COBRA ARPA Subsidy: What Employers Need to Know

If you are an employer who offers employee benefits and have terminated individuals, or if you have had employees with a reduction of hours within the last 17 months, it is important to learn more about the COBRA provisions of The American Rescue Plan Act of 2021. President Biden signed ARPA into law on March 11, 2021 and it provides a 100% COBRA subsidy for certain individuals, referred to as “Assistance Eligible Individuals” (AEI) beginning on April 1 through September 30, 2021, and it is important that you are aware on how it may affect your business.

What is COBRA?
Before we dive into the new legislation and how it affects employers and eligible participants (also referred to as “qualified beneficiaries”), it is important to briefly explain “What is COBRA?” COBRA is a federal law that requires employers to offer continuation of their health and welfare benefit plans if the employee has a qualifying event, such as termination or reduction of hours. If the individuals accept COBRA, he/she traditionally will pay 102% of the premium for elected coverages and can have continuation of coverage up to 18-36 months, depending on the situation. COBRA is generally administered by the employer or outsourced to a third-party administrator.

Some states have “mini-COBRA” laws, such as Cal-COBRA, which applies to employers with 2-19 employees. Not all states have mini-COBRA laws. If an eligible participant elects Cal-COBRA, he/she will traditionally pay 110% of the premiums for elected coverages. Cal-COBRA is generally administered by the carrier. We are awaiting further guidance on the implications of ARPA on the mini-COBRA administration.

Who is Eligible for the COBRA Subsidy?
Based on information found on the Department of Labor website and a page created specific to the COBRA subsidy, only certain “Assistance Eligible Individuals,” referred to “AEIs” are eligible for the COBRA subsidy and they may include:

• Individuals who were involuntarily terminated or had a reduction of hours, therefore no longer eligible for coverage during the subsidy period of April 1 through September 30, 2021.
• Individuals who were involuntarily terminated or had a reduction of hours, who previously did not elect COBRA or allowed their COBRA to lapse, and who have not exhausted their maximum 18 months of coverage. These individuals will have a “second chance” to elect COBRA.
• Includes spouse and dependent children, who are qualified beneficiaries.

There are individuals who are NOT eligible for the COBRA subsidy and may include:

• Individuals who voluntarily resigned employment.
• Individuals who are eligible for other group coverage, such as a new employer’s group plan or spouse’s group plan.
• Individuals who are eligible for Medicare.
• Individuals who have used the maximum period of COBRA coverage.
• If an employer cancelled their group plan, there is no COBRA subsidy available.

The COBRA subsidy is NOT automatic. Individuals who are eligible, who previously did not enroll in COBRA or Cal-COBRA must elect within 60 days of the notice from the group’s plan administrator. The group administrator must provide the notice no later than May 31, 2021. If the AEI does not elect COBRA within the 60-day period upon notification, the subsidy is forfeited.

Who is paying for the COBRA subsidy?
• If the employer has 20 or more employees, either fully insured or self-funded, the employer is responsible for the 100% COBRA subsidy and the 2% COBRA administration fees.

Tax credits will be issued to the employer or the insurer, against the quarterly Medicare taxes. If the credit exceeds the premium, a refund will be available. There is a provision of the law that limits the ability to take the tax credit for premium subsidy if the employer is also taking the tax credit for qualified health plan expenses under FFCRA paid leave provisions or Employee Retention Credit under the CARES Act. We are awaiting more guidance from the IRS on the mechanics. There will not be any “double dipping.”

Penalties for non-compliance
The Department of Labor will be monitoring for compliance on The American Rescue Plan Act.

• Employers may be subject to an excise tax under the Internal Revenue Code for failing to satisfy the COBRA continuation coverage requirements. This tax can be as much as $100 per qualified beneficiary, but not more than $200 per family for EACH DAY the employer is in violation of the COBRA rules.
• Individuals who become eligible for other group health plan coverage or Medicare are required to notify their plan administrator. If they do not notify the plan administrator, the penalty can be the greater of $250 or 110% of the amount of the subsidy. However, regulations state that a person will not be subject to a penalty if the failure to notify the employer/health plan is due to reasonable cause and NOT due to willful neglect.

What are the Next Steps for An Employer?

1. Identify individuals who have been terminated or had a reduction in hours since October 2019.

2. Make sure you have employee records and documentation for your voluntary vs. involuntary terminations, as this makes a difference with COBRA subsidy eligibility.

3. New Model Notices and FAQ were released on April 8 for COBRA by the Department of Labor and can be found on the DOL.gov website.
a. General Notice and Election Notice
b. Notice in Connection with Extended Election Period
c. Alternative Notice (special notice for mini-COBRA/Cal-COBRA)
d. Notice of Expiration of Premium Assistance – NEW
e. Summary of the COBRA Premium Assistance Provision

4. If you outsource your COBRA administration, coordinate with the TPA to ensure the notices are sent to qualified beneficiaries.

5. Make sure you properly reinstate the participants electing the COBRA subsidy with the carriers.

6. As of April 15, 2021, it is still unclear how the employers with Cal-COBRA new alternative mini-COBRA notices will be distributed, as Cal-COBRA is generally administered by the carriers. We are awaiting further regulation and details from the carriers. Stay tuned as more information becomes available.

If you are an employer offering group health benefits, it is important to take the time to make sure your group plans are compliant with the new COBRA provisions under the new law, The American Rescue Plan Act of 2021. Make sure the proper, NEW model notices have been updated and distributed, and make sure you document, document, document!

If you have any questions regarding The American Rescue Plan Act and the COBRA subsidy, please contact MNJ Insurance Solutions at (714) 716-4303 for more information.

This content is provided for informational purposes only.  While we have attempted to provide current, accurate and clearly expressed information, this information is provided “as is” and MNJ Insurance Solutions makes no representations or warranties regarding its accuracy  and completeness.  The information provided should not be construed as legal or tax advice or as a recommendation of any kind.  External users should seek professional advice form their own attorneys and tax and benefit plan advisers with respect to their individual circumstances and needs.

The American Rescue Plan Act of 2021: COBRA Model Notices

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021, which provides 100% COBRA subsidies for certain individuals beginning on April 1, 2021 through September 30, 2021. Limitations may apply.

On April 7, 2021, the Department of Labor released guidance and the NEW required model notices that determine how the COBRA subsidies will be administered and Frequently Asked Questions.

The DOL’s Employee Benefits Security Administration posted the following:

COBRA Premium Subsidy dedicated page
Frequently Asked Questions
• Five Model Notices:

1. General Notice and Election Notice,
2. Notice in Connection with Extended Election Period,
3. Alternative Notice for State Continuation,
4. Notice of Expiration of Premium Assistance, and
5. Summary of the COBRA Premium Assistance Provisions

MNJ Insurance Solutions will continue to provide updates regarding this topic, as it becomes available. Please contact MNJ Insurance Solutions for more information at (714) 716-4303.

Practical Tips for Employers & Employees: Coronavirus Pandemic

In uncertain times such as these, employees are looking for guidance wherever they can find it. Listed below are practical tips Employers can help calm some of their employees’ fears by taking the following actions:

  • Communicate the future of the business with employees in meetings, on the company intranet site, in newsletters.
  • Educate employees that there are cyber criminals that may prey on individuals during times of panic and hardship.  Be careful of cyber scams.
  • Be empathetic in your communications, as every employee’s situation may be different.

 

In these uncertain times, it’s imperative that you communicate your business’ plans as frequently as possible. While it is impossible to control the pandemic, it is possible for you to help ease the stress your employees are experiencing.

For additional employee communications or resources regarding the COVID-19 pandemic, contact MNJ Insurance Solutions.

Department of Labor Releases New FMLA Forms: May 2015

Over the Memorial Day holiday weekend, the Department of Labor published new FMLA forms. The new forms are good through May 2018.

Download the new forms:

 

This content is provided for informational purposes only.  While we have attempted to provide current, accurate and clearly expressed information, this information is provided “as is” and MNJ Insurance Solutions makes no representations or warranties regarding its accuracy  and completeness.  The information provided should not be construed as legal or tax advice or as a recommendation of any kind.  External users should seek professional advice form their own attorneys and tax and benefit plan advisers with respect to their individual circumstances and needs.

What is the Difference between Federal COBRA and Cal-COBRA?

When an employer offers a group health insurance plan, such as medical, dental, or vision insurance, the employee and covered dependents (“Qualified Beneficiaries”) are provided an opportunity to continue their current plan at the individual/family’s expense when they have a qualifying event. Qualified events may include termination or reduction of hours of the covered employee’s employment for other than gross misconduct; divorce or legal separation from a covered employee; the loss of dependent status by overage dependent; the covered employee becomes eligible for Medicare; or the death of the covered employee. The continuation of group coverage option is known as either “Federal COBRA” or “Cal-COBRA.”

 

Listed below are some highlights of Federal COBRA vs. Cal-COBRA:

 

 Federal COBRACal-COBRA
Employer size20 or more employees more than 50% of the previous calendar year2-19 employees
Who is eligible?Covered Individual and covered spouse/dependents at the time of the qualifying eventCovered Individual and covered spouse/dependents at the time of the qualifying event
Who sends the COBRA Notice to the individual and qualified beneficiaries?Either the employer or a third-party administrator sends the COBRA notice within 30 days of the qualifying event.Employer must notify the insurance carrier and the carrier is responsible for sending out the Cal-COBRA notifications to the individual and qualified beneficiaries.
How long do they have to elect the COBRA/Cal-COBRA coverage?Employee and/or qualified beneficiary must elect coverage within 60 days of the qualifying event.Employee and/or qualified beneficiary must elect coverage within 60 days of the qualifying event.
How much does it cost to continue coverage?Cost is 102% of the regular premium for 18 months.NOTE: premium may change within that period, depending on plan year and renewal rates with insurance carriers.Cost is 110% of the regular premium for 18 months.NOTE: premium may change within that period, depending on plan year and renewal rates with insurance carriers.
Duration of Coverage ContinuationGenerally extends health coverage for 18 months. Individuals with certain qualifying events may be eligible for a longer extension (i.e. 29 or 36 months).Cal-COBRA allows individuals to continue their group coverage for up to 36 months. For individuals covered under Federal COBRA, Cal-COBRA may also be used to extend health coverage for a combined period of up to 36 months.

 

We typically recommend that employers with 20 or more employees outsource the COBRA administration to one of our preferred third-party administrators (TPA), as COBRA requires a number of plan notifications to take place at different stages in the COBRA process. Some of the notifications include:

 

The other option for Insurance coverage for individuals and qualified beneficiaries may be to elect Individual coverage, either “on” or “off-Exchange” plans, providing it is within their “Special Enrollment” period. If it is not “open enrollment” for individual coverage for on or off-Exchange plan and they had a qualifying event (as seen above), then they have up to 60 days to enroll under the special enrollment period. See blog post:   Help…I lost my job…Should I take COBRA or Covered California (Exchange)?

 

For more information, please do not hesitate to contact MNJ Insurance Solutions at (714) 716-4303.

 

Additional COBRA Information:

 

This material is for informational purposes only and not for the purpose of providing legal advise.  You should always contact your attorney to determine if this interpretation is appropriate for your particular situation.

Help…I Lost my Job…Should I Take COBRA or an Individual Policy?

COBRA is a federal law that requires employers of 20 or more employees with group health plans to offer employees, their spouse and dependents a temporary period of continued health care coverage if they lose coverage through the employer’s group health plan.  Employers who have not continuously had 20 employees are covered if they had at least 20 employees on more than 50% of  the typical business day in the previous calendar year.  Both full-time and part-time employees are counted to determine whether the plan is subject to COBRA.

 

Individuals are not obligated to participate in COBRA after leaving an employer or having a reduction in hours.  However, if an individual declines the initial offer of COBRA, he/she may qualify for “special enrollment” in Covered California health insurance or an “off-exchange plan” outside of the annual Open Enrollment period for Individual/Family coverage.  An “off-exchange plan” are plans that are offered by the carrier direct, rather than through Covered California.  In order t take advantage of the special enrollment in Covered California or “off-exchange plan,” the individual/family losing group coverage must apply for coverage no later than 60 days after their employer-sponsored plan ends.  It is also important to note that if an individual were to terminate their COBRA coverage during Open Enrollment of Covered California or elect an off-exchange plan, he/she cannot change their mind to go back to COBRA.

 

If an individual were to elect COBRA and loses his/her coverage (i.e. due to non-payment), he/she will NOT be eligible for special enrollment through Covered California, nor opt to an off-exchange individual plan at that time.  Outside of Open Enrollment, individuals qualify for special enrollment with Covered California or off-exchange individual plans if one of the following apply:

  • If former employer was responsible for remitting payments for the COBRA premium and fails to do so in a timely manner, therefore participant is cancelled due to group non-payment;
  • The COBRA participant moves out of the plan coverage area and there is not another option available (i.e. former employer offers HMO only plan and COBRA participant moves out of state and the HMO would no longer be a good option);
  • If the former employer cancels the group plan, therefore, COBRA is no longer available; or
  • The beneficiary has maximized their COBRA duration available under the plan.

 

Listed below are pros and cons of Electing COBRA vs. Enrolling in Covered California after an individual and qualified beneficiaries have had a qualifying event.

 

PROSCONS
ELECTING COBRA
  • The network of doctors and hospitals available in each plan and individual can continue the current benefits.
  • Covers more Rx than individual plans.
  • Transition and electing COBRA is typically an easier process than enrolling in Covered California.
  • If you are currently seeking treatment or under the care of a physician, it is easier to continue care under COBRA.
  • The total monthly premiums for the individual and qualified beneficiaries (family members previously enrolled on the plans) are paid by individual.
  • If the individual and qualified beneficiaries enrolled in COBRA, they cannot drop their COBRA plan and enroll in Covered California plan unless it is Open Enrollment for Covered California.
  • Depending on the level of benefits previously provided by the employer, the COBRA monthly premiums may be more expensive than desired coverage through Covered California (i.e. if employee or dependents may not need the rich covered previously offered by the employer).

 

ENROLLING IN COVERED CALIFORNIA OR “OFF EXCHANGE PLANS” WITH THE CARRIER
  • Depending on income, the individual and qualified beneficiaries may qualify for tax credit and/or subsidy (depends on household income – chart for 2015) with Covered California.
  • Copays and deductibles may vary with options for Covered California or “off-exchange plans.”
  • Individual has options to move to another carrier (plans for 2015) than what may be provided through their former employer.

 

  •  Doctors and hospitals may not be in the network for the Covered California or “off-exchange” plan option.  It is important to confirm preferred doctors before selecting a plan to ensure they are in the network.
  • Prescription plans offered through Covered California individual plans or “off-exchange” plans often cover a smaller list of formulary drugs than group plans.

 

Note: If you have a qualifying event, your spouse has other group coverage offered through his/her employer, you may also want to explore adding onto their group plan as an additional alternative.  If this is an option through his/her employer, it must be done within 30 days of the loss of coverage.

If you have questions regarding your personal situation, MNJ Insurance Solutions are able to assist and can be reached at (714) 716-4303.

 

More Resources:

COBRA vs. Exchange Coverage – Covered CA

 

Disclaimer:  The views and opinions expressed are those of the author and do not necessarily reflect the official policy or position of Covered California.  Any content provided by our bloggers or author is of their opinion and are not intended to malign any organization, company, government entity, anyone or anything.

This document is for general information only.  While we have attempted to provide current, accurate and clearly expressed information, this information is provided “as is” and MNJ Insurance Solutions makes no representations or warranties regarding its accuracy or completeness.  The information provided should not be construed as legal or tax advice or as a recommendation of any kind.  External users should seek professional advice from their own attorneys and tax advisors with respect to their individual circumstances.

HSA, HRA, or FSA…What is the Difference?

high-interest-savings-account

Health care accounts are not all created equal. That’s why you need an experienced, trusted adviser to help you understand health care accounts. MNJ Insurance Solutions is here to help you understand the complex, and sometimes confusing, health care accounts and their acronyms, like HSAs, HRAs, and FSAs, so you can make an informed decision about the type of health plan and corresponding health account that is right for you.

Below is a chart to help compare Health Savings Accounts (HSA), Health Reimbursement Arrangements (HRA), and Flexible Spending Accounts (FSA) and highlight their differences in benefits.

 Health Savings Account (HSA)Health Reimbursement Arrangement (HRA)Flexible Spending Account (FSA)
Account definitionsA tax-advantaged account used to pay for qualified medical expenses of the account holder, spouse, and/or dependents.An employer-funded arrangement used to reimburse employees for out-of-pocket qualified medical expenses.An employer-established and optional tax-advantaged account funded by the employee to pay for qualified medical expenses with pre-taxed dollars.
Who can open the account?The employee or employer as long as the employee is enrolled in an HSA-compatible health plan.The employer.The employer.
Who can contribute?Employers, employee/account holder, or any third party, IF the employee has a HSA-compatible health plan.The employer.The employee.
Who owns the account?The employee/account holder.The employer.The employee, but unused account balances revert back to the employer at the end of the plan year.
Is there an annual contribution limit?In 2013, limits are $3,250 and $6,450, respectively. See HSA limits per applicable year.Yes, as determined by the employer’s plan design.Yes, as determined by the employer’s plan design, and subject to maximums redefined by ACA.
Do unused funds carry over to the next year?Yes.Possibly, as determined by employer’s plan design.Possibly, if the plan document includes the rollover provision.   See your Section 125 FSA Summary Plan Description for more details.
Can you take the account funds with you if you change jobs, change health plans, or retire?Yes.No.Section 125 FSA plans are a COBRA eligible benefit.   Therefore, an employee may opt to take COBRA for the unused benefits for the duration allowed.
Can you use the account for retirement income?Yes, after age 65, you can withdraw funds for any reason with no penalty. Although, if not used for qualified medical expenses, withdrawals will be taxed as income and an excise tax will be applied.No.No.
Is the account tax advantaged?Yes, account holders contribute tax-free, any interest or investment gains are tax-free, and when used for qualified expense, you withdrawals are tax-free.No.Yes, employees’ contributions are made through pre-taxed payroll deductions.
Can the account earn interest?Yes, and after the account balance reaches a minimum balance requirement (typically $2,000), you can invest in funds available with your HSA third-party administrator and any gains are also tax-free.No.No.
Can the account reduce the out-of-pocket health care expenses of the account holder?Yes.Yes.Yes.

Additional Information Resource:

ACA impact on health reimbursement arrangements (HRAs)

 

If you have any questions or would like to further explore HSA, HRA, and/or FSA options for your company, please contact MNJ Insurance Solutions at (714) 716-4303.

 

This content is provided for informational purposes only.  While we have attempted to provide current, accurate and clearly expressed information, this information is provided “as is” and MNJ Insurance Solutions makes no representations or warranties regarding its accuracy  and completeness.  The information provided should not be construed as legal or tax advice or as a recommendation of any kind.  External users should seek professional advice form their own attorneys and tax and benefit plan advisers with respect to their individual circumstances and needs.

DOL Revised FMLA Definition of “Spouse”: February 25, 2015

main1

The Family and Medical Leave Act (FMLA) entitles eligible employees of covered employees of covered Employers to take unpaid, job-protected leave for specified family and medical reasons.  The FMLA also includes certain military family leave provisions.  On February 25, 2015, the U.S. Department of Labor revised Family Medical Leave Act definition of a “spouse.”   The Final Rule’s definition of spouse expressly includes individuals in lawfully recognized same-sex and common law marriages and marriages that were validly entered into outside of the United States if they could have been entered into in at least one state.

 

The DOL noted in its Fact Sheet on the Final Rule that the definitional change means that eligible employees, regardless of where they live, will be able to take:

  • FMLA leave to care for their lawfully married same-sex spouse with serious health conditions,
  • Qualifying emergency leave due to their lawfully married same-sex spouse’s covered military service,
  • Military caregiver leave for their lawfully married same-sex spouse,
  • FMLA leave to care for a stepchild, regardless of whether the in loco parentis (in the place of parents) requirement of providing day-to-day care or financial support for the child is met,
  • FMLA leave to care for a stepparent, who is same-sex spouse of the employee’s parent, regardless of whether the stepparent ever stood in loco parentis to the employee,
  • FMLA leave for their own serious condition, or
  • FMLA leave for the birth of a child or the placement of a child for adoption or foster care and bonding.

 

Action Items for Employers:

Employers that are required to provide FMLA should train and familiarize their Human Resources, Leave Administrators, and Managers/Supervisors with this new rule if they are involved with the leave management process, as benefits available to certain employees may change with the Final Rule.

In addition, we recommend that employers update their FMLA policy in their Employee Handbook, forms, and notices, if they specifically defined “spouse” in any matter, so that the documentation reflects the new changes of the DOL’s definition, which takes effect March 27, 2015.

 

Additional Information on the Final Rule:

 

This content is provided for informational purposes only.  While we have attempted to provide current, accurate and clearly expressed information, this information is provided “as is” and MNJ Insurance Solutions makes no representations or warranties regarding its accuracy  and completeness.  The information provided should not be construed as legal or tax advice or as a recommendation of any kind.  External users should seek professional advice form their own attorneys and tax and benefit plan advisers with respect to their individual circumstances and needs.

Section 125: Who CANNOT Participate in a Cafeteria Plan, FSA, or HRA

taxes

We often receive the question of “Who can and cannot participate in a Section 125 Cafeteria Plan, Flexible Spending Account (FSA), or HRA?”  From time to time, we find clients who are participating in tax-favored benefits who should not, as they are not eligible, or they do not have a plan document in place.  Of course, these items can be an issue!

First, it is important to note, an employer’s eligibility rules may not discriminate in favor of highly compensated individuals. Pursuant to Code section 125(g)(3), a plan does not discriminate in favor of highly compensated individuals if it meets all of the following:

  • The plan benefits a classification of employees that does not discriminate in favor of highly compensated individuals;
  • The same employment requirement applies to all employees and the plan does not require more than three years of employment to participate; and
  • Entry into the plan is not delayed.

While there are some exceptions, generally an employer can define which classes of employees and former employees are eligible to participate in a Section 125 plan. However, the following individuals are NOT eligible to participate in Section 125 Cafeteria Plan, Flexible Spending Account (FSA), or Premium Only Plan (POP), or any of its qualified benefits:

  • More than 2% shareholder of an S-corporation, or any of its family members,
  • Sole proprietor,
  • Partner in a partnership, or
  • Non-employee director, solely serving on a corporation’s board of directors, and not otherwise providing services to the corporation as an employee. (26 CFR Section 1.125-1(g)(2)(i).

There are a few exceptions to the above-mentioned rule:

  • Dual-status individuals are eligible IF they are both an employee and provide services to the employer as a director or independent contractor.  This rule is not available for partners or more than 2% S-corporation shareholders. (26 CFR Section1.125-1(g)(2)(iii).
  • Employee spouse of self-employed individuals are eligible if they are bona fide employees and are not themselves self-employed.  State laws relating to ownership (especially in community property states) may also affect their status.

NOTE:  Sole proprietors, partnerships, and S-corporations may still sponsor Section 125 Cafeteria Plans and FSAs to their employees, and there are benefits to both the employer and employee for doing so.  In addition, the more than 2% shareholders in a S-corporation can still deduct health insurance premiums paid or reimbursed by the S-corporation, but must report these payments as income.  (Notice 2008-1).

Health Reimbursement Arrangements (HRA)

Self-employed individuals cannot participate in HRAs.  The same rules described above for Cafeteria Plans and their qualified benefits also apply to HRAs.  Informal guidance by the IRS suggests that the self-employed individuals cannot participate in a HRA even if they are taxed on the value of the benefits they receive.

Other Things to Take into Consideration:

Non-discrimination Testing:  Since self-employed individuals are not eligible to participate in Cafeteria Plans, qualified benefits and HRAs, they should not be included in the non-discrimination testing for such plans.  However, for Section 125 testing, understand that employee-spouses will almost always qualify as Key Employees under the ownership attribution rules, and may make a plan susceptible to failing the Key Employee Concentration Test.

Consequences of Non-compliance:  The Section 125 Cafeteria Plan Regulations provide a non-exhaustive list of 11 operational failures that will disqualify the tax-favored status of a Cafeteria Plan and all of its qualified benefits, including a FSA, forcing all such benefits for participants to be reclassified as taxable income.  Similarly, an HRA with ineligible participants would lose its tax-favored status for all participants.

 

If you have any questions or would like to further discuss how a Section 125 can benefit your company and its employees, reduce benefit costs, and improve employee engagement, please contact MNJ Insurance Solutions at (714) 716-4303.

 

This content is provided for informational purposes only.  While we have attempted to provide current, accurate and clearly expressed information, this information is provided “as is” and MNJ Insurance Solutions makes no representations or warranties regarding its accuracy  and completeness.  The information provided should not be construed as legal or tax advice or as a recommendation of any kind.  External users should seek professional advice form their own attorneys and tax and benefit plan advisers with respect to their individual circumstances and needs.

Section 125: Advantages for the Employer AND Employee

save on taxes

Section 125 Cafeteria Plan

A Section 125 cafeteria plan is an employee benefits program designed to take advantage of the pre-taxed savings through the Section 125 of the Internal Revenue Code. The cafeteria plan allows employees to pay certain qualified expenses, such as health insurance premiums, on a pretax basis, and therefore reducing their taxable income and increasing their spendable/take-home income. Funds set aside in a flexible spending accounts (FSA) are not subject to federal, state, or Social Security taxes. On average, employee save from $0.25 to $0.49 for every dollar they contribute to the FSA.

Premium Only Plan (POP)

Employers may deduct the employees portion of the company sponsored insurance premium directly from eligible employees paycheck before taxes are deducted.

Flexible spending account (FSA)

In a FSA, employees may set aside on a pre-taxed basis of pre-established amount of money per plan year. The employee can use the funds in the FSA to pay for eligible medical, dependent care, or transportation expenses, depending on the plans the employer offers.

 

Benefits to the Employer:

Employers may add a FSA plan as a key element in their overall benefit package. Because an FSA plan offers a tax advantage, employers experience tax savings from reduced FICA, FUTA, SUTA, and Worker’s Compensation taxes on participating employees. These tax savings reduce or eliminate the various costs associated with offering the plan. Meanwhile, employee satisfaction is heightened because participating employees experience a “raise” at no additional cost to the employer.  Increase participation equals greater tax savings to the employer.

 

Benefits to the Employee:

An employee who participates in the FSA must place a certain dollar amount into the FSA each year they wish to participate. This election amount is deducted from the employee’s paycheck (for that amount divided by the number of payroll periods). For example, an employee is paid 24 times a year, and elects $1200 to contribute towards his/her medical FSA. The $50 is deducted pre-tax from each paycheck and it’s held in an account by the plan administrator to be reimbursed upon qualifying claims submissions.

 

The Use-It-Or-Lose-It Rule and Carryover:

This rule states that any funds remaining in the participating employee’s FSA account at the end of the plan year will be forfeited to the employer.

In addition, there is a new carryover provision that was implemented on October 31, 2013, where employees carryover up to $500 of unused medical FSA funds from one plan year to the next with no fees or penalties. Carryover ensures the participating employee a safety net when determining how much money to set aside in a medical FSA each year. Employees can contribute funds with more confidence, knowing they will not lose funds (maximum carryover is $500) at the end of the plan year. NOTE: This must be included in the Section 125 the plan document to allow such carryover.

Cafeteria plans are qualified, non-discriminatory benefit plans, meaning a discrimination test must be met based on the elections of participants.

 

Qualifying Events that will Allow a Participant to Adjust or Revoke a Plan Election:

  • A marriage or divorce
  • Death of spouse or dependent
  • Birth or adoption of a child
  • Termination or commencement of a spouse’s employment
  • Change in employment status from full-time to part-time, or part-time to full-time for you or your spouse

Please refer to your summary plan description “SPD” for more information about changing your elections. Changes must be made within 30 days of the qualifying event.

 

Nondiscrimination testing:

Section 125 of the Internal Revenue Code requires that cafeteria plan to be offered on a non-discriminatory basis. To ensure compliance, the Internal Revenue Code sets forth testing requirements that must be satisfied on an annual basis. These testing requirements are in place to make certain that cafeteria plan benefits are available to all eligible employees under the same terms, and that the plan does not favor highly-compensated employees, officers, and owners.

 

Exceptions in Participation in the Section 125 Cafeteria Plan:

The following individuals are not eligible to participate in a section 125 cafeteria plan, including a premium only plan “POP.”

More than 2% shareholder of an S-Corporation, nor any family members, Sole Proprietor, Partner in a partnership, or Nonemployee director, so we serving on the corporation’s board of directors (and not otherwise providing services to the corporation as an employee).

Special rules apply to more than 2% shareholder of the organization. These individuals may not participate in the plan, nor made their employee spouse, children, parents, and grandparents. In determining the status of an individual that becomes or ceases to be more than a 2% shareholder during the course of the S-corporation’s taxable year, the individual is treated as a more than 2% shareholder for the entire year.

 

If you would like more information and find out if a Section 125 Premium Only Plan and/or Flexible Spending Account is right for your company, please contact MNJ Insurance Solutions at (714) 716-4303.

 

For more details, please refer to:

http://www.irs.gov/pub/irs-drop/n-05-42.pdf

FAQs about Affordable Care Act Implementation (Part XXII)

 

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