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Cafeteria Plan Compliance Requirements

What Are The Key Components Of Cafeteria Plan Administrations?

cafeteria plan training & certification program A "Cafeteria Plan", also known as a Section 125 plan, is an employee benefits plan that allows employees to choose from a menu of pre-tax benefits.

These plans are governed by Section 125 of the Internal Revenue Code and offer employees flexibility in selecting benefits that best suit their needs. The key components of cafeteria plan administration include:
  • Plan Design:
    This involves allowing the employer to establish the structure of its cafeteria plan, including the types of benefits offered, eligibility criteria, enrollment periods, and any employer contributions. Note:Plan design should comply with IRS regulations and be tailored to meet the needs of both employees and the employer.
  • Benefit Options:
    Cafeteria plans typically offer a variety of benefits for employees to choose from, including health insurance, dental and vision coverage, flexible spending accounts (FSAs) for healthcare and dependent care, retirement savings plans such as a 401(k), group term life insurance, and other fringe benefits like commuter benefits or legal assistance plans. Employers may also offer the option for employees to receive cash in lieu of certain benefits.
  • Communication and Education:
    Administrators play a crucial role in educating employees about their benefit options, how the cafeteria plan works, and any changes or updates to the plan. Clear communication helps employees make informed decisions and maximize the value of their benefits.
  • Employee Enrollment:
    Administrators must facilitate the enrollment process for employees, which typically involves providing information about available benefits, enrollment deadlines, and any required documentation. Employees need to make informed choices based on their individual circumstances and needs.
  • Compliance and Regulatory Oversight:
    Cafeteria plans are subject to various regulatory requirements, including those outlined in Section 125 of the Internal Revenue Code, ERISA (Employee Retirement Income Security Act), HIPAA (Health Insurance Portability and Accountability Act), and other applicable laws. Administrators must ensure compliance with these regulations to avoid penalties and maintain the tax-favored status of the plan.
  • Claims Processing and Reimbursement:
    For benefits such as FSAs or dependent care accounts, administrators are responsible for processing claims and reimbursing eligible expenses according to plan rules. This involves verifying the validity of expenses, maintaining accurate records, and disbursing funds in a timely manner.
  • Recordkeeping and Reporting:
    Administrators must maintain detailed records of plan participation, contributions, benefit elections, claims activity, and other relevant data. They may also be responsible for generating reports for regulatory compliance, financial accounting, and plan analysis purposes.
By effectively managing these key components, cafeteria plan administrators can help employers offer competitive benefits packages, improve employee satisfaction, and achieve their strategic goals while maintaining compliance with regulatory requirements.

Excerpts From Our Cafeteria Plan Training & Certification Program

The following are three of many recomendations from our Cafeteria Plan Training & Certification Program:

Excerpt #1: Partners, Independent Contractors, 2% or More Owners:

Partners in a partnership, independent contractors, and 2% or more owners of S-corporations (and their spouses/children/parents) are not eligible to participate in a Cafeteria Plan because they are considered self-employed.

The partnership may maintain a Cafeteria Plan for its common law employees. Spouses and dependents of partners, who are not partners themselves but are common law employees of the partnership, may participate in the Cafeteria Plan.

Example 1: An attorney hired by a law firm has not yet been made a partner in the firm. She has no ownership and is a common law employee. The attorney may participate in the Cafeteria Plan.

Example 2: An attorney has been employed by the same law firm for the past seven years and has recently been named a partner. He may no longer participate in the Cafeteria Plan.

Excerpt #2: Selling Of Paid Time-Off Days:

A paid time-off sell arrangement allows employees to sell back to the employer elective and non-elective vacation days.

This arrangement may be included in the Cafeteria Plan. Annual elections are made prior to the plan year during open enrollment. The employer may place a specified number of paid time-off days within the Cafeteria Plan. An employee may elect to sell this amount of time back to the employer and receive cash in lieu of taking the time off.

Excerpt #3: Timing Of Changes:

To avoid having to determine whether a requested election change is made too long after the status change, the plan document should specify a maximum time limit for requesting changes. This time period should meet the minimum requirements for HIPAA special enrollments (30 days) and should include language regarding the election of COBRA (60 days for elections and 45 days for the first premium payment).

What Are The Most Common Errors Of Cafeteria Plan Administration?

While cafeteria plans provide flexibility and tax advantages for both employers and employees, there are common errors in their administration that employers should be aware of:
  • Failure to Comply with IRS Regulations:
    One of the most significant errors is not adhering to the strict IRS regulations governing cafeteria plans. This includes failing to follow plan document requirements, eligibility rules, and nondiscrimination testing.
  • Incorrect Plan Documentation:
    Errors in plan documents, such as missing or outdated provisions, can result in noncompliance with IRS regulations. It's essential for employers to regularly review and update plan documents to reflect any changes in the law or company policies.
  • Nondiscrimination Testing Failures:
    Cafeteria plans must undergo nondiscrimination testing to ensure that benefits are not disproportionately favoring highly compensated employees. Errors in conducting or interpreting these tests can result in penalties and plan disqualification.
  • Inadequate Communication:
    Employers may fail to effectively communicate plan details and changes to employees. This lack of communication can lead to misunderstandings about benefit options, enrollment periods, and coverage details.
  • Dependent Eligibility Verification:
    Employers are responsible for verifying the eligibility of dependents enrolled in benefit plans. Delayed or inadequate verification processes can lead to ineligible dependents receiving benefits, resulting in additional costs and compliance issues.
  • Poor Recordkeeping:
    Accurate recordkeeping is crucial for cafeteria plan administration. Employers should maintain detailed records of employee elections, contributions, reimbursements, and plan communications to demonstrate compliance with IRS regulations.
To mitigate these errors, employers should invest in proper training for plan administrators, utilize reputable third-party administrators for assistance, and conduct periodic audits of their cafeteria plan processes to ensure compliance with IRS regulations.

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