Module 9 - Section 125 Plans

Under ACA, large employees must offer health coverage that have these 2 qualities

"Minimum value" and "affordable"

A dependent-care assistance plans offer participants to pay for the first $ ???.00 of dependent care on a tax-free basis

$5,000

What must be included in the written plan in order for the plan to be considered qualified

1. A specific description of each benefit available and their applicable period coverage 2. The rules governing employee eligibility and participation 3. Procedures for making participant elections under the plan 4. The manner in which contributions may be made 5. The maximum amount of employer contributions available to any participant 6. Define the plan year

What plans are effected by change-in-status rules

1. Accident and health coverage 2. Dependent care expenses 3. Group term life insurance 4. Adoption assistance

Rules of a cafeteria plan

1. All participants are employees 2. May choose from at least 2 benefits (cash can be an option) 3. The plan can only benefit employees, not owners, partners 2%+ shareholders of an S corp

What other plans can be included in employer provided accident or health coverage under IRC Sections 105 & 106

1. Business travel accident plans 2. Hospital indemnity or cancer policies 3. Medicare supplements 4. Short and long term policies 5. FSAs

Why do employers develop credit values rather than use the actual dollar values associated with premium cost

1. Can smooth out benefit inequities making it possible for the employer to offer a cash option that is not a dollar-for-dollar value. 2. Makes the benefit more valuable than cash and as such more appealing (than cash and being uninsured)

Are there any benefits under a cafeteria plan that are taxable

1. Cash 2. Paid time off 3. Group term life greater than $50k

Employee disadvantages to benefits under cafeteria benefits plans

1. Changes once a year 2. Changes prior to plan year 3. Use it or lose it FSA rule 4. Tax credit may be more beneficial than dep. care FSA 5. May be slight reduction in social security benefits since there is no FICA tax

What are eligible expenses under dependent-care assistance plans

1. Child-care centers that care for 6 or more children 2. Caregivers for a disabled spouse 3. Babysitters (cannot qualify on participants tax return) 4. Nursery schools 5. Day camps 6. Household expenses

What common total comp benefits are not considered qualified benefits and cannot be funded through a cafeteria plan

1. Contributions to medical savings accounts 2. Qualified long-term care 3. Archer medical savings accounts 4. Dependent life insurance 5. Meals 6. Parking and mass transit reimbursement 7. Legal and financial assistance 8. HRAs

How can forfeited FSA funds be used

1. Divide forfeiture funds equally among all employees, not just those effected 2. Pay plan expenses 3. Donated to charity 4. Retained by the employer

Two other names for HSAs

1. Employee-owned trusts 2. Custodial accounts

What qualified benefits may be included within a cafeteria plan

1. Employer provided accident or health coverage under IRC Sections 105 & 106 2. Individually owned accident or health plans no longer offered as of 2014. Plan cannot reimburse premiums under health care FSA nor policies by another employer 3. Employer-provided group term life excludable as income if under $50k. If over, only 1st 50k is excludable, whatever is over is included as income 4. Employer-provided dependent care 5. Employer-provided adoption assistance 6. A 401k plan or purchase of retiree group term life by participants 7. Contributions to an HSA

What types of arrangements can be referred to as cafeteria plans

1. Employers allotting "credits" or dollars to employees 2. Not giving money to employees, only option to make tax-favored benefits purchases "cafeteria style" 3. POP plans

Why is it important for employers to develop a carefully crafted communication campaign when establishing a cafeteria plan

1. Employers must be prepared for negative reactions and criticism 2. Without proper communication and adequate time to answer questions, employees could view cafeteria plans as a way for employers to pay them less 3. Communication should include the good and the bad 4. If employers use surveys, the plan should meet employee needs and reflect employee input and suggestions to pass nondiscrimination testing

The reasons why cafeteria plans are popular

1. Ever-increasing costs of benefits 2. Diverse workforce wit vastly differing employee benefit needs

FSA Plan Mechanics

1. Expenses can be reimbursed when care is received rather than billed 2. Expenses can be submitted any time during the plan year 3. The maximums must be set before plan year and can be lower than the statutory maximum 4. 3rd party must substantiate the claim (EOB) 5. Unused funds cannot be refunded to the participant

Employee benefit contributions are not subject to which 3 things

1. Federal income tax 2. FICA 3. FUTA

Define full flex plan as it related to the employee and employer

1. Gives participants the opportunity to select among a full range of benefits 2. Employers determine the $ amount to contribute to benefits, and provides the cash to the plan or use a credit system to fund the purchase of benefits

What benefits are included in employer provided accident or health coverage under IRC Sections 105 & 106

1. Health 2. Medical 3. Hospitalization coverage 4. Prescription plans 5. Drugs 6. Dental 7. Vision 8. Disability 9. AD&D coverage 10. Other plans

Pre-ACA, What events are allowed "consistent" changes in change-in-status rules

1. Legal marital status 2. Number of dependents 3. Employment status 4. Place of work or residence 5. Dependent satisfies or no longer satisfies eligibility 6. Placement or termination of an adoption

Explain cafeteria plan participation when taking USERRA

1. May elect to continue coverage during the leave period 2. Deferred amounts can be paid as a single lump sum (at the beginning of each year or beginning of the LOA) or in monthly payments

What benefits typically provide a premium conversion feature (POP) under a flexible benefit plan

1. Medical 2. Dental 3. Vision 4. Group term life under $50,000

What three account types for FSAs

1. Medical reimbursement 2. Dependent care 3. Adoption assistance

What responsibility does the plan have to employees as it relates to adoption assistance programs under cafeteria plans

1. Must be nondiscriminatory 2. Must be maintained for the exclusive benefit of employees 3. Employees must be given reasonable notice of the plans existence

What cafeteria plan changes can be made when taking FMLA

1. On unpaid FMLA may revoke all health plan coverage for remainder of coverage period 2. Can revoke non-health benefits, but under same non-FMLA rules (status change) 3. In both cases, participants can reinstate upon return

Employer disadvantages to benefits under cafeteria benefits plans

1. Ongoing administration costs, although offset by pay-roll savings 2. Federal tax law compliance 3. FSA balance available day 1 4. Adverse selection since healthy employees can opt out 5. Cafeteria plans are subject to complex coverage and nondiscrimination testing

Types of Cafeteria plans

1. POP plans 2. Reimbursement accounts 3. Full flex plans

Health care FSA rules+ for special tax treatment

1. Participants must be reimbursed for qualified medical expenses incurred during the coverage period 2. Coverage cannot be less than a year 3. FSA cannot eliminate employer risk 4. The plan document must state the maximum

Employer advantages to benefits under cafeteria benefits plans

1. Payroll savings bc they do not pay FICA or FUTA on flex plan contributions 2. Deferral amounts not considered wages when determining workers' comp premiums and other payroll-based expenses 3. Create employee awareness of value of their benefits 4. Considered consumer-driven plans due to employee cost sharing (select v basic)

General Legal Requirements in order for a cafeteria plan to receive favorable tax treatment

1. Plan must be operated in accordance with a written benefit plan 2. Must allow participants to choose between two or more benefits that consists of cash and a qualified plan. Cannot offer only qualified plans

What qualifies as adoption expenses under the cafeteria plan

1. Reasonable and necessary adoption fees 2. Attorney fees 3. Travel expenses 4. Other expenses directly related to the legal adoption

What events were added to the status change list in 2014

1. Reduction in hours, even if this didn't result in ineligibility 2. If the employee qualifies under Special Enrollment Period for enrollment in the ACA Exchange (Medicare/Medicaid) w/in a certain period

With a credit system, participants can purchase benefits under a flexible benefit plan. What pricing parameters need to be considered when developing a pricing matrix?

1. The number of credits a participant will be given 2. The acceptable level of employee contribution 3. The # of participants expected to select each available benefit 4. The # of credits that are expected to be paid as a cash benefit 5. The purchase price of benefit options 6. The hidden employer subsidies 7. Total premium cost

What requirements must be met to claim benefits under a dependent-care assistance plan

1. The participant's spouse must also be employed 2. The participant's spouse must be a full-time student 3. The participant's spouse is physically or mentally incapable of self-care

If employers elect a grace period for FSA use after the plan year, how long is it?

2 1/2 months

When did the IRS expand the events that allow participants to make status changes?

2014

What does it mean to be a qualified benefit

A benefit that meets regulatory requirements in order to be tax-favored

What is an evergreen election

A participant makes a one-time elections that stays in effect from plan year to year, unless the participant makes a change during the open enrollment period

Adoption care assistance expenses are limited: A. Per adoption B. Year-to-year

A. Per adoption

Under what code must a health care FSA meet to qualify for special tax treatment under a cafeteria plan

All requirements that apply to accident and health plans under IRC Section 105 & 106 and all requirements of Section 125

How are disability plans generally handled under premium conversion plans

Allowed to be paid pre-tax but usually paid after-tax so the disability payment is not considered taxable.

How did the HEART Act enhance USERRA

Allows employees called to active duty (a least 179 days) to receive a distribution on the unused balance of their health care FSA

Define a taxable benefit

Any benefit that results in taxable income for the employee when it is received and a tax deduction for the employer when it is paid

If the caretaker under dependent care assistance is a child or step child of the participant, how old must they be?

At least 19

What is a negative election

Automatic enrollment in certain benefits under a cafeteria plan

Why are POP plans considered the simplest form of a cafeteria plan?

Because there are no employer contributions and only offered so employees can pay for benefits on a tax-favored basis

Employee advantages to benefits under cafeteria benefits plans

Benefits are paid on a tax-favored basis and are not subject to FICA and FUTA

Assures that employers maximizes the value of benefits and avoids spending money on duplicated or unneeded benefits

Cafeteria plans

Describe the tax doctrine of constructive receipt within the context of cafeteria plans

Cafeteria plans are an exception to the tax doctrine of constructive receipt that usually states when an individual has control over how money is spent, it is taxable. However if cafeteria plans meet all applicable tax laws, participants can avoid taxation and receive tax-free benefits

How are common law dependents treated on cafeteria plans

Cafeteria plans do not permit the benefits of non-spouse partners to be paid on a tax-favored basis

When an FSA is funded purely from salary deferrals, the participant chooses between two or more benefits. What is included in those two options?

Cash and qualified benefits

Who is covered under dependent-care assistance

Dependents under the age of 13 or disabled adults/children over the age of 13

What is the general rule regarding a participants ability to revoke an HSA benefit election during coverage period

Employees may elect, revoke or change HSA elections at any time during the plan year

What requirements must be met in order to have a valid negative election

Employees must receive reasonable notice of the automatic deferral and have the option to decline coverage each plan year

What is a core benefit within a flexible benefit plan

Establishes some minimum level of benefit coverage below which the company will not permit the employee to go. May require the participant select some basic health coverage and a minimum level of life insurance

How is an eligible expense defined to qualify for reimbursement under a dependent-care assistance plan

Expenses that enable the participant and the participant's spouse to work or look for work

True or False: Payment of pretax premiums for individual policies is allowed under a cafeteria plan when policies are purchased through the ACA marketplace

False. Pretax premiums is premiums for all individual policies is prohibited

FICA

Federal Insurance Contributions Act

FUTA

Federal Unemployment Tax Act

Another term for full flex plan

Full choice plan

Credit systems are associated with which cafeteria plan

Full flex plans

Explain the section 125 loop hole that exists with long-term care

HSA contributions are pre-tax and can be used to pay for long-term care insurance premiums

What does HEART stand for?

Heroes Earning Assistance and Relief Tax Act of 2008

Under what code must a health care FSA meet qualification requirements

IRC Section 105

Dependent care assistance plans can be offered on a standalone basis or part of a cafeteria plan. When offered as part of a cafeteria plan, what code must it meet certain requirements

IRC Section 125 & 129

Under what code must a dependent care assistance plan meet qualification requirements

IRC Section 129

Who governs cafeteria plans

IRS

Describe benefit tax treatment prior to Section 125

If the participant had any type of choice, the tax doctrine of constructive receipt required they be taxes as if they'd elected the max available taxable benefit. The reason being that participants could elect cash.

Define tax doctrine of constructive receipt

Income is considered received by a taxpayer when it is available to them, even if not physically collected. So if it's available to you, you will be taxed regardless of whether you received the income or not.

What is the purpose of a core benefit

Intended to supply a basic level of protection so the employees cannot be underinsured

Why is PTO carry over prohibited?

It would be considered deferral of compensation

The regulations describe procedures for allocating experience gains (unused FSA funds)

On a "reasonable and uniform basis"

Where are FSA salary deductions kept?

On a company's ledger with a record of the account of each participant

What reduces the dependent-care assistance amount?

Other dependent care assistance provided by the employer such as On-site day care at a reduced rate or subsidized by the employer

What is a dependent care assistance plan?

Payment for provisions of services, if paid for by the participant, is considered employment-related expenses

What is a POP plan

Plans that include only pre-tax premium conversion

What is the simplest form of a cafeteria plan

Premium conversion plan or premium-only plans

What plans are typically excluded from evergreen elections

Reimbursement accounts, particularly dependent-care accounts

What must a participant do in order to claim dependent care assistance expenses as an exclusion from income

Report to the plan administrator the name, address and taxpayer ID of the dependent-care provider

When was Section 125 added to the IRC code?

Revenue Act of 1978

What is another option if the employer doesn't allow FSA grace period

Rollover up to $570 (for 2022)

What tax code governs cafeteria plans

Section 125 of the IRC code

What is meant by "consistent" benefit election in accordance with IRC Section 125

The change corresponds with the event that affects eligibility.

Cafeteria plans that offer paid time off must make this distinction

The distinction between an elective and non elective paid-time-off

Forfeited FSA funds belong to:

The employer

If an employer allows employees to opt out of employer-paid insurance, what occurs when the employee opts out?

The employer pays their contribution to the employee as cash and it is taxed, and the contribution can be less than the actual cost

The ACA affordability test applies to which option?

The lowest cost option

How is the cash requirement in cafeteria plans satisfied without giving the employee a $ amount?

The salary-reduction satisfies the cash requirement. If an employee does not elect the tax-favorable benefit, the "cash" for the benefit remains on their check

What is a cafeteria plan

The umbrella under which tax-favored employee benefits are offered

How might a cafeteria plan appeal to lower paid employees

These employees generally prefer higher take-home pay to tax savings, so a generous cash option could result in employees not being adequately covered unless core benefits were mandated or limits placed on the cash option

How might a cafeteria plan appeal to higher paid employees

These employees typically value opportunities to reduce personal taxes through flex plans, so maximums limiting contributions to reimbursement accounts would be concerning

What is non-elective paid time off

Time that cannot be sold back by the employee or carried over (sick time)

True or False: Most states follow federal tax treatment

True

What does USERRA stand for?

Uniformed Services Employment and Reemployment Rights Act

What is included in "paid time off"

Vacation, sick leave, personal days

What tax document must include participants dependent-care assistance benefits

W-2

What benefits are excluded from preferential tax treatment

Whole life insurance and long-term care insurance

What are medical plans that include FSAs also referred to as

reimbursement accounts