Eligibility requirements

[Steve]

The employer maintains a health plan that provides for immediate eligibility to officers of the company, and all other employees are required  to complete 60 days of service. Thus, eligibility for the cafeteria plan is tied to eligibility for the health plan. Does the bifurcated eligibility requirement for the cafeteria plan violate nondiscrimination?

[Brian Gilmore]

Great question because different sources will take different positions on this one.  My position would be that because both employee groups are eligible for the cafeteria plan (i.e., the ability to contribute the employee-share of the premium on a pre-tax basis) immediately upon becoming eligible for the underlying health plan, there is no violation of the Section 125 NDT requirements under §125(g)(3)(B)(i).  In other words, they are both immediately eligible to contribute pre-tax upon becoming eligible for the health plan, and therefore they actually have the same condition of enrollment for cafeteria plan purposes.

I don't view the 125 eligibility test as intended to look-through to the underlying health benefit components for which the POP is used to make employee pre-tax contributions.  Otherwise, a huge percentage of employers would technically be violating the Section 125 eligibility test component of the NDT rules because it's so common to have different employee groups with different health plan eligibility conditions.

My take is that there are other provisions designed to address the appropriate timing of offering coverage underlying the health plan, including the ACA employer mandate, the ACA 90-day waiting period rule, §105(h) for self-insured plans, the ACA nondiscrim rules for fully insured plans if they ever take effect, etc.

 

[MRestum]

Section 125(g)(3)(B)(i) is referencing eligibility for the cafeteria plan, not the underlying benefits offered under the cafeteria plan. Thus, while eligibility for a fully-insured health plan could be structured in that manner, the employer should require officers to wait 60 days to make pre-tax contributions under the cafeteria plan. That is, they should be required to make only post-tax contributions until they have satisfied the cafeteria plan's 60-day waiting period. The other option would be to create two cafeteria plans with different waiting periods (assuming both can pass eligibility testing). 

[Steve]

Thank you for your input.

[Luke Bailey]

On 8/26/2022 at 3:10 PM, Brian Gilmore said:

I don't view the 125 eligibility test as intended to look-through to the underlying health benefit components for which the POP is used to make employee pre-tax contributions.  Otherwise, a huge percentage of employers would technically be violating the Section 125 eligibility test component of the NDT rules because it's so common to have different employee groups with different health plan eligibility conditions.

So Brian, you're saying that this satisfies 125(g)(2)(B))(i) because the employment requirement for the 125 plan is the same for both groups, i.e. date of hire, it's just that the non-officers have nothing to buy under it, assuming this is a POP and no other benefits? And what about an employee hired in November or December? Under 125(g)(2)(B)(ii) they would have to participate 1/1 of next year, right? I'm thinking MRestum has a point if I am understanding both of your answers, which are contrary to each other, right?

[Brian Gilmore]

Agree @MRestum has a reasonable position here, too.  As I mentioned, there are positions all over the board on this issue.  My point is that in both scenarios the employees can contribute the employee-share of the premium on a pre-tax basis through the cafeteria immediately upon having a premium to pay.  When you're hired in the year shouldn't affect the analysis either way.

Point here really is that in practice you'll almost never see an employer taking after-tax contributions for anything other than (non tax-dependent) domestic partner coverage.  You'll also almost never see multiple cafeteria plans for the same employer (and I'm not sure that approach really works given the other aspects of the eligibility test that require nondiscriminatory classifications).  And yet tons of employers have different waiting periods for different classes of employees.  So this is really an academic discussion more than a practical one.

I consider the contributions and benefits test component of the rules to be where the rubber hits the road in terms of practical issues surrounding the 125 NDT rules.  That's the part of the rules requiring a “uniform election with respect to employer contributions.”  This generally means (absent some limited exceptions) that all full-time non-HCP employees eligible for the same plan option as an HCP must be offered at least the same employer contribution amount that is available to the HCPs for that plan.

[Luke Bailey]

16 hours ago, Brian Gilmore said:

And yet tons of employers have different waiting periods for different classes of employees.  So this is really an academic discussion more than a practical one.

The IRS doesn't seem to do much in terms of cafeteria enforcement, that's for sure. But there are a lot of issues like this, hypertechnical, with reasonable arguments on both sides, and then at some point the IRS will put out guidance or an agent will start looking at the issue, and then all of a sudden it comes under scrutiny. It happens.