Employee benefits.Cafeteria Plan Cafeteria Plan An employee benefit plan that allows staff to choose from a variety of benefits to formulate a plan that best suits their needs. Also known as "cafeteria employee benefit plan" or "flexible benefit plan". Prop. Regs. Sec. 125, governing cafeteria plans, was added to the Code in 1978, (41) and proposed regulation were issued in 1984, 1989, 1997, and 2000. However, the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. finalized See finalization. only the portions of proposed regulations on the effects of the Family and Medical Leave Act and the circumstances under which participants may change cafeteria plan elections. (42) In August 2007, the Service issued new proposed regulations (43) that completely replace the old proposed regulations, adjusting some existing rules and adding provisions to address subsequent additions to the statute, such as health savings accounts A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a High Deductible Health Plan (HDHP). The funds contributed to the account are not subject to federal income tax at the time of deposit. (HSAs). The proposed effective date for the new regulations is plan years beginning on or after January 1,2009, though taxpayers may rely on these proposed regulations until they are finalized. A number of different types of plans fall within the scope of Sec. 125. The regulations apply somewhat different rules to each of the following: (1) "flex" plans, which allow participants to choose among a variety of qualified benefits; (2) premium-only plans, in which the only choice is between cash and pretax pre·tax adj. Existing before tax deductions: pretax income. pretax adj [profit] → vor (Abzug der) Steuern contributions to a health plan; (3) medical flexible spending accounts flexible spending account, n an employee reimbursement account primarily funded with employee-designated salary reductions. Funds are reimbursed to the employee for health care (medical and/or dental), dependent care, and/or legal expenses and are , which reimburse re·im·burse tr.v. re·im·bursed, re·im·burs·ing, re·im·burs·es 1. To repay (money spent); refund. 2. To pay back or compensate (another party) for money spent or losses incurred. out-of-pocket medical expenses; (4) dependent care flexible spending accounts, which reimburse the costs of caring for employees' dependents; and (5) adoption flexible spending accounts, which reimburse adoption expenses. Sec. 125(d)(1) requires that a cafeteria plan be in writing. Critical changes under the proposed regulations involve the implementation and interpretation of this provision. Following an approach adopted long ago in the qualified plan context, the new proposed regulations would impose both form and operational compliance requirements Compliance requirements are a series of directives established by United States Federal government agencies that summarize hundreds of Federal laws and regulations applicable to Federal assistance (also known as Federal aid or Federal funds). . To satisfy the former, a plan document would have to include (among other items) (1) a description of the benefits available to participants; (2) eligibility provisions; (3) an explicit prohibition against participation by nonemployees (see discussion below); (4) procedures for participants' election among benefits; (5) procedures for making contributions through salary reduction or nonelective contributions Nonelective Contribution A type of contribution an employer chooses to make to each of his or her eligible employee's employer-sponsored retirement plan. The contribution is not based on salary reduction contributions made by the employee. ; and (6) a stated maximum contribution per employee. The plan would then have to operate in conformity with both the regulatory requirements Regulatory requirements are part of the process of drug discovery and drug development. Regulatory requirements describe what is necessary for a new drug to be approved for marketing in any particular country. and written plan provisions. Much like qualified plan disqualification dis·qual·i·fi·ca·tion n. 1. The act of disqualifying or the condition of having been disqualified. 2. Something that disqualifies: illness as a disqualification for enlistment in the army. , any defect in the form or operation of a cafeteria plan would be significant: The plan would cease to be a cafeteria plan, and all employees' benefits would be includible in taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. . However, unlike the qualified plan regime, there is no determination letter process or Employee Plans Compliance Resolution System, (44) nor has the IRS given any indication that it intends to establish one. If cafeteria plan compliance becomes an audit target, the degree of effort that employers will have to put into ensuring that plan documents are up to date, unambiguous, compliant with the regulations, and followed to the letter will be significant. As noted above, the proposed regulations require plans explicitly to bar participation by individuals who are not the employer's common-law employees (e.g., sole proprietors, partners, 2% shareholders in subchapter S corporations subchapter S corporation n. the choice by a small corporation to be treated under "subchapter S" by the Internal Revenue Service, which allows the corporation to be treated like a partnership for taxation purposes. , corporate directors, and independent contractors A person who contracts to do work for another person according to his or her own processes and methods; the contractor is not subject to another's control except for what is specified in a mutually binding agreement for a specific job. ). Previously, most practitioners had assumed that nonemployees simply could not gain a tax benefit from participation in a cafeteria plan (because their benefits were includible in income), not that they had to be formally excluded from participation. A second area of profound change in the proposed regulations deals with nondiscrimination non·dis·crim·i·na·tion n. 1. Absence of discrimination. 2. The practice or policy of refraining from discrimination. non issues. Sec. 125 does not exclude from income the benefits of highly compensated participants in a plan that discriminates in their favor in either coverage or benefits. Cafeteria plan nondiscrimination rules also have requirements about "key employees" (as defined under Sec. 416(i)(1)). Key employees must include in gross income any benefit attributable to a plan year for which their portion of the plan's statutory nontaxable benefits exceeds 25% of the amount provided to all participants in the aggregate. The key employee concentration test, which primarily affects very small companies, is little changed from the earlier proposed regulations. (45) The proposal would clarify the nondiscrimination standards, generally replacing facts-and-circumstances tests with cross-references to detailed qualified plan rules. The Sec. 410(b) nondiscriminatory classification test would be the standard for determining whether eligibility to participate in a cafeteria plan was weighted too heavily in favor of the highly compensated group. This test compares the percentage of those employees who are eligible for benefits with the percentage of eligible non-highly compensated employees, borrowing the definition of "highly compensated" from Sec. 414(q). For benefits testing, the fundamental nondiscrimination rules set forth in the proposed regulations are (1) all similarly situated similarly situated adj. with the same problems and circumstances, referring to the people represented by a plaintiff in a "class action," brought for the benefit of the party filing the suit as well as all those "similarly situated. participants must have a uniform opportunity to elect qualified benefits, and (2) the use of nonqualified benefits by highly compensated employees (HCEs) must not be disproportionate to compensation. In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke" put differently , a plan is discriminatory if HCEs predominantly choose qualified (generally nontaxable) benefits and non-HCEs generally prefer cash. As a numerical test, aggregate qualified benefits as a percentage of aggregate total compensation for the highly compensated group may not be higher than for the non-highly compensated. Because employers must make all elections before the beginning of the year, they can, in theory, check for benefit discrimination beforehand and require HCEs to cut back their elections if necessary. However, this kind of policing may not prove to be practicable. Nonqualified Deferred Compensation Final Regs. The Service has issued final regulations on nonqualified deferred-compensation arrangements under Sec. 409A. (46) These rules generally follow the proposed regulations issued in 2005 (47) but provide additional guidance and clarify many key issues, including: * Liberalizing the definition of the underlying stock-for-stock options and stock appreciation rights (SARs) that may be permitted without triggering the application of Sec. 409A; * Easing the ability to extend the exercise period for stock options and SARs without triggering Sec. 409A; * Clarifying that payments can be limited based on an objective, defined formula or a fixed limit established on or before the date, time, and form of payment are required under Sec. 409A; * Adding guidance on payments under the short-term deferral deferral - Waiting for quiet on the Ethernet. exception to Sec. 409A; * Clarifying that deferred-compensation payments can be delayed if payment would jeopardize jeop·ard·ize tr.v. jeop·ard·ized, jeop·ard·iz·ing, jeop·ard·izes To expose to loss or injury; imperil. See Synonyms at endanger. the employer's ability to continue as a going concern; * Providing more exceptions for severance-pay arrangements; * Clarifying the definition of a deferred-compensation payment; and * Providing more flexible rules on the treatment of similar deferred-compensation arrangements as one plan for purposes of the Sec. 409A penalties. The final regulations were effective April 17, 2007, but generally apply starting in 2008 and may be applied retroactively ret·ro·ac·tive adj. Influencing or applying to a period prior to enactment: a retroactive pay increase. [French rétroactif, from Latin . All deferred-compensation arrangements must be in writing and in compliance with Sec. 409A by December 31, 2007. Plans are not required to be amended retroactively to cover the period from the January 1, 2005, effective date of Sec. 409A through the end of the transition period but must show operational compliance with the rules during that time. Additional separate guidance is expected to address the prohibition on offshore funding and springing trusts, application of the rules to partnership arrangements, and income calculation and inclusions, none of which is covered in the final regulations. Employer-Owned Life Insurance Life insurance proceeds are generally excluded from a recipient's gross income. PPA PPA 1. Palpation, Percussion & Ausculation 2. Pittsburgh pneumonia agent 3. Postpartum amenorrhea 4. Price per accession 5. Pure pulmonary atresia '06 added Sec. 101(j), which provides that in the case of employer-owned life insurance contracts on the life of certain employees, the amount excluded from the applicable policyholder's income as a death benefit cannot exceed the premiums and other amounts paid by the employer for the contract. (This group includes officers, directors, and highly compensated employees, as defined in Sec. 414(q).) The excess death benefit is included in income. The provision, however, allows numerous exceptions. When new notice and consent requirements (discussed below) are met, the income-inclusion rule does not apply if the insured was an employee during the 12-month period before the insure& death or, at the time the contract was issued, was a "highly compensated employee" or a "highly compensated individual" (This group includes greater-than-5% owners, employees earning over $100,000 in the preceding year, directors, or any employees in the top 35% of employees ranked by pay.) In addition, the rules do not apply if the death benefits are paid to the insured's family, any individual designated by the insured (or to trusts for the benefit of either), or the insured's estate, or if the proceeds are used to purchase an equity interest in the company that owns the policy. The last exception should cover most buy-sell agreements buy-sell agreement n. a contract among the owners of a business which provides terms for their purchase of a withdrawing partner's or stockholder's interest in the enterprise. . The notice (by the employer) and consent (by the employee) requirements provide that before the issuance of the contract, the employee must be notified, in writing, that the employer intends to insure the employee's life, the maximum face amount of the policy for which the employee could be insured, and that the employer will be the beneficiary of the policy. (48) The employee must provide written consent to being insured and must agree that the employer may continue coverage even after the insured terminates employment. Sec. 101(j) applies to contracts issued after August 17, 2006 (except for tax-free Sec. 1035 exchanges), and to preexisting pre·ex·ist or pre-ex·ist v. pre·ex·ist·ed, pre·ex·ist·ing, pre·ex·ists v.tr. To exist before (something); precede: Dinosaurs preexisted humans. v.intr. policies with significant increases in death benefits after that date (this may commonly occur in buy-sell situations). The provision also adds new reporting requirements on the employer for contracts issued after that dale. (49) HSA HSA Health Savings Account (US) HSA Human Serum Albumin HSA Human Services Agency (Nevada) HSA Health Services Agency HSA Health and Safety Authority (Ireland) Enhancement In its waning hours, the 109th Congress sent the president the Health Opportunity Patient Empowerment patient empowerment The providing of information regarding therapeutic options so that a Pt can actively participate in the decision on whether to undergo a diagnostic or therapeutic procedure, or pursue alternatives. See Patient Bill of Rights. Act of 2006 (included in the Tax Relief and Health Care Act of 2006), (50) which included a package of provisions to improve HSAs. The first change liberalized the "comparable contribution requirement" for HSAs. Employers do not have to contribute to employees' HSAs, but if they do, they must make comparable contributions to the accounts of all comparable participating employees. Contributions are comparable if they are the same dollar amount or the same percentage of the high-deductible health plan's (HDHP HDHP High Deductible Health Plan ) deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). . Participating employees are considered comparable, with some exceptions, if they are covered by any HDHP that the employer offers. For purposes of applying the comparable contribution requirement, Sec. 223 allows employers to distinguish between employees with different types of coverage (i.e., single or family) and between full- and part-time employees. The regulations permit employers to create three subcategories of family coverage, allowing more precise comparisons. The act made the comparable contribution requirement more flexible by permitting employers to make larger HSA contributions for non-highly compensated employees than for highly compensated employees, effective for tax years beginning after December 31, 2006. (51) The highly versus non-highly compensated employee concept is borrowed from qualified plan rules. The pertinent definition is supplied by the qualified plan rules at Sec. 414(q). (52) The second change permits the transfer of an employee's balance in either a health flexible spending account (health FSA FSA Financial Services Authority FSA Food Standards Agency (UK) FSA Farm Service Agency (USDA) FSA Financial Services Agency (Japan) ) or health reimbursement account  This article or section is in need of attention from an expert on the subject.Please help recruit one or [ improve this article] yourself. See the talk page for details. (HRA HRA Health Reimbursement Arrangement HRA Health Risk Assessment HRA Housing and Redevelopment Authority HRA Human Resources Administration HRA Health Reimbursement Account HRA Housing Revenue Account ) into an HSA. Congress believed that some employers were unwilling to adopt HSA-based consumer-directed health plans because of problems coordinating HSAs with their existing HRAs and health FSAs. Employees generally may not fund HSAs while covered by HRAs or health FSAs because those arrangements represent additional, non-HDHP health care coverage that an HSA "eligible individual" cannot have. Qualified Distributions To help remedy this structural impediment A disability or obstruction that prevents an individual from entering into a contract. Infancy, for example, is an impediment in making certain contracts. Impediments to marriage include such factors as consanguinity between the parties or an earlier marriage that is still valid. , the bill created a five-year window during which employers may allow their employees' health FSAs or HRAs to make "qualified HSA distributions," which are tax-free transfers from an FSA or HRA to an HSA. The goal was to make it easier for employers to replace existing health FSAs and HRAs with consumer-directed health plans based on HDHPs and HSAs only. The mechanism is similar to a direct rollover Direct Rollover A distribution of eligible rollover assets from a qualified plan, 403(b) plan, or a governmental 457 plan to a Traditional IRA, qualified plan, 403(b) plan, or a governmental 457 plan or a distribution from an IRA to a qualified plan, 403(b) plan or a governmental from a qualified plan to an individual retirement account. However, the favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. tax treatment of the qualified HSA distribution is conditioned on the employee's maintaining HDHP eligibility and coverage for the 12-month period beginning on the date of distribution. The confluence confluence /con·flu·ence/ (kon´floo-ins) 1. a running together; a meeting of streams.con´fluent 2. in embryology, the flowing of cells, a component process of gastrulation. of rules regarding the commencement of eligible-individual status, the end of health FSA or HRA coverage, and the forfeiture The involuntary relinquishment of money or property without compensation as a consequence of a breach or nonperformance of some legal obligation or the commission of a crime. The loss of a corporate charter or franchise as a result of illegality, malfeasance, or Nonfeasance. of unused health FSA balances at the end of each plan year presents challenges for employees who wish to take advantage of qualified HSA distributions. In response, the IRS published Notice 2007-22, (53) which provided a procedural road map for employers to follow to ensure that special distributions from HRAs or FSAs to an HSA are accorded tax-exempt status. The notice provided detailed examples of successful (and unsuccessful) qualified HSA distributions. Finally, the act included a provision permitting individuals to make onetime qualified HSA funding distributions from their IRAs. These transfers, which cannot exceed the individual's otherwise applicable HSA contribution limit for the year, are subject to rules similar to those that apply to the qualified HSA distributions described above. Additional HSA Guidance Separately, the Service released other HSA guidance during the past year. In April 2008, it issued final regulations on two "comparable contribution" issues (54) as a supplement to the final regulations released in July 2006. (55) The regulations provide a way for employers to comply with comparable contribution requirements for employees who are eligible to establish an HSA but either did not set one up or failed to notify the employer about the establishment by December 31. The regulations require the employer to notify employees of the need to furnish fur·nish tr.v. fur·nished, fur·nish·ing, fur·nish·es 1. To equip with what is needed, especially to provide furniture for. 2. information about their HSAs, provide sample language for the notice, and set deadlines for making contributions to the accounts of employees who respond. The regulations also allow employers to make accelerated contributions to the HSAs of employees who have incurred more qualifying medical expenses than the employer's cumulative HSA contributions at that time, as long as similarly situated employees are treated uniformly. In Letter Ruling 200704010, (56) the IRS provided examples of other insurance coverage that is compatible with an HDHP and therefore does not prevent the establishment of an HSA. The ruling examined 11 policies offering coverage of various types. Nearly all of them qualified as "permitted insurance" under the ruling, though certain provisions were disallowed, indicating that HSA account holders can have significant coverage and still maintain an HSA. In Notice 2008-59, the IRS has provided employers and employees with 42 questions and answers giving guidance on health savings accounts. (41) Revenue Act of 1978, P.L. 95-600, Section 134(a). (42) Regs. Secs. 1.125-3 and -4. (43) REG- 142695-05. (44) Rev. Proc. 2006-27, 2006-1 CB 945. (45) Prop. Kegs. Sec. 1.125-7. (46) TD 9321. Corrections were made to these final regulations in Announcement 2007-68, 2007-32 IRB IRB See: Industrial Revenue Bond 348, and Announcement 2007-78, 2007-38 IRB 663. (47) REG-158080-04. (48) Sec. 101(j)(4). (49) See Sec. 6039I(a). (50) Tax Relief and Health Care Act of 2006, P.L. No. 109-432. (51) Sec. 4980G(d). (52) See Sec. 4980G(d). (53) Notice 2007-22, 2007-10 IRB 670. (54) TD 9393. (55) TD 9277. (56) IRS Letter Ruling 200704010 (1/26/07). |
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