to plans amended at direction of the plan sponsor, vs IRS amendments due to changes in legal requirements in plan administration and plan document.

[katieinny]

KHanvey: I happened to be reading Notice 2010-38 today, and had the same question you did, so I turned to Benefitslink. I was glad to see your question posted. In our case, we are dealing with clients that have POP plans -- no Health FSAs. Some also have Dependent Care plans, but it seems those aren't affected by changes. One person was saying that the POP cafeteria plan doesn't need updating -- only the underlying health care plans must reflect the "up to age 27" language. However, it seems to me that there is little doubt that the POP plan must be amended. So the next question is are we already too late since we're 6 weeks into 2011 for a calendar year plan? Based on LRDG's edited note, a retroactive amendment is okay, since the new age requirement must be implemented this year as a legal requirement, not at the employer's discretion. Am I interpreting that correctly?

[Guest Sieve]

Do you really need to amend a POP for that? I don't see why. Certainly all of the health care rules are not in such a plan, or at least not in the POP protion.

[katieinny]

Okay, now I'm really confused. The POP is a cafeteria plan. The intro says "It is intended that this plan qualifies as a cafeteria plan under 125 for Health Insurance Benefits as elected by eligible employees." I've been reading as many articles as I can find, including the IRS Notice, and it sure looks to me like the plan needs to be amended to include the "up to age 27" language. What am I not understanding?

[GMK]

For one, you need to read the eligibility section of your POP document to see if it allows up to age 26 persons, or needs to be amended.

edit: or up to age 27 in some locations.

[katieinny]

The document says up to age 19 or 24 if a full-time student. I guess what you're saying is that some documents don't provide an age, but refer to code sections instead. Since this document includes an age, it must be amended.

[GMK]

I guess what you're saying is that some documents don't provide an age, but refer to code sections instead.

Yup.

[Guest Sieve]

katieinny -

If the POP portion of the cafe plan describes those for whom premiums can be paid by age or by dependency status, and would, by its terms, exclude kids up to age 26--then, Yes, I'd say you need to amend the cafe plan. I assumed that the plan did not include that type of language, but only said it would pay premiums for the employer's group health plan (whatever terms that coveage might include), and therefore it would be up to the health plan to provde for the appropriate child coverage.

Sorry for the misdirection . . .

[katieinny]

No problem -- I should have said that the age was listed in the document up front. I'll send out an amended page and stop obsessing about this.

[GMK]

There is no flaw in obsessing about getting the details right in these matters.

(I think Ben Franklin said that ... maybe. )

[Chaz]

There is no requirement under health care reform to amend cafeteria plans for adult children. The law only requires plans that provide dependent coverage to provide coverage to age 26 children. The law permits plans to provide such coverage on a tax favored basis. So, you wouldn't have to amend the cafeteria plan but if you didn't, participants would have to pay their percentage of the premium after-tax and you would have to impute income for the employer's share.

[GMK]

you wouldn't have to amend the cafeteria plan but if you didn't, ... you would have to impute income for the employer's share.

Generally a good point, but is this what you mean? Do you need a cafeteria plan for the employer's share to be federally exempt?

[Chaz]

I'm sorry, you are totally correct on that. No cafeteria plan is needed for the employer's contribution. I totally withdraw that part of the sentence. A cafeteria plan is only required in order for the employee to pay his or her portion pre-tax.

Good catch. I have no excuse except that it is 70 degrees on a Friday in February.

[GMK]

I have no excuse except that it is 70 degrees on a Friday in February.

I appreciate your posts, and you caught me off guard for a minute.

But the real question is why are you typing responses here when it's 70 degrees on a Friday in February? We got to 50 yesterday, which significantly reduced the snow mountains on the lawns, but 70!! wow.