Healthcare Reform: Changes for the New Year
The Patient Protection and Affordable Care Act (known as the “PPACA” or the “Health Care Reform Act”) brought with it a wholesale change in the way health care will be delivered in our country. While the majority of news coverage has focused on other, perhaps more controversial, provisions of the PPACA, employers should be aware of two provisions of the PPACA that may affect the health-related benefits that are currently offered to employees.
SIMPLE CAFETERIA PLANS
One feature of the PPACA that may benefit employers is the ability to adopt a new “Simple Cafeteria Plan.” These plans offer employers the opportunity to provide tax-free benefits to its highly compensated employees (“HCEs”) and key employees. Under pre-PPACA law, many employers either didn’t have cafeteria plans or significantly restricted the benefits offered to owners and other key personnel through the cafeteria plan because of non-discrimination requirements. The new Simple Cafeteria Plan offers an alternative that will allow owners and higher paid employees to participate fully in cafeteria plans.
Cafeteria plans are plans that offer employees the ability to obtain certain benefits on a pre-tax basis rather than receiving cash. The most common benefits offered in a cafeteria plan are the ability to purchase health insurance on a pre-tax basis and the ability to participate in flexible spending accounts through the plan. Most cafeteria plans offer health flexible spending accounts (“Health FSAs”) which allow employees to contribute a portion of their salary into an account on a pre-tax basis and then be reimbursed for eligible medical expenses. This can result in significant tax savings on behalf of the employee. Also, because the employee defers salary on a pre-tax basis, the plan offers tax advantages to the employer since those deferrals are not subject to FICA or Medicare taxes.
Federal law requires that cafeteria plans not discriminate in favor HCEs or key employees. Generally, a cafeteria plan discriminates in favor of HCEs if the plan favors HCEs as to eligibility to participate, contributions, or benefits received under the plan. A cafeteria plan discriminates in favor of key employees if more than 25% of the total of the nontaxable benefits provided to all employees under the plan is allocated to key employees of the company.
Smaller employers generally have a higher concentration of HCEs or key employees, and therefore it can be difficult to satisfy the non-discrimination requirements of cafeteria plans. This can make it difficult to justify the cost of maintaining a cafeteria plan since the plan is unable to offer benefits to HCEs or key employees.
Now, employers with fewer than 100 employees are able to offer a Simple Cafeteria Plan, in which the non-discrimination requirements of a cafeteria plan are treated as satisfied so long as the plan complies with new rules relating to eligibility and employer contributions. The employer contribution rules require an employer to make either (1) a uniform “non-elective” contribution for all eligible employees in the plan, or (2) a “matching” contribution for all eligible employees who make a contribution to the plan themselves. A non-elective contribution is a contribution made by a employer regardless of whether an employee elects to make a salary reduction contribution themselves. If the employer elects to provide non-elective contributions, the employer must offer a uniform percentage contribution on behalf of all employees of no less than two percent of the employee’s compensation.
The alternative to the non-elective contribution is for the employer to make a “matching” contribution, in which the employer offers to match the employees’ contributions to the cafeteria plan. The amount that the employer must contribute is limited to the lesser of (a) six percent of the employee’s compensation, or (b) twice the amount of the salary reduction elected by the employee. To illustrate the matching component of the plan, if an employee makes $20,000 per year and elects to contribute 5% of his salary to a Simple Cafeteria Plan, the employer is required to contribute an amount equal to 6% (or $1,200) of the employee’s salary to the plan. However, if the employee elects to contribute 2% (or $400) of his salary to the cafeteria plan, the employer would only be required to contribute an amount equal to 4% of the employee’s salary (or $800, two times the amount the employee contributed himself).
The Simple Cafeteria Plan must also comply with certain eligibility requirements. Generally, if an employer wishes to adopt a Simply Cafeteria Plan, it will need to allow employees to participate if they have worked for the employer for at least one year, are at least age 21, and have worked at least 1,000 hours during the prior year. There are some exceptions to the eligibility rules that may allow employers to exclude certain classes of employees from the plan (e.g., employees that are part of a collective bargaining agreement if there is evidence that benefits conferred as part of the cafeteria plan were part of the good faith bargaining between the employees and the employer).
If your company has not adopted a cafeteria plan because of non-discrimination restrictions or if your company has a cafeteria plan and has had trouble meeting the non-discrimination requirements, the new Simple Cafeteria Plan may be a cost effective way to provide additional benefits to your employees while providing tax advantages to both your company and your employees.
OVER-THE-COUNTER (OTC) DRUG REIMBURSEMENTS AND DEBIT CARDS
Beginning on January 1, 2011, participants in Health FSA’s and health reimbursement arrangements (“HRAs”) are no longer able to receive tax-free reimbursements for OTC drugs unless they are prescribed by a physician. Reimbursements for medicine and drugs will be restricted to prescribed drugs, insulin and OTC drugs that are prescribed by a physician. Depending on how your cafeteria plan (if it offers a Health FSA) or HRA treats reimbursements for OTC drugs, it may need to be amended to comply with the new rule. Plans must be amended by June 30, 2011 and employers must start complying with new rules on January 1, 2011. This effective date applies whether the plan year is a fiscal or a calendar year.
Some Health FSAs allow participants to use debit cards to pay for eligible medical expenses. Effective January 15, 2011, such debit cards may be used to purchase OTC medicines only if certain requirements are met, such as the OTC medicine must be dispensed by a pharmacist and a prescription number must be assigned to the OTC medicine.
Please contact a member of our Employee Benefits Group if you need to amend your plan to address the new requirements relating to OTC drugs or if you would like to find out more about Simple Cafeteria Plans.