Emergency Regulations on Cafeteria Plan Requirements
By Daniel J. Blake, Esq.
It has been nearly a year since Massachusetts passed its landmark Health Care Reform Law. In addition to mandating that individuals obtain health insurance coverage, the Law requires that employers with 11 or more employees establish a compliant Section 125 Cafeteria Plan by July 1, 2007. The intent of the Section 125 Cafeteria Plan requirement is to make it more affordable for employees to comply with the Law's individual coverage mandate. Section 125 Cafeteria Plans allow employees to pay for health insurance premiums and other qualified benefits on a pre-tax basis. Employers also benefit because they are not required to pay payroll taxes on earnings used by employees to pay for premiums.
The Law created a new state agency, the Commonwealth Health Insurance Connector Authority (the "Connector"). With the July 1, 2007 deadline looming, on March 20th the Connector issued emergency regulations on Section 125 Cafeteria Plans. The emergency regulations provide guidance to employers on determining coverage, requirements for a compliant plan, employee eligibility, and timing and filing requirements.
Employers Covered and Timing
The Section 125 Cafeteria Plan requirement does not apply to employers that pay 100% of the cost of medical care coverage for all employees. The Section 125 Cafeteria Plan requirement applies to all other employers with 11 or more employees at locations within the Commonwealth of Massachusetts, regardless of whether the employer offers medical care insurance on an insured or self-insured basis, whether such insurance is purchased on an individual or group basis, or whether employees obtain such insurance through the Commonwealth-sponsored Connector Plan or some other means.
Whether an employer must establish and maintain a compliant Section 125 Cafeteria Plan is determined as follows. The employer must total all payroll hours over a one-year period for all employees, including full-time employees and part-time or temporary and seasonal employees, and divide that total by 2,000. If the quotient is greater than or equal to 11, then the employer is covered and must establish and maintain a Section 125 Cafeteria Plan. Self-employed individuals should count themselves in making the calculation; however, independent contractors are not included. Payroll hours include all hours for which the employer paid wages, including regular time worked, holidays, vacation, paid leave and sick time, as well as time spent on short-term or long-term disability. While overtime should also be included in the calculation, the maximum number of hours to be counted for an employee is 2,000.
The determination period for the initial determination of coverage is from April 1, 2006 - March 31, 2007. If the employer is covered for that period, then it must have a compliant Section 125 Cafeteria Plan in place by July 1, 2007. If the employer is not covered for that period, then the period for determining coverage runs from June 30 of each year to July 1 of the following year. Employers who become covered after the initial April 1, 2006 - March 31, 2007 determination period must have proper plans in place by October 1 of the first year of coverage.
In addition to complying with existing Internal Revenue Code requirements for Section 125 Cafeteria Plans, the new Connector regulations require that a compliant plan must allow employees to pay for health insurance premiums through the plan (known as a "premium only plan") and offer access to at least one medical care coverage option. The emergency regulations do not require the employer to contribute its own funds for the medical care coverage options offered, but it may elect to do so. Employers likewise may choose to offer a flexible spending account as a coverage option. However, Section 125 Cafeteria Plans that function only as flexible spending account plans, or premium only plans that do not include access to any medical coverage options, will not satisfy the requirements for a plan contained in the emergency regulations.
In addition, the employer must maintain a written plan document that contains at least the following six elements:
Eligibility for Participation
The emergency regulations permit a Section 125 Cafeteria Plan to include an eligibility waiting period that ends on the sooner to occur of (i) the date that the employee is eligible for any of the medical care coverage options under the Plan or (ii) two calendar months following the date of the employee's hire. The eligibility waiting period for employees employed by employers covered based on the initial April 1, 2006 - March 31, 2007 determination period may be extended to no later than September 1, 2007. In addition, employers must offer eligible employees the opportunity to participate in the plan during applicable election periods, regardless of whether the employee was previously eligible or had previously waived participation in the plan. Certain employees may be excluded from participation in the Section 125 Cafeteria Plan, even though the employer may have been required to count them in order to determine whether the employer is covered by the Law's Section 125 Cafeteria Plan requirement. These include:
Initially covered employers must file Section 125 Cafeteria Plans with the Connector on or before July 1, 2007. An employer who becomes covered thereafter must file its plan with the Connector by October 1st of the first year that it becomes covered. The plan itself may be a separate, stand-alone document, or it may be combined with other employer-provider plans. In addition, employers may utilize more than one plan document, including a plan established solely for employees not eligible for any subsidized medical care coverage options.
The Connector will hold a public hearing on the emergency regulations in Boston on April 27, 2007 and expects to issue final regulations some time in May 2007. In the interim, employers should become familiar with the requirements described in the emergency regulations and determine whether they will be covered based on the initial determination period. If so, employers should take steps to put a compliant Section 125 Cafeteria Plan in place, or to modify existing plans as necessary so that they comply with the regulations.
Dan Blake is Counsel in our Boston office and can be reached at firstname.lastname@example.org or at 617-368-2504. Ron Weiss is the Chairman of our Business/Finance Department and can be reached in our Springfield office at email@example.com or at 413-272-6259. Call either with any questions.