Flashcards in Section 125 Plans Part 1 Deck (29)
What are the two primary factors that contribute to the popularity of cafeteria plans?
1. Increasing cost of benefits
2. Diverse workforce
A __________ plan assures that the employer maximizes the value of its benefit dollars and avoids spending money on duplicated or unneeded benefits.
A flexible benefit plan allows employees to contribute toward benefits on a ___ _________ basis.
1. Tax favored
Provided a cafeteria plan is designed in accordance with all applicable tax laws, a cafeteria plan participant can avoid taxation and instead receive ___ _____ benefits.
1. Tax free
An essential concept in understanding a cafeteria plan is recognition that the cafeteria plan really is an _________ plan under which tax-favored employee benefits are offered.
Section 125 was added to the IRC by the _________ ____ __ ______
1. Revenue Act of 1978
If the requirements of Section 125 are met and the benefits are eligible for inclusion in a cafeteria plan, the:
The benefits are not considered as taxable income to the participant
What are some benefits that cannot be offered in a cafeteria plan
Whole life insurance and long term care insurance
Can a health savings account funded through a cafeteria plan fund premiums for long-term care insurance or services.
What are the primary advantages to an employee in receiving benefits under a cafeteria plan?
1. Preferential tax treatment
2. Contributions to a cafeteria plan are exempt from federal income tax and not subject to FICA/FUCA
3. Most state and local tax laws follow federal treatment
What are the primary disadvantages of a cafeteria plan?
1. Benefit elections generally must be made prior to the beginning of the plan year and, with limited exception, the election is irrevocable during the entire period of coverage.
2. An employee may be worse off financially by paying for dependent care expenses through a cafeteria spending account rather than taking the tax credit on his or her personal tax return.
3. May notice reduction in Social Security benefits due to no contributions
Unused benefit dollars at the end of the plan year subjected to forfeiture
"Use it or lost it" rule
Discuss the advantages to employers in offering their employee benefits through a cafeteria plan
1. Payroll cost savings due to no FICA or FUTA
2. Deferral amounts are not considered wages for purposes of workers' comp
3. Create greater employee awareness of the overall value of their benefits
Disadvantages employers face in sponsoring cafeteria plan?
1. Cost of administration
2. Must adhere to strict federal tax laws
3. Employer incurs cash flow risk if claims exceed employee plan contributions early in the plan year
4. Terminating employees claims can exceed contributions and recoveries
Adverse selection becomes a greater risk when employees can opt in and out of various benefit plans. If all the less healthy participants select the most comprehensive insurance coverage and the more healthy participants select minimum or no health coverage, the overall plan costs may __________
Cafeteria plans are subject to complex coverage and _________________ testing.
This type of plan has no employer contributions and the plan is offered to employees so they may pay for their insurance costs on a tax-favored basis.
Premium conversion plan
If the employer is going to allow employees to opt out of employer-paid insurance coverage, this must occur through a ______ _______ within a cafeteria plan.
Which types of benefits typically provide a premium conversion feature under a flexible benefit plan?
Medical insurance (including dental, vision, and other types of medical coverage) and group term life insurance
The payment of pretax premiums for individual policies is prohibited.
What is an FSA
Offer an employee the ability to fund certain qualified benefits on a pretax basis through a salary reduction agreement or a combination of salary reductions and employer contributions
FSAs are permitted for:
Health Care Reimbursements
What is a full flex plan (full choice plan)
Gives participants an opportunity to select among a full range of benefits. The employer determines a dollar value it wishes to earmark for the benefits portion of total comp.
What are the pricing matrix factors utilized to value credits
1. The number of credits a participant will be given
2. The acceptable level of employee contribution
3. The number of participants expected to select each benefit offered
4. The number of credits that are expected to be paid as a cash benefit
5. The purchase price of benefit options
6. The hidden employer subsidies
7. The total premium cost
Why do employers develop credit values for use in flexible benefit plans rather than use the actual dollar values associated with premium costs?
Such a system can smooth out benefit inequities. This type of pricing makes the benefits more valuable than cash.
What is a core benefit within a flexible benefit plan
A minimum level of benefit coverage which a company will not allow an employee to go below
What is the affordability test
Large employers must offer lowest cost option that also meets ACA minimum value requirements
Cafeteria plans that include welfare plans are subject to what other major laws besides the IRC and ERISA?
MHPA (Mental Health Parity Act)
NMHPA (Newborns and Mothers Health Act)
WHCRA (Women's Health and Cancer Act)
MMA (Medicare Prescription Drug
WFTRA (Working Families)