Automatice Enrollment for Cafeteria Plans
Jarrett
13 Posts
Is anyone using an automatic enrollment procedure for cafeteria plans?
AUTOMATIC ENROLLMENT APPROVED FOR CAFETERIA PLANS; RETIREMENT PLANS MAY
NEED TO AMEND THEIR COMPENSATION DEFINITIONS
[Rev. Rul. 2002-27 (May 20, 2002)]
The IRS has just ruled that contributions used to buy group health
coverage under Code Section 125 won't be included in an employee's
gross income just because the cafeteria plan uses an automatic
enrollment procedure. There are essentially two parts to this ruling:
an analysis of two hypothetical situations that illustrate how the
income exclusion works under cafeteria plans; and an explanation of how
the Code Section 415(c) compensation definition used for qualified
retirement plans is affected by this Ruling, including guidance about
amending plans to be consistent with the Ruling.
In the first situation, employees have the option to pay for
employee-only or family group health insurance coverage through a
cafeteria plan. Under an automatic enrollment procedure, each new
employee (and each current employee for the first plan year that the
procedure is in place) is automatically enrolled in employee-only
health coverage, and his or her salary is reduced pre-tax to pay for
part of the coverage cost, unless the employee affirmatively elects
cash. Alternatively, an employee with a spouse or child can elect
family coverage. At the time of hire and again before the beginning of
each subsequent plan year, the employer provides a detailed notice to
the employee explaining the automatic enrollment procedure, including
the right to decline coverage and avoid salary reduction. (The Ruling
provides additional detail regarding the content of the notice for both
new hires and current employees.) Elections to receive cash or family
coverage are effective if made when the employee is hired or within a
reasonable period ending before compensation for the first pay period
is currently available (or, in the case of a current employee, prior to
the start of a subsequent plan year or under other circumstances
permitted by IRS regulations). Elections carry over to the next year
unless changed.
Analyzing this situation, the IRS observes that under Code Section 125,
no amount will be included in a cafeteria plan participant's gross
income solely because the participant can choose among two or more
benefits consisting of cash and qualified benefits (such as
employer-provided health coverage). It concludes that this choice may
be "either in the form of an affirmative election to receive qualified
benefits in lieu of cash or an affirmative election to receive cash in
lieu of qualified benefits." After receiving the notice explaining the
options described above, the employee has a choice between cash and a
qualified benefit. This element of choice triggers the application of
Section 125 and, consequently, the income exclusion applies.
The second hypothetical situation is similar to the first, with one
exception--under the automatic enrollment procedure, an employee can
only affirmatively elect cash by certifying that he or she has other
health coverage (the "certification approach"). The employer does not
otherwise request or collect information regarding other health
coverage as part of the general enrollment process. With respect to the
employees that can elect cash (i.e., those who can certify that they
have other health coverage), the IRS reached the same conclusion as in
the first situation--Section 125 does apply. However, the IRS found
that Section 125 did not apply to employees who cannot certify that
they have other health coverage. That is because they have no choice
between cash or qualified benefits and are automatically enrolled in
the employee-only coverage. Section 125 does apply, however, to these
employees' elections to take family coverage instead of employee-only
coverage. (Presumably, this is because employees are not automatically
enrolled in family coverage and consequently, they retain the requisite
choice.)
AUTOMATIC ENROLLMENT APPROVED FOR CAFETERIA PLANS; RETIREMENT PLANS MAY
NEED TO AMEND THEIR COMPENSATION DEFINITIONS
[Rev. Rul. 2002-27 (May 20, 2002)]
The IRS has just ruled that contributions used to buy group health
coverage under Code Section 125 won't be included in an employee's
gross income just because the cafeteria plan uses an automatic
enrollment procedure. There are essentially two parts to this ruling:
an analysis of two hypothetical situations that illustrate how the
income exclusion works under cafeteria plans; and an explanation of how
the Code Section 415(c) compensation definition used for qualified
retirement plans is affected by this Ruling, including guidance about
amending plans to be consistent with the Ruling.
In the first situation, employees have the option to pay for
employee-only or family group health insurance coverage through a
cafeteria plan. Under an automatic enrollment procedure, each new
employee (and each current employee for the first plan year that the
procedure is in place) is automatically enrolled in employee-only
health coverage, and his or her salary is reduced pre-tax to pay for
part of the coverage cost, unless the employee affirmatively elects
cash. Alternatively, an employee with a spouse or child can elect
family coverage. At the time of hire and again before the beginning of
each subsequent plan year, the employer provides a detailed notice to
the employee explaining the automatic enrollment procedure, including
the right to decline coverage and avoid salary reduction. (The Ruling
provides additional detail regarding the content of the notice for both
new hires and current employees.) Elections to receive cash or family
coverage are effective if made when the employee is hired or within a
reasonable period ending before compensation for the first pay period
is currently available (or, in the case of a current employee, prior to
the start of a subsequent plan year or under other circumstances
permitted by IRS regulations). Elections carry over to the next year
unless changed.
Analyzing this situation, the IRS observes that under Code Section 125,
no amount will be included in a cafeteria plan participant's gross
income solely because the participant can choose among two or more
benefits consisting of cash and qualified benefits (such as
employer-provided health coverage). It concludes that this choice may
be "either in the form of an affirmative election to receive qualified
benefits in lieu of cash or an affirmative election to receive cash in
lieu of qualified benefits." After receiving the notice explaining the
options described above, the employee has a choice between cash and a
qualified benefit. This element of choice triggers the application of
Section 125 and, consequently, the income exclusion applies.
The second hypothetical situation is similar to the first, with one
exception--under the automatic enrollment procedure, an employee can
only affirmatively elect cash by certifying that he or she has other
health coverage (the "certification approach"). The employer does not
otherwise request or collect information regarding other health
coverage as part of the general enrollment process. With respect to the
employees that can elect cash (i.e., those who can certify that they
have other health coverage), the IRS reached the same conclusion as in
the first situation--Section 125 does apply. However, the IRS found
that Section 125 did not apply to employees who cannot certify that
they have other health coverage. That is because they have no choice
between cash or qualified benefits and are automatically enrolled in
the employee-only coverage. Section 125 does apply, however, to these
employees' elections to take family coverage instead of employee-only
coverage. (Presumably, this is because employees are not automatically
enrolled in family coverage and consequently, they retain the requisite
choice.)
