Unlike summer blockbuster movies with a large cast of key characters, benefit plan documentation has just three: the plan document under the Employee Retirement Income Security Act (ERISA), the summary plan description (SPD), and the Internal Revenue Code Section 125 cafeteria plan document.
But there can still be occasional confusion over the specific role the three documents play. And in some cases, a document may be missing from the scene, particularly the one regarding the cafeteria plan, and cause large plot holes. This column will serve as your script describing the purpose of each document and what they should say to their audience—the benefit plan participant.
Role of Each Document
The benefit plan documents serve three distinct purposes:
- The ERISA plan document describes the legal requirements for the ERISA plan; very often, it is a wrap document that wraps all ERISA benefits—for example, medical, dental, vision, group life, health flexible spending account (FSA), health reimbursement arrangement (HRA), short-term disability (STD), long-term disability (LTD), most employee assistance plans—in a single plan, which allows for a single Form 5500 filing.
- The SPD is the communication vehicle whereby the employer sponsoring the ERISA benefits summarizes the eligibility and various other rules applicable to the ERISA plan. Again, some employers will include all of their ERISA benefits into a single wrap SPD, incorporating those benefits by reference.
- The cafeteria plan document is the document that summarizes the qualified benefits (for example, medical, dental, vision, health FSA, and dependent care FSA) that an employer allows employees to pay for on a pretax basis through salary reductions. An HRA cannot be included in a cafeteria plan because HRAs are funded solely by employer contributions.
The SPD must be provided to all participants. The other two documents do not have to be provided automatically but must be provided upon request.
The cafeteria plan document is of particular importance because it is essentially the hall pass for pretaxing benefits. Without it, an employer is technically not allowed to pretax benefits and must treat amounts paid for qualified benefits as taxable wages. Stated another way, you must have a tax code provision that makes compensation and other benefits nontaxable; otherwise, those benefits are taxable. Section 125 provides that exception, but that exception applies if and only if there is a written cafeteria plan document.
So what should be in this document? The 2007 proposed cafeteria plan regulations and other guidance provide several content requirements. In addition, there are other provisions that we typically see in a cafeteria plan document. The remainder of this column will summarize the required and recommended cafeteria plan document content.
- Description of benefits. First and foremost, a cafeteria plan document must adequately detail which benefits are available through pretax salary reductions. It is optimal to describe the benefits with such specificity no doubt exists that they are being referenced. For example, include the policy number and insurance carrier for fully insured plans and other identifying information and the benefit vendor for other plans. Typically, this information will be in an appendix that refers to specific documents (for example, a certificate of coverage) that are incorporated by reference. Here are the only qualified benefits that can be offered through a cafeteria plan:
- Group-term life insurance
- Medical coverage
- Prescription drug coverage
- Dental coverage
- Vision coverage
- Health FSA
- Dependent care FSA
- Health savings account (HSA) contributions
- COBRA premiums
- Accidental death & dismemberment coverage
- LTD and STD coverage
- Adoption assistance
- Tax Code Section 401(k) contributions
- Contributions to certain plans maintained by educational organizations
In addition, the document needs to identify the coverage periods (a.k.a. plan years) for each benefit, to the extent that they differ from the cafeteria plan year.
- Eligibility and participation rules. This is a critical provision. It is important to define which individuals can participate in the cafeteria plan. Sometimes, the eligibility requirements for a specific benefit may be different from the cafeteria plan. The rules clarify that only employees can be eligible to participate in a cafeteria plan.
- Election procedures. This provision is often one of the lengthier parts of the document. It must describe not only the timing of elections (including deadlines) but also the process. The document must articulate the irrevocable election rule. It also must include all the exceptions to this rule that allow mid-year election changes (for example, a change in status). The document should touch on all three types of enrollments: initial, mid-year and special (under the Health Insurance Portability and Accountability Act (HIPAA)).
- Contribution methods. This provision indicates the various types of contributions that are permitted: those made by the employee and the employer, and any flex credit system that the employer may have implemented. A flex credit is an employer contribution that eligible employees can use to pay for one or more qualified benefits but not take as cash or other taxable benefits.
- Maximum contribution amounts. With a few statutory exceptions, this provision does not necessarily need to specify a dollar amount but simply identify the method for determining the maximum dollar amount. Under the Affordable Care Act (ACA), a health FSA has an annual maximum for salary reduction contributions that is adjusted annually for inflation by IRS. For health FSA plan years starting in 2017, that amount is $2,600. Under Code Section 129(a), a dependent care FSA has an annual maximum of $5,000, or $2,500 if married filing separately.
- Plan year. The plan year is a 12-month period. If a valid business purpose exists, an employer can implement a short plan year or otherwise change the plan year. Valid business purposes exist when changing insurance carriers or aligning the plan year with the coverage periods of one or more qualified benefits.
- Health and dependent care FSA requirements. This provision should detail the various requirements that apply to FSAs. For example, the use-or-lose rule applies to both types of FSAs. The uniform coverage rule applies only health FSAs, as does the ability for an employer to offer a carryover from one plan year to the next of up to $500.
- FSA grace period (if applicable). Health and dependent care FSAs can have a grace period of up to an additional two months, 15 days after the plan year ends where eligible expenses may be reimbursed. A health FSA cannot have both a carryover and a grace period.
- Coverage during Family and Medical Leave Act (FMLA) leave. The document must identify what happens to the benefits (and the payments for them) during FMLA leave, particularly when it is unpaid. The plan must allow an employee to revoke his or her elections during unpaid leave or continue coverage and allow the employee to discontinue payment. Ultimately, an employer can offer these payment options:
- Payment while on leave
- Catch-up payment upon return
An employer cannot require prepayment as the only option. If the employer offers payment while on leave for non-FMLA leaves, the employer must offer the same option for FMLA leaves. If catch-up option is the employer’s only FMLA option, then the same must hold true for non-FMLA leaves.
- Coverage during military leave under the Uniformed Services Employment and Reemployment Rights Act (USERRA). The employer must establish reasonable procedures for continuing payment during USERRA leave. A leave of fewer than 31 days means the employee need only pay the employee portion of the election; longer leaves allow the employer to charge up to 102 percent of the total cost. USERRA leave is for up to 24 months and often runs concurrently with COBRA continuation coverage because this type of leave often is a reduction of hours that causes a loss of coverage, a COBRA qualifying event.
- Paid time off ordering rules (if applicable). If the employer uses the cafeteria plan to offer a paid time off election program (where employees can buy and sell vacation days, personal days, or sick time), the document must dictate that nonelective time off (that is, the normal allotment) must be used before any elective time off (that is, the additional days that were purchased).
- Plan qualification statement. The document should clearly state that it is intended to satisfy the Code Section 125 requirements for a written document.
- Plan administrator and duties. It is prudent to identify the plan administrator in this document, consistent with the same requirement for the SPD. Clearly defining the plan administrator’s duties is also a good idea in the event that there is ever a dispute. The document typically gives the plan administrator discretionary authority to interpret terms and conditions and settle disputes.
- Plan amendment process. The document will likely need to be updated from time to time, so the document should give the plan administrator the unrestricted right to amend the plan and describe how this is done.
- “No contract of employment” statement. Because a plan participant can request a copy of the cafeteria plan document, it is good to clarify that it does not create any contractual rights or obligations.
- “No guarantee of tax consequences” statement. There may arise situations where the tax status of certain benefits comes into question. For example, an employer may offer domestic partner coverage and accept an employee’s representation that the domestic partner is a tax dependent. If later it turns out that this is not the case, then the document would confirm that the employee, neither the employer nor the cafeteria plan, is responsible.
Another example would be a cafeteria plan that allows HSA salary reduction contributions. If, unbeknownst to the employer, the employee had other non-high deductible health plan coverage (that is, through a spouse’s general-purpose health FSA), then the employee should bear the tax consequences of making contributions when HSA ineligible, neither the employer nor the cafeteria plan.
A cafeteria plan document cannot have a retroactive effective date. The document (and any amendments) must have a prospective effective date.
In conclusion, the cafeteria plan document is a vital resource in an employer’s benefit offering. If the document has not been updated in the past five years, it is likely in need of an update. After all, no one wants to go to the principal’s office because of an outdated hall pass (or no hall pass at all).
|Rich Glass is a health and welfare attorney for Mercer Health & Benefits LLC. He is a licensed attorney and brings more than 24 years of legal expertise, specializing in benefits, human resources, and related regulatory compliance. He has testified before the IRS and has provided comments on regulations issued by several governmental authorities. He is a member of Thompson’s Health Plan Advisory Panel and contributing editor of the Flex Plan Handbook. He is a frequent speaker and author on various benefits, employment law, and compliance issues.|