Janet LeTourneau

The Affordable Care Act (ACA) has had to take a detour for flexible benefit plans. Without a little tweaking of the change in election rules for cafeteria plans, some employers and employees will not be able to take advantage of the health insurance exchanges starting January 1, 2014.

Beginning in October 2013, individuals will have the opportunity to enroll in state exchanges throughout the country for coverage starting January 1, 2014. These dates coincide with a large number of employers’ benefit plans that offer health insurance coverage. Their health plan years end December 31, and employees may enroll at an exchange for the 2014 plan year. However, because of the change of election rules for cafeteria plans, employers who run their benefits on a fiscal plan year rather than a calendar year may have difficulty.

When participants enroll in a cafeteria plan—even just for pretaxing health insurance premiums—the election is irrevocable unless they have a qualified reason to change their election. The availability of health coverage through an exchange does not constitute a change in status. Thus, participants whose cafeteria plans do not end on December 31 would be unable to change their salary reduction elections in the middle of their cafeteria plan year to purchase coverage through an exchange.

In January 2013 the IRS issued a clarification entitled “Shared Responsibility for Employers Regarding Health Coverage.” This publication included instructions for employers whose benefit plans operate on a fiscal year.

To address the issue of employees who participate in fiscal year cafeteria plans, the Treasury Department and the IRS will allow a one-time transition period. Participants will be able to change from an employer-sponsored health insurance plan to a state exchange plan, even though their plan year does not start on January 1.

Affected large employers may, at their discretion, amend their written cafeteria plans to permit either or both of the following changes in salary reduction elections:

 • Employees who elect to reduce their salary through the cafeteria plan for accident and health plan coverage with a fiscal plan year beginning in 2013 are allowed to prospectively revoke or change their election with respect to the accident or health plan once, during the plan year, without regard to whether they experienced a change in status event described in the change of status regulations 1.125-4; and

 • Employees who failed to make a salary reduction election through their employer’s cafeteria plan, for accident and health plan coverage with a fiscal plan year beginning in 2013 before the start of the cafeteria plan year beginning in 2013, are allowed to make a prospective salary reduction election for accident and health coverage on or after the first day of the 2013 plan year of the cafeteria plan year, without regard to whether they experienced a change in status event described in 1.125-4.

Why is allowing employees to seek coverage on the exchange so important? ACA was written to assure that employees and individuals could purchase insurance coverage through state exchanges. Allowing change of cafeteria elections mid-year provides maximum flexibility to employees. The proposed rule offers this example:

The shared responsibility rule for applicable large employers means they are subject to a specific “assessable payment” starting January 1, 2014, if they either:

 • Fail to offer full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored health plan and any full-time employee is certified as having received a premium tax credit or cost-sharing reduction; or

 • Offer full-time employees (and their dependents) minimum essential coverage that meets minimum value and affordability directives and one or more employees are certified as having received a premium tax credit or cost-sharing reduction.

An applicable large employer is an employer that employed an average of at least 50 full-time employees or full-time equivalents, based on hours of service, on business days during the preceding calendar year. Without making the suggested amendments to their cafeteria plans, these assessable payments could really add up to a hefty fee if only one employee enrolls at a state exchange and receives a credit for premium.

While the IRS has provided this welcome clarification and remediation for employers with fiscal year cafeteria plans, it is not mandatory that employers offer this option to their employees. The proposed rule also included an expanded timeframe for adopting this one-time change in status amendment to cafeteria plans. Cafeteria plans may be amended retroactively to implement these transition rules. The retroactive amendment must be made by December 31, 2014, and can be retroactive to the date of the first day of the 2013 cafeteria plan year.

This amendment is only for accident and health coverage offered through a cafeteria fiscal year plan beginning in 2013 and does not apply to any other qualified benefits offered through the plan, such as health flexible spending accounts. It is also temporary and applicable only to cafeteria plans that begin in 2013.

Details are in the Federal Register dated January 2, 2013, available at www.gpo.gov/fdsys/pkg/FR-2013-01-02/html/2012-31269.htm.

While there is time to prepare for this change, there’s no time like the present for employers to make the amendment to cafeteria plans so employees can begin considering exchanges.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

"FAQs (frequently asked questions) About Affordable Care Act Implementation (Part XI)” was issued jointly from Depart­ments of Labor (DOL), Health and Human Services (HHS) and the Treasury Department on January 24, 2013. In part, this publication addressed health reimbursement arrangements (HRAs) that incorporate lifetime or annual limits within their plan design.

What Is an HRA?

HRAs are employer-financed accounts that pay employees for eligible medical expenses. HRA plans do not have to physically set aside money for participant claims, but must pay eligible claims as they are presented. Employees cannot contribute to HRAs.

Many times HRAs are coupled with a high-deductible health insurance product. An HRA pays for some or all of the deductible expenses formerly paid by insurance, which adds up to lower premiums, the same out-of-pocket costs for employees and, hopefully, health cost savings for everyone.

HRAs are considered group health plans and, therefore, fall under many of the changes made by the Affordable Care Act  (ACA). For instance, in my January article “PPACA Mysteries Solved: SBC And CER Fee Requirements Revealed” I discussed summary of benefit coverage (SBC) requirements and comparative effectiveness research (CER) fees.

Typically, HRAs are established to pay medical expenses and have a variety of plan designs, many of which include annual limits. After January 1, 2014, unless HRAs are integrated with an underlying health plan that meets the ACA prohibition on annual and lifetime limits, HRAs with annual limits may no longer be offered by employers.

The prohibition on annual and lifetime limits will affect all HRAs that are not excepted benefits. HRAs that cover only dental and vision expenses and those that cover only retirees would be considered excepted benefits. All others must adhere to the annual and lifetime limits rule or be integrated with the employer-sponsored primary group health plan.

Several questions and answers in this latest set of FAQs assist employers in answering the integrated versus stand-alone conundrum so that employers may formulate a go-forward approach for their HRAs.

What Is an Integrated HRA?

FAQs Part XI gives a clear answer. To be considered integrated with a group health plan, an HRA must benefit only employees who are covered by a primary group health plan that meets the requirements of ACA and is provided by the employer. It appears that an integrated HRA could not benefit an employee who was eligible for a health plan but not enrolled.

Also, FAQs clarifies that an ­employer-

sponsored HRA cannot be integrated with individual market coverage or with employer plans that provide coverage through individual policies.

Start Preparing Now for HRA Changes

If employers offer HRA coverage only to employees participating in health plans, the current HRA can be maintained as is. If not, the purpose of the HRA must be reviewed: What is the intent, who should it benefit and for how much? It’s possible that a change in HRA eligibility or plan design would assure that the HRA fits into the scenarios outlined in FAQs. Options include:

 • Ensuring that the HRA is integrated by covering only those who are enrolled in the health plan.

 • Allocating employer dollars to employees through a health flexible spending account (FSA).

 • Amending the HRA to provide only vision and dental coverage in order to preserve an annual dollar limit available to participants.

 • Reviewing the retiree HRA to ensure that no rehired retirees (active employees) participate.

If a current stand-alone HRA has unused amounts credited prior to January 1, 2014, with certain restrictions, those dollars may be used after December 31, 2013, to reimburse medical expenses through a stand-alone HRA. Employers are not permitted to increase the amount credited to their HRA for 2014 above what was in effect on January 1, 2013.

Truthfully, the industry is using a “wait and see” approach to understand just which rules will apply to HRAs in the future and how they are to be implemented. Clarification is needed on a number of open issues related to HRAs, including:

 • The impact to an HRA if an employee is covered under a spouse’s group health plan.

 • If an excepted benefits category can be created for a nominal stand-alone HRA.

 • If a premium-only HRA arrangement may be allowable.

 • If an HRA that qualifies as an FSA under IRC 106 (i.e., limited under “five-times” rule) may still be allowed under current interim regulations.

Now is a great time to review HRA options for your clients. For companies currently offering HRAs, it’s important to look at the changes made by the ACA that may impact their approach.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

In a quandary about owners and key employees who can’t fully participate in cafeteria plans due to nondiscrimination testing? I have been asked over and over how to maximize non-taxable benefits to owners and key/highly compensated employees. The solution may be a simple cafeteria plan.

With a simple cafeteria plan, a company can skip all the applicable nondiscrimination testing requirements associated with today’s cafeteria plans, assuming it meets specific requirements.

First let’s discuss what constitutes an eligible employer and then move on to the eligibility, participation and contribution requirements. Then, as we go through some examples, you may see how C corporations can provide additional non-taxable benefits to owners and key employees. A simple plan will be a snap for some of your employers. Let’s look at the facts.

Eligible Employer

Simple plans are for “small” businesses, i.e., 100 or fewer employees during either of the two years preceding application. If an employer has not been in existence for two years, calculations are based on the average number of individuals reasonably expected to be employed on business days during the current year. Employees must be counted under common ownership rules, part-time, seasonal and leased employees.

Eligible employers that grow to more than 100 employees after establishing a simple plan can retain eligibility until their employee population averages 200 or more. Then, at the end of the plan year, that employer must revert to a regular cafeteria plan with nondiscrimination testing for the subsequent plan year.

IRS regulations prohibit a sole proprietor, member in a partnership, member of an LLC (in most cases) or person owning more than 2 percent of an S corporation from participating in a cafeteria plan, but they may still sponsor a simple plan. Plus these owner/employees can still benefit from the savings on payroll taxes and, in some cases, workers’ compensation premiums—and these types of business entities may have key or highly compensated employees who can benefit from a simple plan. Shareholders of regular C corporations may also participate in a simple cafeteria plan.

Eligibility and Participation Rule

Simple plans must allow all employees with at least 1,000 hours of service during the preceding year to participate, with the right to elect any benefit offered.

Some employees may be omitted from participating if they are under the age of 21, have less than one year of service, are covered by a collective bargaining agreement, or are a nonresident alien working outside of the United States whose income did not come from a U.S. source.

Required Employer Contributions

Required employer contributions can be delivered through the plan by either of two methods.

Non-Elective. Contributions must be equal to a uniform percentage of not less than 2 percent of an employee’s compensation for the plan year. This amount is made available to all eligible employees, even if they do not make salary deductions.

Matching. Contributions may be the lesser of twice the amount of an employee’s salary reduction contributions or 6 percent of an employee’s compensation for the plan year.

Employer contributions must be available to be used for any qualified benefit offered through the plan, but cash need not be an option for these required employer contributions. Employer contributions cannot be made to highly compensated or key employees at a greater rate than to rank-and-file employees.

Non-Discrimination Tests

What does all this “buy” an employer? In addition to some serious payroll tax savings, there’s no more complicated and confusing nondiscrimination testing associated with offering a regular cafeteria plan. Two of those most frequently failed tests are the dependent care 55 percent concentration test and the overall 25 percent concentration test. Let’s work through one case example to see how the 25 percent concentration tests can affect a regular cafeteria plan and how the implementation of a simple cafeteria plan can benefit owners and key employees.

Let’s assume there are two owners and nine other employees. The owners elect $19,600 and six non-highly compensated employees elect $26,000 for a total of $45,600 in salary reductions. These amounts include premiums for employer-provided health coverage, dependent care and a health FSA.

This scenario would not pass the 25 percent concentration test because $19,600 divided by $45,600 equals 43 percent of total benefits going to key employees. In order to pass, the owners would have to reduce their elections to approximately $8,700. In addition, the plan would not pass all of the dependent care discrimination tests; thus, one owner would lose the $5,000 pretax benefit from the dependent care portion of the plan.

By establishing a simple cafeteria plan, there are no required discrimination tests and business owners are able to take advantage of substantial employer contributions.

Chart 1 illustrates the contribution options this employer may pursue. In this example the employer could choose between contributing 2 percent of compensation to the simple plan for all eligible employees, or contributing an amount equal to 6 percent of compensation for participating employees.

In addition, this employer previously paid half of the group health insurance premiums. Employer contributions to the simple cafeteria plan will take the place of employer-paid group health insurance premiums in the amount of $27,600. And don’t forget, if participants don’t spend all their money, it can be forfeited back to the employer to offset administrative expenses. Thus, by forfeiting unused contributions, the employer’s net costs could be reduced further. In the example shown in Chart 1, a contribution of 6 percent of compensation to a simple cafeteria plan would provide the two owners with $24,000 and the six non-highly compensated employees with $18,000. The net outlay of $12,335 is a drastic reduction, considering the premiums they used to pay—and $24,000 goes directly to the owners.

It’s All in the Numbers

For small or family-owned C corporation businesses, a simple cafeteria plan may be just the ticket to maximize benefits to owners and key employees.

For larger companies a simple plan may make sense in order to pass all the nondiscrimination tests and preserve non-taxable benefits to owners, key and highly compensated employees.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

The New Year is one month old. Resolu­tions were made and, by now, a few have probably already been broken. Both employers and employees are breathing a sigh of relief because they don’t have to think about benefits for another year. The truth is, the beginning of a new year is a great time to think about benefits, and it is most certainly critical to do so.

Many employers have their benefit enrollment meetings and election deadlines at the end of the year. This is a time when everyone is busy with the holidays, school functions and vacations. They simply don’t take a lot of time to study benefit options. While participants typically can’t make changes to most benefit elections now, they might be able to purchase additional voluntary products, make changes to their 401(k)s, health savings accounts and commuter benefit elections, as well as make an effort to learn more about their employer benefits.

Now that we’ve averted the fiscal cliff, many employees may want to increase their deferrals into important tax-advantaged plans. And the Affordable Care Act (ACA) made several changes to cafeteria plans and the way employers view and report on health insurance related items. There’s also more to come in 2014. Employers have their hands full, so why not step up and simplify their lives?

Flexible Spending Accounts (FSAs)

Cafeteria plans, or flexible spending accounts (FSAs), can be set up any time during the year. Employers should be given the option to have a premium-only plan, particularly if they pay all or a portion of their insurance costs. Such a plan allows employees to save between 25 and 40 percent on the dollars they spend for most insurance products.

What if an employer already has a premium-only plan? They can generally amend their plan at any time to add an FSA (same as health care reimbursement, dependent care and adoption assistance accounts). With rising medical costs, there’s no reason for employers to miss this important tool for containing costs. Employers can save up to 10 percent on every employee dollar redirected to FSAs.

Another employee perk would be to add the Internal Revenue Service (IRS) grace period to employer FSA plans. This means that employees will have an extra two and one-half months to spend any funds that may be left over in cafeteria plans at the end of the plan year.

Here’s an example. At the end of the cafeteria plan year, a participant may not have incurred enough expenses to spend all the money he set aside. Without the grace period he would forfeit those funds to the plan at the end of the plan year. By instituting the grace period, a participant will have an additional two and one-half months to incur expenses and spend the money in their FSA. Although grace periods can’t be retroactive, they can be put in place for the beginning of the subsequent year.

Giving away employer flex credits might be something for the employer to consider. The new $2,500 limit for participant salary redirections in the 2013 plan year is an effective approach to boost participant pre-tax buying power. It’s somewhat like a health reimbursement arrangement (HRA), with unused credits forfeiting back to the employer at the end of the plan year (under current law). As I’ve said before, health FSAs are the new HRAs.

Flex credits don’t have to be a huge commitment for employers, just a little “seed money” to get a plan jump started. First, it gets employees interested in the plan and then they see how easy it is to participate and save money. Also, many will have additional expenses throughout the rest of the year, which makes them think about participating in plans the following year.

Employer flex credits can be delivered as a participant match or a flat dollar amount to all employees. It just can’t be discriminatory. Plus, there’s only one plan document with this approach.

One caveat: In order for the health FSA annual limit to exceed $2,500, employer flex credits must not be available in cash.

Insurance Coverage

Have your employer clients been thinking about offering a high-deductible insurance product but just haven’t taken the time to check out all the options? Now is an opportune time for them to leisurely and diligently scrutinize the options available. Should they wait until the beginning of the next year? Sure. Should they implement mid-year? That’s always a possibility. Why wait another year for employers and employees to start saving on premiums?

Extensive planning must be a part of any mid-year change of this nature in order to find a strategy that best fits each employer’s objectives. Employees currently enrolled in a health FSA cannot change their current election because of the cost or coverage changes sustained with switching insurance plans. However, if employers currently don’t offer a health FSA, then it’s a no-brainer.

Health Savings Accounts

Employees might want to set up a health savings account (HSA) along with their qualifying high-deductible health care plan. The full amount of the IRS annual limitation can still be contributed into an HSA even if it is opened during the calendar year. Certain additional rules apply.

Premium FSAs

Individually owned policy premiums through cafeteria plans get their own flexible spending account separate from the health FSA because premiums cannot be reimbursed from the health FSA portion of a cafeteria plan. Employers can get ready for the 2014 insurance exchanges, although smaller employers may already be sending their employees to market with some employer dollars and instructions to get their own insurance plan.

Parking and Transit Plans

Employers should take the time to survey employees on their needs in this department. They can set up a plan mid-year so participants and employers start saving on taxes right away. The higher 2013 limit for transit plans of $240 per month means even more tax savings.

There is also a bicycle commuter benefit. An employer can make available up to $20 per month to employees who bike to work. Participants may use the funds to help purchase a new bike or make repairs.

Wellness Programs

And last, I can’t pick up an insurance-related magazine or email without reading about wellness—wellness programs, the cost savings associated with wellness programs, or the pitfalls of wellness programs.

How about a resource center that includes a medical dictionary, disease treatments and symptoms, resources for healthy living and information on drugs and medicines? There’s a slew of cool tools available for employees. My biggest problem every day? What’s for dinner. I don’t need an app, and I don’t need a dozen cookbooks—I just go to the wellness center. It’s the right amount of information at the right time for me, and it’s always in the same place. No need to hunt down the recipe for that yummy low-fat meatloaf—it’s on the wellness resource site.

Be the Trusted Partner in 2014

Insurance exchanges and more employee choice is headed our way. The good news? There are more consumer education tools available to help in making critical decisions for health insurance and health care expenses.

Gear up now to be the trusted partner employers are going to need for the ACA tsunami. Advocate education, education, education for employees making critical health care decisions.

Of course some things cannot be readily changed after the beginning of a new plan year—like elections to cafeteria plans. Participants would need a valid change in status to alter that benefit. But, as you can see, such is not true for all benefits.

So do your employer clients a favor and remind them that now is one of the best times to make a benefits New Year resolution.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

The “Who Done It” of The Patient Protection and Affordable Care Act of 2010 is more of a “Who Does What and How,” as benefit professionals race to make sense of the disclosure requirements for group health plans.

One of these disclosure requirements is the summary of benefits and coverage (SBC) for medical plans, including health reimbursement arrangements (HRAs) and health care flexible spending accounts (health FSAs). Another directive requires certain health insurance carriers and sponsors to pay a fee, based on covered lives, for comparative effectiveness research (CER).

SBCs do not affect a health FSA if that health FSA is an excepted benefit or if an HRA can be classified as an FSA and thus, an excepted benefit. So first, we are going to walk through a short discussion of SBCs and CER fees and then delve into what is an excepted benefit and see how this rule applies to SBCs.

SBCs for HRAs

SBCs are required for all participants and beneficiaries enrolling or re-enrolling in group health plans, including HRAs and health FSAs on or after September 23, 2012. For participants joining the plan after open enrollment, the requirement to provide an SBC is effective the first day of the plan year following September 23, 2012. An SBC may be provided in paper format (or electronically under certain circumstances).

The Department of Health and Human Services (HHS) has created an SBC template that must be completed and distributed using specific terms and conditions for HRAs. While HRAs qualify as health plans, this SBC template does not fit the unique circumstances of most HRAs, so information may be confusing to participants. Thus, when distributing SBCs to participants, a cover letter of explanation may be helpful.

Another important note is that employees may receive multiple SBCs for various plans and coverage. For example, they might receive one or more SBC for health insurance coverage and an additional SBC for their HRA (if the HRA is not integrated with their health insurance policy or considered standalone).

In the future, quite a bit of guidance regarding HRAs is expected. For example, HRAs providing medical coverage that are not integrated with an underlying medical plan must meet several PPACA requirements beginning in 2014. Also beginning in 2014, integrated HRAs must provide one consolidated SBC that covers both medical and HRA coverage.

Comparative Effectiveness Research (CER)

PPACA Section 6301 created a new nonprofit corporation to assist in clinical effectiveness research. To aid in the financial support for this endeavor, certain health insurance carriers and health plan sponsors will pay fees based on the average number of lives covered by these welfare benefit plans. These fees go into effect for plan years ending on or after October 1, 2012.

The fee for the initial plan year is $1 per average covered life, and $2 per average covered life for the following year. Indexed each year thereafter, the fee will be determined by the value of national health expenditures. However, this fee does phase out and will not apply to plan years ending before October 1, 2019.

Which plans are required to pay fees? CER fees are required for all group health plans including HRAs and health FSAs, unless a plan consists solely of excepted benefits such as those that cover only vision or dental expenses. HRAs exempt from other regulations would be subject to the CER fee. For instance, an HRA that covered only retirees would be subject to this fee.

How are fees calculated? Fees may be calculated for nonexempt HRAs and health FSAs by counting each participant without regard to spouses and dependents also covered by the plans, if the plan sponsor has no other relevant self-insured plans. Also, if employers have more than one qualifying self-insured plan,  these plans may be considered one, as long as they all have the same plan year.

Relying on the “one plan” method does have its drawbacks, however. Let’s say an employer sponsors a self-insured health plan and a nonexempt health FSA. For CER fee purposes, the count would start with the health plan and include all covered lives including employees, spouses and dependents. Anyone not enrolled in the employer’s health plan, but participating in HRAs or health FSAs, would be counted as one additional covered life.

Who pays the fees? For self-insured plans the plan sponsor would be liable for the fees. Generally, the plan sponsor will be the employer. For fully-insured plans, the insurance carrier will need to pay the fees.

Fees are reported and paid once a year by submitting Form 720 by July 31 of the year following the end of the plan year.

So now that you know about SBCs and CER fees, let’s take a look at excepted health FSA plans where the SBC rules do not apply.

What is an “excepted” health FSA? “Excepted” benefit language goes way back in the annals of FSAs. Generally, for plan years beginning after June 30, 1997, health and welfare plans were subject to Health Insurance Portability and Accountability Act (HIPAA) certification requirements. This required plan sponsors to issue certificates of credible coverage to participants who lost coverage in health plans.

Certificates verify that a participant had creditable coverage from a previous plan or employer that would offset any pre-existing condition limitation periods in new health plans. Losing coverage could include termination of employment or dropping health insurance coverage.

A health FSA within a cafeteria plan is considered a welfare benefit plan and therefore must comply with the HIPAA certification requirement, unless the health FSA has a specific exception that exempts it from issuing the certification. So how is that accomplished?

On December 29, 1997, the IRS, Department of Labor (DOL) and the Health Care Financing Administration published “Clarification of Regulations.” This publication specified circumstances under which a health FSA would be excepted.

So what are the requirements that will exempt a health FSA from HIPAA certification and in turn exempt health FSAs from providing SBCs at enrollment time?

Two-Part Test

In order for a health FSA to be an excepted benefit, it must pass two tests:

1. The employer must provide another health insurance plan that does not offer just excepted benefits. In other words, it must provide health benefits that are not limited to just vision or dental expenses.

2. The maximum reimbursement under the health FSA cannot be greater than two times the employee’s salary reduction. Or, if the maximum reimbursement is greater than two times an employee’s salary reduction, it cannot be greater than an employee’s salary reduction election plus $500.

Let’s look at an example of this exception. But first, the short answer is—the health FSA is an excepted benefit if the employer provides another health insurance plan and the cafeteria plan does not include employer flex credits.

Let’s work through an example if there are employer flex credits in a cafeteria plan. In this cafeteria plan the employer supplies everyone in the plan with $400 that could be used toward any benefit in the plan. The maximum limit for the health FSA is $1,200 and the employer provides another health insurance plan to all employees. Is this health FSA exempt from providing an SBC at enrollment time? Two times the employee annual salary reduction election is $1,600. This means that the health FSA is exempt from HIPAA certification requirements and, therefore, exempt from providing an SBC.

Another example for consideration would be a health FSA that provides a maximum limit of $800 with employer flex credits in the amount of $450. This employer also provides another health insurance plan to all employees. The health FSA is also exempt from providing an SBC. Two times the employee annual salary reduction election would be $700, which makes the maximum limit of $800 greater than two times the employee’s salary reduction. However, when we add $500 to the maximum amount of employee salary reductions, which would be $350, we end up with an amount ($850) that is greater than the annual salary limit of $800. This health FSA would also be exempt from proving an SBC.

Now that we are talking about employer flex credits, what exactly are employer flex credits within a cafeteria plan? Well, you are probably familiar with cafeteria plans in general that allow employees to make an annual election to pay certain expenses with pre-tax dollars, which in turn reduces their taxable salary.

Employer flex-credits are non-elective employer contributions made available for every employee eligible to participate in a cafeteria plan and to be used at the employee’s election for one or more qualified benefits. However, cash or other taxable benefits may also be an option for those employer flex-credits, at the employer’s discretion. The amount of employer flex-credits available in cash need not be equal to the amount of the non-elective employer flex-credits that could be used for qualified benefits within the cafeteria plan.

In other words, a participant in a cafeteria plan may estimate health FSA expenses to be $2,000 for the plan year. If the employer supplies flex-credits in the amount of $500, the employee would have to deduct only $1,500 from her salary to pay all her estimated expenses with pre-tax money. And, of course, there are other considerations surrounding employer flex-credits such as nondiscrimination rules, but you get the idea.

Keep in mind that HHS required a “good faith effort” this first year in providing SBCs. And I’m sure we’ll receive additional information in 2013 concerning the questions we have about SBCs and CER fees.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

The Internal Revenue Service (IRS) and Social Security Administration have released the cost-of-living (COLA) adjustments that apply to dollar limitations set forth in certain IRS Code Sections. The consumer price index rose enough since the third quarter of last year to warrant an increase in some indexed figures for 2013.

Social Security and Medicare Wage Base

For 2013, the Social Security wage base increases to $113,700 from $110,100 in 2012. Unless Congress acts to extend the current reduction in the tax rate for employee withholding, they will increase to 7.65 percent in 2013 from the 5.65 percent withheld in 2012. The Social Security rate of 6.2 percent is applied to wages up to the maximum taxable amount for the year; the Medicare portion of 1.45 percent applies to all wages.

Indexed Compensation Levels

The indexed compensation levels for determining who is considered highly compensated or a key employee remain unchanged for 2013 and are shown in Table 1.

401(k) Plans

In 2013, the maximum for elective deferrals increases to $17,500. The catch-up contribution for those 50 or older remains at $5,500 for 2013 (no change from 2012). That means that those who are age 50 or older during the 2013 taxable year may generally defer up to $23,000 into their 401(k) plans.

Health FSAs

We have an additional indexed figure to track starting in 2013. It’s the annual limit for participant salary reductions for health flexible spending accounts (FSAs). For plan years starting on or after January 1, 2013, the participant salary reduction amount to the cafeteria plan’s health FSA portion of the plan may not exceed $2,500. However, this does not preclude employer flex credits that are not convertible to cash from being added to participants’ health FSAs.

Adoption Credits

Unless Congress acts, this tax credit will expire at the end of 2012. Parts of the adoption tax credit, under IRS Code Section 23, will expire on December 31, 2012. The remaining part of Section 23 will allow for a $10,000 credit for adoption of a child with special needs, regardless of expenses.

A “special needs” adoption, which becomes final during a taxable year, will be deemed to have qualified expenses in an amount equal to the excess (if any) of $10,000 over the aggregate qualified adoption expenses actually paid or incurred.

There will be no adoption-related benefits allowed under a cafeteria plan arrangement starting January 1, 2013, unless Congress updates current legislation. Because the credit is set to expire at the end of 2012, no indexed figures were released for the 2013 taxable year.

Health Savings Accounts (HSAs)

Minimum deductible amounts for qualifying high-deductible health plans (HDHPs) increase to $1,250 for self-only coverage and $2,500 for family coverage in 2013. Maximums for the HDHP out-of-pocket expenses increase to $6,250 for self-only coverage and $12,500 for family coverage.

Maximum contribution levels for HSAs also increase in 2013 to $3,250 for self-only coverage and $6,450 for family coverage. Catch-up contributions, allowed for those 55 and older, are set at $1,000 for 2013. Remember, qualifying HDHPs and no other permissible coverage (such as coverage under another employer’s plan or from a health care flexible spending account that is not specifically compatible with an HSA) are required in order to fund an HSA.

Archer Medical Savings Accounts (MSAs)

For high-deductible insurance plans that provide self-only coverage, the annual deductible amount must be between $2,150 and $3,200 in 2013. Total out-of-pocket expenses under a plan that provides self-only coverage cannot exceed $4,300. The annual deductible amount must be between $4,300 and $6,450 for plans that provide family coverage in 2013, with out-of-pocket expenses that do not exceed $7,850.

Although new MSAs are not allowed, maximum contributions to existing MSAs that are attributable to a single-coverage plan is 65 percent of the deductible amount. Maximum contributions for a family-coverage plan are limited to 75 percent of the deductible amount. MSA contributions must be coordinated with any HSA contributions for the taxable year and cannot exceed the HSA maximums.

Dependent and/or Child Daycare Expenses

Just a reminder that although the daycare expense limit associated with a cafeteria plan is not indexed, the tax credit available through a participant’s tax filing was raised in 2003. Daycare credits must be filed on Form 2441 and attached to the 1040 tax filing form.

 For 2013, unless Congress acts, the limits for daycare tax credit expenses will be reduced and based on $2,400 of expenses covering one child and $4,800 for families with two or more children. If one of the parents is going to school full time or is incapable of self-care, the non-working spouse would be “deemed” as earning $200 per month for one qualifying child and $400 for two or more qualifying children. This “deemed” earned income is used whether a person is using the employer’s cafeteria plan or taking the daycare credit.

Cafeteria plan daycare contribution limits are $5,000 for a married couple filing a joint return or for a single parent filing as “head of household.” For a married couple filing separate returns, the limit is $2,500 each.

The daycare credit is reduced dollar-for-dollar by contributions to or benefits received from an employer’s cafeteria plan. Employees may participate in their employer’s cafeteria plan and take a portion of the daycare expense through the credit if they have sufficient expenses in excess of their cafeteria plan annual election, but within the tax credit limits.

Long Term Care

For a qualified long term care insurance policy, the maximum non-taxable payment is now $320 per day for 2013.

Finally, by participating in a cafeteria plan, participants will be lowering their income for the earned income tax credit (EITC). Check out the new limits in IRS Publication 596, “Earned Income Credit,” and for more information about this tax credit. 

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

Although an election to a cafeteria plan is generally irrevocable, there are times when participants may change their election. For information about permissible changes, please refer to the change in status rules and Internal Revenue Service (IRS) Regulation 1.125-3. This regulation summarizes the effect of the Family and Medical Leave Act (FMLA) on the operation of a cafeteria plan.

The leading principle outlined mandates that employers offer coverage under the same conditions as would have been provided if the employee were continually working during the entire leave period.

This article examines IRS Regulation 1.125-3 rules for participants going on unpaid FMLA leave. It summarizes employees’ rights to continue or revoke coverage and cease payment for health flexible spending accounts (FSAs) when taking an unpaid FMLA leave and specifications for participants returning from leave.

Coverage Continuation

Employers may require an employee who chooses to continue coverage while on FMLA leave to be responsible for the share of premiums that would be allocable to the employee if the employee were working. FMLA requires the employer to continue to contribute its share of the cost of employees’ coverage.

Cafeteria plans may offer one or more payment options to employees who continue coverage while on unpaid FMLA. These options are prepay, pay-as-you-go and catch-up.

 • Prepay is paying for coverage in advance of the FMLA leave. This may be a difficult method of continuing coverage for a couple of reasons. The first consideration is if participants cannot afford to have extra funds taken from their paycheck, and the second consideration is a timing issue. Most FMLA leave involves an incident or circumstance that is not planned, making the prepay option impossible to deduct from participants’ paychecks. However, if planning in advance is feasible, the coverage can be paid on a pretax basis through the cafeteria plan.

 • The pay-as-you-go option means that participants pay their share of coverage payments on a schedule as if they were not on leave. This method requires participants to write a check to their employer each month or pay period in order to continue coverage. Since no payroll is taking place, such a payment is with after-tax dollars.

 • Catch-up contributions allow employees to continue coverage but suspend coverage payments during their leave. Catch-up contributions are made upon their return. The advantage is that contributions can be taken out on a pretax basis through a cafeteria plan. The downside is that if a participant does not return from the leave, the employer may have reimbursed expenses in anticipation of the participant making up the coverage payments.

Whatever payment options are offered to employees on a non-FMLA leave must be offered to employees on an FMLA leave. A cafeteria plan may offer one or more payment option and may include the prepay option for employees on an FMLA leave, even if this option is not offered to employees on a non-FMLA leave; however, the prepay option may not be the only option offered.

As long as employees continue health FSA coverage, or employers continue it on their behalf, the full amount of a health FSA election, less any prior reimbursements, must be available to participants at all times, including the FMLA leave period.

Coverage Revocation

Prior to taking an unpaid leave participants may revoke existing health FSA coverage. Failure to make required payments during an FMLA leave may result in lost coverage. Regardless of the reason for the loss of coverage, employees must be reinstated to a health FSA upon their return from FMLA leave.

Depending on plan document language, returning employees may be allowed not to elect coverage for a health FSA or they may be required to be reinstated in health coverage. If an employer’s plan requires reinstatement, it must also require those returning from unpaid leave not covered by FMLA to also resume participation upon return from leave.

An employer also has the right to recover payments for benefits when an employee revokes coverage.

If coverage under a health FSA terminates while an employee is on FMLA leave, that employee is not entitled to receive reimbursement for claims incurred during leave. Even if an employee wishes to be reinstated upon return for the remainder of a plan year, that employee may not retroactively elect health FSA coverage for claims incurred during leave when the coverage was terminated.

Employees have the right to reinstate coverage at the level before their FMLA leave and make up unpaid coverage payments; or they may resume coverage on a prorated basis at a level that is reduced for the period during FMLA leave for which no premiums were paid. This prorated level of coverage is further reduced by prior reimbursements and future coverage payments are due in the same monthly amounts payable before the leave.

Example:

              Annual Election       $1,200

           Contributed Prior       $  400

                           to FMLA       (8 pay periods)

            (Employee paid twice a month)

                       Distributed       $  600

                  Prior to FMLA

                                FMLA       6 pay periods

     from May 1 to July 31

 Number of Pay Periods      10

Remaining in Plan Year

Reinstate Coverage. Using the above facts, and upon a participant’s return from FMLA, annual election will remain at $1,200. The employee’s election, or coverage amount, for the remainder of the year is as follows: original annual election minus reimbursed to date ($1,200 minus $600) equals $600. The new pay period contributions will increase to $80 per pay period. Remember, the employee is making up contributions from the three-month leave.

The employee will contribute $1,200 ($400 contributed prior to the leave plus $800 ($80 times 10)). The employer exposure is $1,200 ($600 disbursed prior to leave plus $600 available upon the employee’s return).

Now let’s see what happens if the employee chooses to prorate coverage upon return from FMLA leave.

The calculation is different in this instance. A new annual election is determined. This is done by prorating the original annual election for the months the participant was absent. Using the same facts as above, the annual election amount minus six pay periods that were missed ($1,200 minus $300) equals $900. The new prorated annual election, reduced by prior reimbursements ($900 minus $600) equals $300. The per pay period contribution remains the same as before at $50 per pay period.

In this instance the employee will contribute $900 ($400 plus $500) with an employer exposure of $900 ($600 plus $300).

In either scenario, the employee is not covered for the time on FMLA if coverage is revoked. No claims may be submitted that were incurred during leave, whether they choose reinstatement or prorated coverage upon their return.

Certain restrictions apply when FMLA leave spans two cafeteria plan years. A cafeteria plan may not operate in a manner that enables employees on FMLA leave to defer compensation from one plan year to a subsequent cafeteria plan year. In other words, employees may not prepay for coverage in one plan year that pays for coverage in the subsequent plan year.

And finally, employees on FMLA leave have all the rights to change their elections according to the change in status rules under IRS Regulation 1.125-4 when returning from an unpaid leave of absence. They may also enroll in benefits for new plan years or any benefits that may have been added by the employer while they were on leave.

If on paid FMLA leave, an employer may mandate that an employee’s share of premiums be paid by the method normally used while the employee was working. 

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

The million dollar question? How do we engage employees in their own health care while employees are eating triple cheeseburgers and fried chicken by the bucket? We try to get inside employees heads and figure out the why behind such counter-productive behavior (and note, Im eating a cookie with my afternoon tea as I write this). The answer is not rational, but its fairly simple: Its cheap, fast and it tastes great.

So, how do medical plans and employers make their benefits less costly and taste great? I believe it starts with letting employees know what medical plans and employers value and, then, engaging employees to value their own health. After all, true health reform starts with the individual. Here are a few ways to let employees know whats valued without costing a bundle of cash.

Removing Barriers to Good Health

Offer low or no-charge services and focus on healthy habits. If annual mammograms are valued by the medical plan and are important to early detection of breast cancer, then they should be provided at no cost.

The Affordable Care Act (ACA) requires preventive services to be available without cost-sharing to women, beginning with health insurance plan years started on or after August 1, 2012. The Department of Health and Human Services (HHS) values preventive care. So much so that HHS mandated that certain preventive services like well-woman visits, mammograms, gestational diabetes screening, counseling and contraception services be among those provided at no cost.

Employers need to ensure that employees know about these valuable benefits and that time during work hours may be used for these exams and treatments. This is where the agent can step in with value-added services. Guide employees toward their insurance information sheets. Point out services that are provided at no cost-sharing.

For enrollments that began on or after September 23, 2012, a summary of benefits coverage (SBC) must be furnished to all employees for each insurance plan offered by the employer. What does the SBC say? Thats the great part. Each SBC for every plan offered will relate the same information in the same manner. Employees can truly compare plans.

The four-page, double-sided form details overall deductible, deductibles for specific services and out-of-pocket limits, plus many more specifics of the plan. And every SBC is in the same order and answers common questions concerning the plan. Coverage examples are also included in the SBC that illustrate medical amounts covered by the plan and patient responsibility. Walk through an SBC with employees to empower them with the knowledge they need to better understand coverage, options and benefits available.

This first year may be a bit confusing as plans work through the complicated rules for developing SBCs, but the goal is to produce a form that includes clear and concise comparative information for consumers to begin to understand their benefit options.

Lets PlayWellness Games

Not everyone can be or wants to be as thin as a runway model. All Im talking about here is starting a buzz to get employees engaged and excited about taking responsibility for their health. Wellness incentives can be as simple as encouraging non-medical solutions. Derail the attitude of Why walk if I can take a pill to control diabetes? Employers need to convey the idea that they value the health benefit of walking and implement self-care. There are various employee incentive programs that offer employee rewards that might be worth getting your workplace involved with. A great way for employers to show this is by offering a type of incentive that offers well being and self-care classes or treatments to their employees. Companies such as Avaana (Avaana.com.au) can help to connect with you with the relevant people to help with your individual wants or needs. It’s a great way to keep your employees healthy, as well as encouraging them to work hard during the day to day running of the business.

Walking programs can often begin with a steps contest. Reward those with the greatest number of steps on their personal pedometers. And please dont call it a walking program. What about a contest for the best nature photo? Employees walk around their own neighborhood or go to the zoo to take pictures. Even betterdiscounted or free admission to the local zoo, botanical garden or arboretum. Employees might find it fun and return for more walking adventures. Its comparable to secretly dropping added vegetables onto a pizza or into a meatloaf. Ive also heard thats a great way to use all those zucchinis from the garden.

Wellness initiatives come with free advertising. The best sales people are the ones who see results, and its very empowering when people lose weight and feel better. Theyre also not shy in telling everyone about their progress.

However, employees cant participate in wellness if they dont know about it. Employers complain that employees dont read their emails or respond to flyers posted in the office. Several years ago I read a great tip about getting employees to read employer bulletins: Post them in the bathroom. Okay, Ill go right ahead and say it. Put them in the stalls and on the walls. Where else do all employees end up at least once per day and, hopefully, where distractions are at a minimum?

Employee Skin in the Game

If employees are not engaged at all, an employer can try a consumer-directed health plan (CDHP).

Start with a CDHP and add in health reimbursement accounts (HRAs) or flexible spending accounts (FSAs). Employees can be incentivized to spend wisely on health care by utilizing an HRA that requires them to pay first-dollar coverage before the HRA kicks in. Alternatively, a qualified high-deductible health plan (HDHP) can be paired with health savings accounts (HSAs) or FSAs.

Money Talks, but Value Lasts

What happens after health risk assessments? Participants get five dollars off every premium payment and they continue on with their lives. How compelling does information have to be? How can employers reach employees and make them understand this is important to them?

Employers need to let employees know and understand what they value and make important, decision-making information readily available. Dont want employees to use the emergency room? Make alternatives clear as to phone numbers and locations.

Retirement

Employers can play the retirement card. Have employees write down three things they want to do when they retire. Then ask them to imagine doing those same things if they are in poor health. The joy of a carefree day is reduced to stopping to rest and counting medications.

Nearly everyone thinks about their retirement years. Besides having enough money saved, they need to think about their health. All the money in the world cant buy health. The goal is to arrive at retirement with enough money and good health. Then keep both of them as long as possible.

A focus on wellness starts from the top down. Engaging owners and human resources is the first step in any employee benefit program. You dont have to be a wellness expert, just put a bug in employers ears about low-cost or no-cost wellness incentives. Small employers would certainly welcome the low-dough approach.

No information contained herein is intended to be legal, accounting or other professional advice. We assume no liability whatsoever in connection with your use or reliance upon this information. This information does not address specific situations. If you have questions about your specific situation, we recommend that you obtain independent professional advice.

In the past I have repeatedly beaten the drum for health reimbursement arrangements (HRAs) as the tool employers can use to fight health care expense inflation, save health care dollars, and offer instead of health savings accounts (HSAs). However, in light of the new federal requirements, HRAs may be a little more complex to pull off.

The scope of this article cannot detail all the changes that HRAs will experience in the next two years, but here are the big three.

 1. Comparative Effectiveness Research (CER) Fees. Generally, HRAs associated with a fully insured health insurance plan or an HRA established with no underlying health insurance will be required to pay a fee to help fund clinical effectiveness research. The fee is $1.00 per participant. This fee is effective for HRAs with a plan year that ends on or after October 1, 2012.

 2. Summary of Benefits and Coverage (SBC). For HRAs that are not “excepted benefits,” a standardized eight-page summary of the benefits tendered through the plan needs to be presented to each eligible employee covered by the HRA. The effective date in this obligation is for enrollment periods beginning on or after September 23, 2012.

 3. Prohibition on annual and lifetime limits. HRAs are forced to contain no annual or lifetime limits after January 1, 2014, if they are not integrated with an underlying health plan that meets the Affordable Care Act (ACA) prohibition.

Truthfully, we are in a “wait and see” time frame to understand just which rules will apply to HRAs in the future and how they are to be implemented. HRAs may be exempt from one or more of these changes. However, let’s take a proactive view of how a cafeteria plan can compensate for a future when HRAs may be restricted by reporting complexity, design or lifetime and annual funding limits.

The annual and lifetime limits the ACA places on HRAs may well make cafeteria plan health flexible spending accounts (health FSAs) a very tasty tidbit on employers’ “menus” of benefits.

Switch Employer Health Care

Funding From an HRA to an FSA

Let’s be right up front, the one big difference between an HRA and a health FSA is the availability of the money. Health FSAs must make the annual election amount available on the first day of the plan year, regardless of the contributions made to date. This may dissuade a few employers, but the gains outweigh the obstacles of an employer prefunded account.

In fact, it’s best to remind employers about prefunded health FSAs and then remind them of their tax savings with some dynamic facts. One example might be how a small employer with 100 employees would still realize a tax savings if they switched from providing $1,500 to participants in an HRA to making the same amount of flex credits available through a cafeteria plan.

This extreme example assumes a turnover rate of 50 percent that occurs within six months of the beginning of the plan year with the entire annual election reimbursed to those in the health FSA at time of termination. The employer still realizes a savings of almost $25,000 (see Table 1).

If employers are willing to expend dollars for health care expenses through a health reimbursement arrangement, wouldn’t they agree to put those same dollars to work in a health FSA? The money can still be isolated for certain expenses like copayments and deductibles.

Health FSA funds can match employee contributions up to a specified amount. This technique means employers make money available only to those who contribute to the cafeteria plan. Match plans may also encourage participation. Greater employee contributions translate into more tax savings for employers.

No information contained herein is intended to be legal, accounting or other professional advice. We assume no liability whatsoever in connection with your use or reliance upon this information. This information does not address specific situations. If you have questions about your specific situation, we recommend that you obtain independent professional advice.

What’s some of the best news you can share with your clients? Offering benefits that don’t cost them a dime!

Pipe dream? No—you can share the news with your clients right now. By reducing the amount of Federal Insurance Contribution Act (FICA) tax employers owe to the Internal Revenue Service (IRS) every pay day, their benefits package could be free.

What kind of benefits am I talking about? For starters, there are cafeteria plans and commuter benefits. Then I’ll move on to other types of benefits that don’t directly save the employer money, but can produce savings when coupled with additional employee offerings.

Cafeteria Plans

Cafeteria plans are not just one benefit, but rather a method of delivering a variety of different benefits. An employer can provide a “menu” of options, thus the reference to “cafeteria.” Employers can choose just the benefits they wish to offer and employees pass through the cafeteria plan “line” to select the specific benefits they want on their “tray” based on their individual needs.

Here’s the menu of benefits that employers can offer their employees.

Premium Only Plans. Sometimes called POPs, this portion of a cafeteria plan allows employers to reduce a portion of their salary in order to pay for employer-sponsored insurance policies or benefits with pretax dollars. Premium only plans are not considered flexible spending accounts (FSAs) because employees are generally not required to submit claims in order to reimburse their premium expenses and premiums cannot be paid through a health FSA. The employer is the conduit for paying the salary reductions straight to the various insurance carriers.

Flexible Spending Accounts. Other benefits offered through a cafeteria plan are commonly called flexible spending accounts, or FSAs. This means that employee salary reductions are held by the employer for future reimbursements. An employee must incur eligible expenses in order to submit claims for reimbursement. Once a claim is adjudicated and approved for payment, untaxed dollars are returned to the employee as a reimbursement for expenses incurred.

FSA benefits reimbursed from cafeteria plans include medical expenses, dependent or child daycare expenses and adoption expenses.

Medical Benefits. In addition to paying for medical coverage through tax-free salary reductions, an additional medical benefit offered through a cafeteria plan is routinely called a health FSA. This sounds simple enough, but what exactly does the IRS consider to be a “medical expense”?

We’ll get the “IRS language” out of the way first. “Eligible medical expenses include amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease, and for treatments affecting any part of or function of the body.”

These expenses are typically what we think of as normal medical charges—trips to doctors, dentists or optometrists—and include eligible fees, prescriptions and medical equipment.

Dependent Care Benefit. This benefit reimburses a participant for daycare expenses. Expenses must be incurred for an eligible child or adult and must allow a participant and spouse, if married, to work or look for work.

This benefit will get more notice as baby boomers age and have responsibility for their parents. An older adult must be a dependent of a participant, be unable to self care, and live with a participant at least eight hours per day.

A dependent care tax credit is available that can be included in a family’s tax return filing. Whether to participate in the daycare portion of a cafeteria plan or to take the tax credit depends on an individual’s filing status, number of dependents and annual daycare expenses.

Adoption Assistance Benefit. The adoption assistance benefit allows employees to redirect a portion of their salary to pay for most expenses associated with a legal adoption. The 2012 IRS limit on expenses that can be turned in for any one adoption is $12,650. This figure will ordinarily be indexed upward each year. The credit is available to everyone, but will reduce as family income levels increase.

An additional rule to keep in mind for adoption benefits would be the taxation of an employee contribution. Most benefits elected and payroll reduced through cafeteria plans are not subject to federal, Social Security and most state taxes. However, the contributions made to the adoption assistance portion of a plan will be subject to the 7.65 percent Social Security, or FICA, taxes. That also means employers will need to pay their matching portion of FICA taxes.

Other Cafeteria Plan Benefits. A cafeteria plan can even offer employees a way to buy and sell vacation days, make contributions to 401(k) plans and deliver employer flex credit contributions. So brush up on these under-utilized benefits and guide employers to expand and update their menu items.

Commuter Benefits allows employees to pay for mass transit or van pooling expenses and parking expenses at or near their place of employment or a location where they take a form of mass transit to work, with pre-tax dollars. The 2012 IRS limit on mass transit and van pooling expenses that may be reimbursed on a tax-free basis per month is $125, and the monthly parking limit is $240.

Although commuter benefits cannot be included in a cafeteria plan, they work much like cafeteria plans except that contributions and reimbursements are monthly limits. Employee salary reductions to the plan escape federal and Social Security taxes, plus employers save on the matching FICA taxes.

All these benefits, with the exception of adoption assistance benefits and 401(k) contributions, add up to big savings for employers. When employers set up cafeteria plans, they reduce the employer portion of FICA. Depending on the number of participants and the amount of their salary redirections—the plan can literally pay for itself—with savings left over.

Table 1 shows an example of how a small employer with 100 employees can reap big savings:

                                                Table 1

                 Example of Savings for a Small Employer

                                                              Average      Estimated        Estimated

                                     Estimated      Annual       Employees’       Employer

                                    Number of    Enrollment      Savings           Savings

                                   Participants      Amount         of 35%*          of 7.65%          Total

Premium Only Plan          80             $4,061         $113,708         $24,853      $138,561

Health FSA                         40             1,500               21,000              4,590          25,590

Dependent Care                 6              3,500                 7,350              1,607            8,957

Transit & Van Pooling      35             1,200               14,700              3,213          17,913

Parking                               60              2,400               50,400           11,016          61,416

Total Savings                                                             $207,158         $45,279     $252,437

*Tax savings will depend on factors such as earnings, tax filing status, other income, deductions and medical coverage costs.

Component Plan Savings. Cafeteria plans and commuter benefits are just the beginning. By coordinating a higher-deductible health plan with a health reimbursement arrangement (HRA), premium savings can be substantial. And the benefit to employees could be more than monetary.

By utilizing a higher-deductible health plan with an HRA, employees are afforded a clearer look at the true cost of office visits and prescriptions. Employees are compelled to make wiser choices to help reduce health care spending.

Another plan to consider with a qualified high-deductible health plan is a health savings account (HSA). An HSA is an individually-owned health care spending account that allows pre-tax contributions to be accumulated tax free, and the account balance rolls forward from month to month and year to year. Pre-tax salary reductions for the HSA made through a cafeteria plan mean more tax savings for employees and employers.

And speaking of HSAs—the IRS issued new, indexed figures for 2013 to start employer planning processes. (See last month’s article.)

Increase Participation,  Increase Employer Savings

Encourage employers to start now to advertise their benefit plans and educate employees to ensure greater participation in the upcoming plan year. 

No information contained herein is intended to be legal, accounting or other professional advice. We assume no liability whatsoever in connection with your use or reliance upon this information. This information does not address specific situations. If you have questions about your specific situation, we recommend that you obtain independent professional advice.