By Danielle Capilla
Chief Com­pli­ance Offi­cer at Unit­ed Ben­e­fit Advisors

CafeteriaCafe­te­ria plans, or plans gov­erned by IRS Code Sec­tion 125, allow employ­ees to pay for expens­es such as health insur­ance with pre-tax dol­lars. Employ­ees are giv­en a choice between a tax­able ben­e­fit (cash) and spec­i­fied pre-tax qual­i­fied ben­e­fits, for exam­ple, health insur­ance. Employ­ees are giv­en the oppor­tu­ni­ty to select the ben­e­fits they want, just like an indi­vid­ual stand­ing in the cafe­te­ria line at lunch.

Only cer­tain ben­e­fits can be offered through a cafe­te­ria plan:

  1. Cov­er­age under an acci­dent or health plan (which can include tra­di­tion­al health insur­ance, health main­te­nance orga­ni­za­tions (HMOs), self-insured med­ical reim­burse­ment plans, den­tal, vision, and more)
  2. Depen­dent care assis­tance ben­e­fits or DCAPs
  3. Group term life insurance
  4. Paid time off, which allows employ­ees the oppor­tu­ni­ty to buy or sell paid time off days
  5. 401(k) con­tri­bu­tions
  6. Adop­tion assis­tance benefits
  7. Health sav­ings accounts or HSAs under IRS Code Sec­tion 223

Some employ­ers want to offer oth­er ben­e­fits through a cafe­te­ria plan, but this is pro­hib­it­ed. Ben­e­fits that you can­not offer through a cafe­te­ria plan include schol­ar­ships, group term life insur­ance for non-employ­ees, trans­porta­tion and oth­er fringe ben­e­fits, long-term care, and health reim­burse­ment arrange­ments (unless very spe­cif­ic rules are met by pro­vid­ing one in con­junc­tion with a high deductible health plan). Ben­e­fits that defer com­pen­sa­tion are also pro­hib­it­ed under cafe­te­ria plan rules.

Cafe­te­ria plans as a whole are not sub­ject to ERISA, but all or some of the under­ly­ing ben­e­fits or com­po­nents under the plan can be. The Patient Pro­tec­tion and Afford­able Care Act (ACA) has also affect­ed aspects of cafe­te­ria plan administration.

Employ­ees are allowed to choose the ben­e­fits they want by mak­ing elec­tions. Only the employ­ee can make elec­tions, but they can make choic­es that cov­er oth­er indi­vid­u­als such as spous­es or depen­dents. Employ­ees must be con­sid­ered eli­gi­ble by the plan to make elec­tions. Elec­tions, with an excep­tion for new hires, must be prospec­tive. Cafe­te­ria plan selec­tions are con­sid­ered irrev­o­ca­ble and can­not be changed dur­ing the plan year, unless a per­mit­ted change in sta­tus occurs. There is an excep­tion for manda­to­ry two-year elec­tions relat­ing to den­tal or vision plans that meet cer­tain require­ments. Par­tic­i­pants may only make elec­tion changes based on IRS pro­vid­ed changes in sta­tus, or cer­tain trig­ger­ing events as con­tained in the Health Insur­ance Porta­bil­i­ty and Account­abil­i­ty Act (HIPAA).

For all the best prac­tices regard­ing par­tic­i­pant con­tri­bu­tions, includ­ing when par­tic­i­pants are unable to pay their required con­tri­bu­tion, request UBA’s new ACA Advi­sor, “Cafe­te­ria Plans: Par­tic­i­pant Con­tri­bu­tions.

To bench­mark your health plan against oth­ers in your indus­try, region, and group size, be sure to pre-order the 2015 Health Plan Sur­vey Exec­u­tive Sum­ma­ry to get the most up to date infor­ma­tion on pre­mi­ums, employee/employer con­tri­bu­tions, plan design trends and more.

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