AZ USA: Tuesday, December 14 - 2010
2011 Cafeteria Plan Manager Software is Available
The Cafeteria Plan Manager software has been updated for 2011. Two significant changes are introduced in 2011 which impact how you administer your cafeteria plan. These changes are the newly introduced Simple Cafeteria Plans and the ineligibility of Over-the-counter drugs expenses. More information on each topic can be found below.
To implement a Simple Cafeteria Plan select the “Simple Cafeteria Plan” option under the “Employer Contributions” tab when you create your new Plan Design for the new year. The Plan Documents as well as the Explanation of Benefits have been updated for 2011. (Since the Congress has not decided on payroll taxes for 2011, the Explanation of benefits still refers to 2010 figures. They will be updated upon Congress and IRS approval.)
The update is available for immediate download.
Simple Cafeteria Plans
The Patient Protection and Affordable Care Act, commonly known as “Healthcare Reform” includes a provision creating “simple cafeteria plans” for small businesses effective for plan years beginning in 2011. What is a Simple Cafeteria Plan (or SCP) and how does it differ from standard Cafeteria Plans? The major advantage of a SCP is it simplifies the discrimination testing aspect of a Cafeteria Plan if the plan meets minimum eligibility, participation, and contribution requirements. This safe harbor covers the regular cafeteria plan nondiscrimination requirement of section 125(b), the 25% concentration test, and the nondiscrimination requirements of 79(d), 105(h), and 129(d) applicable to group term life insurance, a self-insured health insurance or medical reimbursement plan, and dependent care assistance benefits (child care).
The Small Business Council of America helped draft the legislation for SCPs but many of the proposed elements were not adopted. Where a business wants to avoid the 25% concentration test and contribute for owner-employees, only a regular C corporation can do so. Long term care insurance is still a prohibited benefit. The SCP rules give a free pass on 125(b) and 105(h) testing for nondiscrimination. Therefore, the Simple Cafeteria Plan should pass testing if it offers all participants eligibility under the SCP and offers the same benefits to those similarly situated.
SCPs are only for groups with 100 or fewer employees. An employer is eligible to implement a simple cafeteria plan if, during either of the preceding two years, the business employed on average 100 or fewer employees. For a new business, eligibility is based on the number of employees (including leased employees) the business is reasonably expected to employ. Businesses that grow beyond 100 employees can continue to maintain a SCP until they have exceeded an average of 200 or more employees during the preceding year.
All non-excludable employees who had at least 1,000 hours of service during the preceding plan year must be eligible to participate in the SCP. Unfortunately, the new rules continue the regular cafeteria plan requirement that a participant can only be an “employee” and thus excludes partners, LLC members taxed as partners, 2% or more owners of S corporations, and sole proprietors.
SCP defines “a qualified employee” as any employee who is not a highly compensated employee under section 414(q) or key employee under section 416(i) and who is eligible to participate in the plan.
SCPs may exclude those employees who:
- have not attained age 21 (or a younger age provided in the plan) before the end of the plan year;
- have less than one year of service as of any day during the plan year;
- are covered under a collective bargaining agreement; or
- are nonresident aliens.
To meet the participation requirement, all eligible employees must be able to elect any benefit under the same terms and conditions as all other participants.
Lastly, employers must agree to contribute towards the SCP. The minimum contribution must be available towards the cost of any qualified benefit offered under the plan. Employer contributions to a SCP must be sufficient to provide benefits to non-highly compensated employees (NHCEs) under 125(j)(3)(A) of at least either:
- A uniform percentage of at least two (2%) percent of compensation whether or not the employee makes salary reduction contributions to the plan; or
- The lesser of a 200% matching contribution or six (6%) percent of the employee’s compensation. Under 125(j)(C), additional contributions can be made, but the rate of any matching contribution for HCEs or key employees cannot be greater than the rate of match for NHCEs under 125(j)(B).
The rate of contributions for key employees and HCEs cannot exceed that of NHCEs. Compensation for purposes of this minimum contribution requirement is compensation with the meaning of section 414(s).
SCPs are treated as meeting the nondiscrimination requirements of IRC Section 125(b), including the concentration test that currently limits key employees’ benefits to 25% of the total of nontaxable benefits provided for all employees under the plan. Nondiscrimination tests applicable to individual benefits are deemed to be satisfied, including the Section 79(d) rules for group-term life insurance, the Section 105(h) rules for self-insured medical expense reimbursement plans, and the dependent care rules of Section 129(d)(2),(3) and (8).
In the past, these nondiscrimination rules have discouraged utilization of cafeteria plans by small businesses. The new SCP safe harbor addresses this problem but only for small employers organized as traditional C corporations since only common law “employees” and not the self employed are eligible. And with the required employer contributions, we do not anticipate many small businesses implementing a SCP.
Over-the-counter drugs become an ineligible expense
Effective January 1, 2011, over-the-counter drugs have been eliminated as an “eligible” expense. The Patient Protection and Affordable Care Act imposes this new restriction on medical FSAs. Most over-the-counter (OTC) drugs and medicines (with the exception of insulin and diabetic supplies) will require a Note of Medical Necessity (NMN) or a prescription from a doctor to be considered an “eligible” expense. (Note: Healthcare debit cards cannot be used to purchase over-the-counter drugs and medicines. If a healthcare debit card is used to pay for these items after January 1, 2011, the transaction will be denied at the point of sale. In this case, employees will need to pay for the expense out-of-pocket and submit a claim, along with an NMN or a prescription, to be reimbursed.)
This restriction does not apply to medical supplies.
Bandages, crutches, wheelchairs will still be considered as an
eligible expense.