Question: Our CEO would like to establish a “benefit bucket”–an allowance of cash for each employee that can be utilized to pick from a suite of health and welfare benefits that are provided through the employer. It would include things like medical, dental, 401k, Life, Disability, supplemental insurance etc. Would this just be an old school Section 125 (Cafeteria) plan? Is there any special documentation needed to allow this arrangement to exist? Are there any possible pitfalls to such an arrangement?
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Answer from the experts at HR.BLR.com:
Thank you for your inquiry regarding a cash allowance for employees to use when selecting from a suite of health and welfare benefits.
Generally, if an employer wants to pay its employees a cash allowance that is earmarked for certain benefits, the arrangement has to qualify under one of the plans the IRS has established (e.g. HRA, FSA, HSA, cafeteria plan). As you note in the question, the cafeteria plan rules were set up to accommodate a “bucket” approach, but employers must comply with the IRS’s requirements when setting up such a plan.
The money in a full flex plan, that allows employees to choose and trade off among different benefits, can come from employer or employee contributions. The employer and/or employees can contribute the money in a variety of ways:
- Employees may “buy down,” or select a level of coverage that is less expensive, and receive either cash or a credit for the difference. The employee may use money that is made available by selecting less expensive coverage to purchase other benefits or taken in cash.
- Employees may be provided with a new “core” benefit plan that is less expensive than the current one. The employer makes available to the employee all or a portion of the difference in cost. The employee can “buy back” his or her current plan, choose other benefits or take the difference in cash.
- Employees may draw credits from a “benefit budget” or “benefit bank” to purchase the benefits they need. The employee may take in cash the money that he or she does not use for benefits. The employer may allocate the amount that is available in the “bank” as: (1) a percentage of the employee’s pay; (2) a flat amount; or (3) a combination of those two methods. The flat amount can be calculated based on the employee’s years of service, family status or age. However, the employer must take care to avoid a discriminatory allocation of credits, since long-term employees and older employees are usually paid more.
- Employees may use their own money to purchase benefits, usually through salary reduction. As flex plans have matured and health costs have escalated, there has been more reliance on funding them solely with employees’ money.