May, 2018 | Fraser Blog

Client Alert: Simple Cafeteria Plan: A Nondiscrimination Testing Alternative

Simple Cafeteria Plan: A Nondiscrimination Testing Alternative

Many small employers have historically shied away from establishing Internal Revenue Code (“Code”) section 125 cafeteria plans due to administrative and logistical issues associated with nondiscrimination testing. Specifically, many small employers’ employee population and benefit utilization makes it extremely difficult to pass the various nondiscrimination testing requirements under the Code. Further, tracking nondiscrimination testing demographics can be time consuming, costly, and just an overall daunting experience. In an attempt to provide small employers with the tax advantages associated with Code section 125 cafeteria plans without the hassle of monitoring nondiscrimination testing compliance, the Patient Protection and Affordable Care Act amended Code section 125 to permit certain eligible small employers to establish a “simple cafeteria plan”. Of interest to employers, a simple cafeteria plan (and many component benefits offered under the simple cafeteria plan) is treated by the Internal Revenue Service (“IRS”) as meeting the applicable nondiscrimination rules associated with cafeteria plans (including Code sections 125, 105(h), 129(d), and 79(d)). Thus, a simple cafeteria plan is a welcomed additional option for certain small employers that do not want to carefully monitor benefit utilization and/or who in the past have had to exclude certain highly compensated individuals from participation.

Code section 125(j) provides guidance related to compliance and administrative issues associated with simple cafeteria plans. Specifically, this Code subsection establishes (1) which employers can sponsor a simple cafeteria plan; (2) which employees must be eligible under a simple cafeteria plan; and (3) what contributions must be provided under a simple cafeteria plan:

Which Employers Can Establish a Simple Cafeteria Plan? In general, employers who employed an average of 100 or less employees on business days during either of the previous two years may establish a simple cafeteria plan. Special rules exist for newly established employers. Additionally, a “growing employer” rule exists for an employer who had been within the 100 employee threshold when it established the simple cafeteria plan under which such employer will continue to be treated as an eligible employer until the year following the first year in which it employs an average of 200 or more employees on business days.
Which Employees Must be Eligible? In general, all employees with at least 1,000 hours of service during the previous plan year must be eligible to participate in the plan. However, certain employees may be excluded (e.g., employees who have not attained age 21 before the close of the plan year; employees who have less than one year of service with the employer as of any day during the plan year; certain employees covered by collective bargaining agreements; and certain nonresident aliens working outside of the United States). And, pursuant to general cafeteria plan rules, certain individuals are categorically ineligible to participate (e.g., partners in a partnership, more than 2% S-corporation shareholders, self-employed individuals). Each employee who is eligible to participate must be able to elect any benefit available under the plan (subject to any terms and conditions that apply to all participants).
Is the Employer Required to Contribute? Qualified employees (i.e., employees who are eligible to participate in the cafeteria plan and are neither key employees under Code section 416(i) nor highly compensated employees under Code section 414(q)) must receive employer contributions in an amount equal to (1) a uniform percentage of not less than 2% of the employer’s compensation for the plan year; or (2) an amount that is not less than the lesser of 6% of the employee’s compensation for the plan year or twice the amount of the employee’s salary reductions. The employer contribution must be provided to each qualified employee, regardless of whether such employee makes any salary reduction contributions under the plan. Additional rules apply with respect to matching contributions on behalf of highly compensated employees and key employees.

To date, the IRS has not issued regulations or other guidance related to simple cafeteria plans beyond Code section 125(j). As such, to date a fair amount of flexibility exists with respect to how employers can structure their simple cafeteria plans. Nonetheless, Code section 125 cafeteria plan requirements are specific and require detailed documentation and diligence. Employers contemplating establishing a simple cafeteria plan should coordinate with their legal counsel to ensure all applicable requirements are met.

This alert serves as a general summary of lengthy and comprehensive new provisions of the Internal Revenue Code. It does not constitute legal guidance. Please contact us with any specific questions.

Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2018 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.

Client Alert: Small Employers Have New Option for Benefit Offerings: Qualified Small Employer Health Reimbursement Arrangements

Small Employers Have New Option for Benefit Offerings: Qualified Small Employer Health Reimbursement Arrangements

In today’s market, small employers have increasingly difficultly offering competitive benefit structures given the elevated financial and administrative cost associated with maintaining comprehensive employer-sponsored group health plan coverage. And, pursuant to guidance issued under the Patient Protection and Affordable Care Act (“PPACA”), employers have been generally unable to pay for the cost of an employee’s health insurance on the individual market without incurring substantial compliance burdens and/or penalties. Certain small employers now have a welcomed new option available to help their employees pay for the cost of health insurance and other medical expenses: a qualified small employer health reimbursement arrangement (“QSEHRA”).

The 21st Century Cures Act amended section 9831 of the Internal Revenue Code (the “Code”) and provides that certain eligible small employers can establish a QSEHRA under which individual health insurance premiums and other Code section 213(d) qualified expenses can be reimbursed from. Unlike other forms of health reimbursement arrangements, a QSEHRA is not considered a “group health plan” for most purposes under the Code, ERISA, and the Public Health Service Act (“PHSA”). As such, a QSEHRA is exempt from numerous cumbersome legal requirements (including the PPACA’s PHSA mandates and COBRA). Thus, small employers that meet the requirements set forth in amended Code section 9831 and IRS guidance (Notice 2017-67) have a new opportunity to make their benefit offerings competitive.

IRS Notice 2017-67 (the “Notice”) provides comprehensive guidance related to compliance and administrative issues associated with QSEHRAs. The Notice is lengthy and comprehensive, and thus requires detailed review by any employer contemplating establishing a QSEHRA. However, a snapshot of highlights from the Notice for employers to keep in mind include:

What Employers Can Sponsor a QSEHRA? In order to adopt a QSEHRA, the employer cannot (1) be deemed an applicable large employer (i.e., generally an employer with 50 or more full-time employees (including full-time equivalents) in the preceding calendar year) under the employer shared responsibility mandate; and (2) offer a group health plan as defined in Code section 5000(b) (e.g., medical, dental, vision, health FSA, etc.) to its employees.
What Employees Must Be Provided Coverage? The QSEHRA must be provided on the same terms to all eligible employees. Uniformity is determined on the basis of the amount made available for reimbursement and not the amount actually reimbursed. The term “eligible employee” generally means any employee of the employer. However, the QSEHRA may be designed to exclude certain classes of employees including (1) employees who have not completed 90 days of service with the employers; (2) employees who have not attained age 25 before the beginning of the plan year; (3) certain part-time and seasonal employees; (4) certain non-participating employees covered by a collective bargaining agreement; and (5) nonresident aliens who do not receive earned income from the employer from sources within the United States. Employees cannot waive participation in the QSEHRA.
What Expenses Can Be Reimbursed? Guidance indicates that a QSEHRA can reimburse employees for Code section 213(d) medical care expenses (including major medical insurance premiums) incurred by the employee or an eligible family member. However, prior to providing reimbursement, the employee must substantiate the incurred expense (using a methodology similar to that used to substantiate health FSA expenses). Expenses reimbursed elsewhere do not qualify for reimbursement. Additionally, the QSEHRA may only reimburse expenses after the employee provides periodic proof that he or she maintains minimum essential coverage.
What is the Maximum Benefit That Can Be Provided? The maximum amount available to an employee under a QSEHRA is subject to an annual statutory dollar limit (adjusted annually for inflation). The limit for self-only coverage in 2018 is $5,050. The limit for family coverage is $10,250 for 2018.
How Does the QSEHRA Need to be Funded? The QSEHRA must be funded solely by an eligible employer (no salary reduction contributions are permitted).
What Notice and Reporting Obligations Are Associated with a QSEHRA? Written notice, which includes certain statutory language, to each eligible employee must be furnished by the employer at least 90 days before the beginning of each plan year (and on or prior to the first day the employee becomes eligible for an employee who is not eligible to participate at the beginning of the plan year). Additionally, the total amount of the employee’s permitted QSEHRA benefit must be reported on Form W-2. And, employers that sponsor a QSEHRA must file a Form 720 annually and pay PCORI fees under Code section 4376.

Small employers that are considering establishing a QSEHRA for their employees should carefully review IRS Notice 2017-67 and Code section 9831 to ensure appropriate legal compliance. The requirements contained in the guidance are numerous and comprehensive. Additionally, employers should keep in mind that QSEHRAs are still subject to the general welfare benefit plan requirements of ERISA and the HIPAA administrative simplification rules (unless an exception exists). Moreover, benefits under a QSEHRA are taken into account for purposes of the Cadillac Tax provisions under Code section 49801. Thus, employers are encouraged to consult with their legal counsel in conjunction with establishing and administering a QSEHRA. Proper administration is imperative and small errors can have large penalties.

Copies of the Notice and Code section 9831 can be found at the following:

Client Alert: IRS Announces 2019 Increases for HSAs and Provides Relief for 2018 Reduction in Family Contribution Levels

IRS Announces 2019 Increases for HSAs and Provides Relief for 2018 Reduction in Family Contribution Levels

The IRS has just released its 2019 annual inflation adjustments for Health Savings Accounts (HSAs) as determined under Section 223 of the Internal Revenue Code. Specifically, IRS Revenue Procedure 2018-30 provides the adjusted limits for contributions to a Health Savings Account (“HSA”), as well as the high deductible health plan (“HDHP”) minimums and maximums for calendar year 2019.

The 2019 limits are as follows:

Annual Contribution Limit
- Single Coverage: $3,500
- Family Coverage: $7,000
HDHP-Minimum Deductible
- Single Coverage: $1,350
- Family Coverage: $2,700
HDHP Maximum Annual Out-of-Pocket Expenses (including deductibles, co-payments and other amounts, but not including premiums)
- Single Coverage: $6,750
- Family Coverage: $13,500
The catch-up contribution for eligible individuals age 55 or older by year end remains at $1,000

Plans and related documentation, including employee communications, should be updated to reflect these new limits for 2019. As always, please keep in mind that participation in a health FSA (or any other non-HDHP) will result in HSA ineligibility, unless the health FSA is limited to: (1) limited-scope dental or vision excepted benefits; and/or (2) post-deductible expenses.

As for 2018, the IRS recently offered relief to those taxpayers affected by the reduction in maximum family contribution. By way of background, Revenue Procedure 2017-37 provided that the adjusted limits for contributions to HSAs for calendar year 2018 were $3,450 for single coverage and $6,900 for family coverage. Based on this guidance, employers communicated these amounts to their employees, and employees made elections up to these amounts.

However, the Tax Cuts and Jobs Act reflected a change in the inflation adjustment calculations for 2018, which actually reduced the maximum annual HSA contribution for those with family coverage back down to $6,850, which was the amount for 2017.

That has since been rectified by relief provided in Revenue Procedure 2018-27, which announced that the previously established $6,900 limitation would remain in effect for 2018.

Those employers who took swift action after the passage of the Tax Cuts and Jobs Act by alerting employees of the reduction, modifying salary reduction amounts, and possibly amending plan documents, are now (depending on the wording of their plan documents and communications) likely put in the position of undoing these changes…

For others, it is welcome relief that modifications are not required.

This alert serves as a general summary of lengthy and comprehensive new provisions of the Internal Revenue Code. It does not constitute legal guidance. Please contact us with any specific questions.