When Did You Last Amend Your Section 125 Cafeteria or Flexible Benefit Plan? Now May Be A Good Time to Dust It Off and Update It

Snell & Wilmer

Section 125 Plans, which are commonly referred to as either cafeteria plans or flexible benefit plans, are much loved, and needed, if you want to allow employees to pay health insurance and other premiums on a pre-tax basis. Unfortunately, they are often ignored and not updated as routinely as they should be.

On September 18, the IRS released IRS Notice 2014-55, which now allows employees to make certain mid-year health coverage changes when they reduce below 30 hours of service or enroll in a qualified health plan through a Marketplace. Employers who want to permit either of these two new changes (which are explained in detail in the Notice, so I will not repeat them here) must amend their Section 125 plans by the end of the plan year in which the changes are allowed. However, a special rule applies to plans that permit changes during the 2014 plan year. Such plans must be amended by the last day of the 2015 plan year (i.e., December 31, 2015 for calendar year plans).

As employers consider whether to amend their Section 125 plans to allow these two new change events, which are beneficial to employees, they should give thought to other plan amendments that may be needed. Below is a list of some of the more recent Section 125 plan amendments that employers may need to make. Many have a December 31, 2014 deadline.

  • Amend health flexible spending accounts to reflect the $2,500 cap on salary reduction contributions. Health flexible spending accounts (“health FSAs”) had to comply with the $2,500 cap for plan years beginning on or after January 1, 2013 and must adopt an amendment reflecting the cap no later than December 31, 2014.
  • Consider allowing carryover of $500 for health FSAs. Employers that want to permit carryovers must notify employees and amend their health FSA to reflect the carryover. Carryover amendments must usually be adopted on or before the last day of the plan year from which amounts are carried over. However, a special rule applies to plans that permitted carryovers from 2013 to 2014. Such plans must be amended to reflect the carryover by the last day of the 2014 plan year (i.e., December 31, 2014 for calendar year plans).
  • Amend Section 125 plans to reflect the federal recognition of same-sex marriages. Employers must now allow same-sex spouses to pay health insurance and other premiums on a pre-tax basis. Same-sex spouses may also be covered under a health FSA and must be treated as spouses under dependent care accounts. Plans should be amended by December 31, 2014 to treat same-sex spouses the same as opposite-sex spouses.
  • Amend Section 125 plans to prohibit providing qualified health plans offered through a Marketplace. Plans had to comply with this requirement as of the first day of the plan year beginning in 2014 and should be amended to reflect this rule.
  • Amend non-calendar-year cafeteria plans to allow mid-year election changes. In 2014, employees were first able to purchase coverage through Marketplaces and the individual mandate took effect. To accommodate employees participating in non-calendar-year cafeteria plans (who would otherwise have been locked into their elections as of January 1, 2014), the IRS provided transition relief (1) allowing employees to prospectively revoke or change their salary reduction elections for accident and health plan coverage election once during the plan year, without regard to whether there was a change in status event, and (2) allowing employees who failed to make salary reduction elections for accident and health plan coverage prior to the normal IRS deadline for the 2013 plan year to make prospective salary reduction elections for such coverage during the plan year, without regard to whether there had been a change in status event. Employers who permitted either mid-year election change during the 2013 plan year must amend their plans by December 31, 2014 to reflect the transition rules.
  • Amend health FSAs to require participants to have a prescription for over-the-counter medications to be eligible for reimbursement under a health FSA. This is a fairly old change. It took effect January 1, 2011, but I thought it worth noting.

For more information please see our 2013 End of Year Plan Sponsor “To Do” List - Part 2 - Health and Welfare.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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