By Phil Larson
When you are thinking of your health and welfare benefit programs, an often misunderstood or missed program may include the cafeteria plan or section 125 plan. A cafeteria plan is a separate written plan maintained by an employer for employees that meets the specific requirements and regulations of section 125 of the Internal Revenue Code.
These are often used to provide many tax incentivised benefits (including FICA, FUTA, Medicare tax or income tax withholding) for many kinds of programs like health flexible spending accounts, adoption assistance, dependent care accounts, pre-tax premiums for medical, dental, vision, vacation buy/sell, and even health savings accounts.
Cafeteria plans provide a very unique way to allow a choice between cash and some of the nontaxable benefits without that "choice" causing taxation. This means employees can help pay for some or all of these benefits with many of the tax savings. These tax savings help the employer as well as the employee, their spouse or dependents.
The IRS recently announced several information letters on cafeteria compliance specifically focussing on health flexible spending accounts. Some noteworthy items include:
CLAIMS PROCESSING:
Health FSAs must adopt procedures to verify claims with (1) an independent third-party verifying the expense, and (2) employee certification that any expense being reimbursed has not already been reimbursed and the employee will not seek reimbursement from any other health benefit plan.
AMOUNT OF INFORMATION:
Participants must provide sufficient details of the service or product to allow the health FSA administrator to verify that the service or product is a qualifying medical expense. The rules require that the information from a third party describe the medical service or product, the date the service or product was provided, and the amount of the expense. Just because the participant paid a bill is not enough and paying for future care is not allowed.
DATA PROTECTIONS APPLY:
Information about health care submitted to health FSA administrators as part of a request for reimbursement is generally protected health information subject to the same protections against disclosure and system-security requirements as information submitted to health insurance plans. This means HIPAA privacy and security applies (and breach notification under HITECH). These same protections may also apply to HSAs if the program substantiates HSA claims under the medical plan (meaning the medical plan verifies the medical expense for the HSA vendor).
PENALTIES AND FAILURE TO DOCUMENT:
The IRS affirms that if the health FSA violates the requirements under section 125 for cafeteria plans, all elections under the cafeteria plan may potentially result in income to employees. Numerous rules exist for section 125 plans, including detailed documentation requirements.
FUTURE CHANGES LIKELY:
Many of the 2016 information letters were addressed to members of congress. This can often mean lawmakers are looking at potential changes. Also, both parties and candidates for president have expressed interest in dependent care. Lastly, health care and taxes continue to be a hot topic at any level. A little known fact is that cafeteria plans make up the single largest impact of the entire tax code. This is primarily due to the fact that employee pre-tax elections continue to increase substantially for health care coverage.
Given the gravity of the issues identified above, entities would be wise to verify that their forms or processes include these points and to verify the indemnity provided by their vendors who support such claims processing. If you need assistance with any of these points or cafeteria plans generally, please contact Kinney & Larson LLP.
When you are thinking of your health and welfare benefit programs, an often misunderstood or missed program may include the cafeteria plan or section 125 plan. A cafeteria plan is a separate written plan maintained by an employer for employees that meets the specific requirements and regulations of section 125 of the Internal Revenue Code.
These are often used to provide many tax incentivised benefits (including FICA, FUTA, Medicare tax or income tax withholding) for many kinds of programs like health flexible spending accounts, adoption assistance, dependent care accounts, pre-tax premiums for medical, dental, vision, vacation buy/sell, and even health savings accounts.
Cafeteria plans provide a very unique way to allow a choice between cash and some of the nontaxable benefits without that "choice" causing taxation. This means employees can help pay for some or all of these benefits with many of the tax savings. These tax savings help the employer as well as the employee, their spouse or dependents.
The IRS recently announced several information letters on cafeteria compliance specifically focussing on health flexible spending accounts. Some noteworthy items include:
CLAIMS PROCESSING:
Health FSAs must adopt procedures to verify claims with (1) an independent third-party verifying the expense, and (2) employee certification that any expense being reimbursed has not already been reimbursed and the employee will not seek reimbursement from any other health benefit plan.
AMOUNT OF INFORMATION:
Participants must provide sufficient details of the service or product to allow the health FSA administrator to verify that the service or product is a qualifying medical expense. The rules require that the information from a third party describe the medical service or product, the date the service or product was provided, and the amount of the expense. Just because the participant paid a bill is not enough and paying for future care is not allowed.
DATA PROTECTIONS APPLY:
Information about health care submitted to health FSA administrators as part of a request for reimbursement is generally protected health information subject to the same protections against disclosure and system-security requirements as information submitted to health insurance plans. This means HIPAA privacy and security applies (and breach notification under HITECH). These same protections may also apply to HSAs if the program substantiates HSA claims under the medical plan (meaning the medical plan verifies the medical expense for the HSA vendor).
PENALTIES AND FAILURE TO DOCUMENT:
The IRS affirms that if the health FSA violates the requirements under section 125 for cafeteria plans, all elections under the cafeteria plan may potentially result in income to employees. Numerous rules exist for section 125 plans, including detailed documentation requirements.
FUTURE CHANGES LIKELY:
Many of the 2016 information letters were addressed to members of congress. This can often mean lawmakers are looking at potential changes. Also, both parties and candidates for president have expressed interest in dependent care. Lastly, health care and taxes continue to be a hot topic at any level. A little known fact is that cafeteria plans make up the single largest impact of the entire tax code. This is primarily due to the fact that employee pre-tax elections continue to increase substantially for health care coverage.
Given the gravity of the issues identified above, entities would be wise to verify that their forms or processes include these points and to verify the indemnity provided by their vendors who support such claims processing. If you need assistance with any of these points or cafeteria plans generally, please contact Kinney & Larson LLP.
