Section 125 of the Internal Revenue Code requires that, in order to be effective for a plan year, a "cafeteria plan" has to both be in writing and be in effect on or before the first day of the plan year. If a cafeteria plan does not comply with Section 125 – including the written plan requirement – then employees' elections of non-taxable benefits will not be recognized for tax purposes. This means that they will be taxable on the salary that could have been received, even if they elect to reduce salary, such as to pay for health insurance or to "fund" flexible spending accounts (FSAs).

Certain "healthcare reform" changes become effective with the first plan year beginning after September 23, 2010. For most cafeteria plans – which are usually calendar-year plans to match employees' taxable years – this is January 1, 2011, so the changes have to be reflected in applicable plan documents by that time.  For instance, if you have a health FSA, amounts spent on over-the-counter drugs are no longer eligible for reimbursement after December 31, 2010. In addition, covered "dependents" for purposes of an FSA can include children up to age 27.
The Internal Revenue Service, in Notice 2010-59 (issued September 3, 2010), modified the rule prohibiting retroactive amendments, but only for amendments implementing the over-the-counter drug changes; that amendment may be adopted as late as June 30, 2011, and still be effective as of January 1, 2011. Any other required changes, however, must still be made prospectively, and must be reflected in your plan documents in order to maintain the benefits of Section 125 of the Code. Ford & Harrison's Employee Benefits group can review your plan documents so that these and other necessary changes can be made in time to protect your employees' tax benefits.

If you have any questions about Cafeteria Plans and collective bargaining agreements, please contact one of the members of the Employee Benefits Group or the author of this Benefits Brief, Jeffrey Ashendorf, at jashendorf@fordharrison.com. 

Under the health care reform law, employers who provide dependent coverage under a health plan must make coverage available to adult children until age 26 without regard to student status, residency, dependency or martial status, beginning with the first plan year on or after September 23, 2010.

The IRS explained in a notice that coverage provided to adult dependent children can be tax-free -- that is, employer contributions are not included in the employee's gross income and employee contributions can be made on a pre-tax basis through a Section 125 ("cafeteria") plan – so long as the adult child has not attained age 27 by the end of the calendar year.

So, coverage must be available for adult children until age 26 but an employer can choose to provide the coverage through the end of the calendar year in which the dependent turns age 26 without tax consequences to the employee.

Why would an employer choose to provide coverage through the end of the calendar year for an age 26 child? Simply because it may be easier from an administrative standpoint to terminate coverage and issue the required COBRA notices to all age 26 children at one time at the end of the year rather than at varied times throughout the year based on individual birthdates.

If you have any questions about dependent coverage, please contact one of the members of the Employee Benefits Group or the author of this Benefits Brief, Penny Wofford, at pwofford@fordharrison.com.

Your dental and/or vision plan will not likely be subject to health care reform and your health FSA may only be subject to certain specific requirements of health care reform.  The provisions of health care reform do not apply to health benefits called "HIPAA-excepted benefits," which are certain types of health benefits that are excepted from the access and renewability requirements of the Health Insurance Portability and Accountability Act ("HIPAA"). 

Excepted benefits under HIPAA include (but are not limited to) separate, limited scope dental and vision plans, and certain health flexible spending accounts ("FSAs").  A dental and/or vision plan will be a "limited scope" plan if benefits are limited to treatment of the mouth or eyes.   Limited-scope dental and vision plans are excepted benefits if they are provided under a separate policy or contract of insurance than the health plan or if included in the health plan, they are not an integral part of the health plan.  Dental and vision benefits will not be considered to be an integral part of the health plan (even if provided in the same plan or policy) as long as participants can waive dental and/or vision coverage and if elected, participants must pay an additional premium for dental and/or vision coverage.

Health FSAs are generally excepted benefits as long as the employer's contribution to the account does not exceed two times the amount of the employee's contribution (or if it does, the employer's contribution is not more than the employee's contribution plus $500) and the employer provides a group health plan to participants of the health FSA.  Even if a health FSA is an excepted benefit there are still some requirements under health care reform that specifically apply to a health FSAs such as the limit on employee contributions and the elimination of over-the-counter medications as reimbursable benefits.  So, you will still have some obligations to meet under health care reform for your health FSA but not the same comprehensive requirements as will apply to your group health plan.

If you have any questions about your individual dental plan, vision plan, or FSA, please contact one of the members of the Employee Benefits Group or the author of this Benefits Brief, Lindsay O'Brien, at lobrien@fordharrison.com.

A group health plan maintained pursuant to a collective bargaining agreement ratified before March 23, 2010 is considered a grandfathered plan, regardless of the funding of the plan (insured or self-funded). But the funding of the plan could determine the length of the grandfathered status. If a self-funded collectively bargained plan adopts changes (whether those changes are made unilaterally by the employer or through negotiations) that would cause any other group health plan to lose grandfathered status, the self-funded collectively bargained plan will lose grandfathered status. However, if an insured collectively bargained plan adopts changes that would ordinarily cause the loss of grandfathered status, the plan will remain grandfathered until the last collectively bargained agreement expires. Upon the expiration of the last agreement, the grandfathered status of the plan will be determined by comparing the plan provisions in effect then with those in effect on March 23, 2010, and whether the changes made would cause the plan to lose it grandfathered status.

If you have any questions about grandfathered plans and collective bargaining agreements, please contact one of the members of the Employee Benefits Group or the author of this Benefits Brief, Isabella Lee, at ilee@fordharrison.com.

A grandfathered plan is a group health plan (whether it is insured or self-funded) that was in existence on March 23, 2010 and has continuously covered at least one person, and includes collective bargaining agreements ratified before March 23, 2010.  A grandfathered plan can make the following changes without losing its grandfathered status:

(1) change third-party administrators for self-funded plans;

(2) increase benefits by voluntarily compliance with the provisions mandated for non-grandfathered plans under Health Care Reform;

(3) make changes required by federal and state requirements;

(4) enroll family members of currently enrolled individuals;

(5) enroll new employees;

(6) disenroll individuals, provided the plan has continuously covered at least one individual since March 23, 2010);

(7) increase premiums, provided the employee contribution to the premium does not increase by more than five percentage points;

(8) increase co-payments by no more than the greater of $5.00 or a percentage equal to medical inflation plus fifteen percentage points; and

(9) increase deductibles by no more than a percentage equal to medical inflation plus fifteen percentage points. 

Additionally, a grandfathered plan must comply with the disclosure and documentation requirements to maintain its status.  Those requirements include (1) a statement in any plan materials provided to a participant or beneficiary describing the benefits under the plan, that the plan believes it is a grandfathered health plan and provide contact information for questions and complaints, and (2) maintaining all plan documents (and any other documents as to the terms of the plan) in effect on March 23, 2010 to verify, explain, or clarify the plan's status as a grandfathered health plan, as well as later documents describing benefits and costs provisions. 

If you have any questions about grandfathered plans, please contact one of the members of the Employee Benefits Group or the author of this Benefits Brief, Tiffany Downs, at tdowns@fordharrison.com.

One of the requirements under the health care reform laws for plan years beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans), is that health plans offering dependent coverage for children must provide such coverage until the child turns age 26.  The health care reform laws go on to state that the determination of whether a child is a dependent of a participant is based only on the relationship between the child and participant, and may not be based on factors such as financial dependency, residency, student status, employment eligibility for other coverage (except for pre-2014 grandfathered plans), or marital status.  However, the applicable tax code guidance specifically defines a child as a son, daughter, stepchild, adopted or foster child.

The lack of a consistent definition of "child" under the health care reform law guidance and the tax code may result in unwanted circumstances for health plans.  For example, health plans providing coverage to a grandchild who resides with a participant would be required to continue coverage of the grandchild until age 26 under the health care reform requirement.  However, because the grandchild is not a "child" as defined under the tax code, the coverage of the grandchild would be treated as additional taxable income to the participant. 

Unless clarifying guidance is issued to reconcile the tax code definition of child with the health care reform regulations, employers should ensure their health plans provide dependent child coverage consistent with the tax code definition of "child" or be prepared to impute income to any participant for coverage of children not meeting the tax code's definition.   
 
If you have any questions about dependent coverage, please contact one of the members of the Employee Benefits Group or the author of this Benefits Brief, Daniel Sulton, at dsulton@fordharrison.com.

When section 105(h) of the Internal Revenue Code becomes applicable to an insured health plan (first plan year beginning after September 23, 2010, or when the plan loses its "grandfathered" status) the plan administrator will have to deal with what are essentially new and potentially complicated tests to determine whether the plan disproportionately benefits "highly compensated employees." In particular, the plan may not discriminate in favor of "highly compensated employees" as to either eligibility to participate or benefits that are provided.

The first issue that must be addressed, therefore, is identifying which employees are "highly compensated." Unlike the definition that is commonly used for retirement plan testing – essentially those employees who earn more than an indexed amount that is currently $110,000 per year – the "highly compensated" individuals for this purpose are:

• 10% shareholders;
• the 5 highest-paid officers; and
• any of the highest-paid 25% of all employees.

In most cases, this group will be broader than the group that is considered for retirement plan testing, since the highest-paid 25% could include individuals at almost any level of compensation. So, unlike for purposes of retirment plan testing, all companies will have "highly compensated employees." For example, if you have ten employees, including two owners who are also the officers, the owners and the two highest paid among the other eight employees will be "highly compensated", regardless of what they actually earn.

The tests themselves will be discussed in a future Benefits Brief.

If you have any questions about the new nondiscrimination tests, please contact one of the members of the Employee Benefits Group or the author of this Benefits Brief, Jeffrey Ashendorf, at jashendorf@fordharrison.com.