Preview of April Compliance Checkpoints: Plan Documentation
Tracking various laws and regulations impacting employee benefits can divert time and resources from your core functions such as recruiting top talent, developing strategic benefits and compensation programs, and meeting cost targets. After all, it takes a lot of work to sustain a destination workplace that attracts, retains, and engages the right people to increase your organization’s productivity and growth. How can you keep pace with evolving legislative and regulatory initiatives and still have the time, resources, and drive to sustain a destination workplace?
As a trusted advisor, Gallagher will help you navigate the ever-changing landscape of employee benefits compliance issues. This edition of Compliance Checkpoints is designed to help guide you as you work to decrease the risks associated with human capital management while maximizing your investment in your workforce, especially when confronted with potential compliance issues associated with offering employee benefits through a cafeteria plan. Check out the action steps below aimed at helping you navigate often overlooked cafeteria plan compliance issues.
- Identify. Document. Repeat. Many individuals use the term “qualifying event” when actually referring to permissible election changes. Qualifying events relate to specific events that trigger COBRA or other continuation rights, such as termination of employment. The appropriate term to use is “permissible election change” because the event in question relates to when an individual may change his or her salary reduction agreement to reflect a change in the amount he or she pays on a pre-tax basis through a cafeteria plan. Permissible election changes essentially fall into three categories — changes in status, cost or coverage changes, and changes required by other laws or court orders. Changes in status generally relate to life events, such as marriage, birth or adoption of a child, and certain changes in employment status. Cost or coverage changes relate to certain changes in the amount required to be paid or the nature of the underlying coverage (for example, a significant cost increase or the addition of a new benefit). Changes required by law generally include changes that permit an employee to coordinate changes under other laws, such as health savings account (“HSA”) rules or Qualified Medical Child Support Order (“QMCSO”) rules. Regardless of the type of underlying event, it is important to remember that the focus is on the salary reduction agreement. Is your organization correctly identifying permissible election changes?
- Limit. Administer. Enforce. As a general rule, an individual’s salary reduction amount is an irrevocable election for the underlying plan year. The IRS permits certain exceptions to that rule, which, as noted above, are called permissible election changes. These exceptions permit individuals to change their salary reduction amounts in the middle of a plan year. The IRS rules for permissible election changes are a ceiling. An employer may not permit a mid-year change in an individual’s salary reduction agreement for a reason not specifically identified by the IRS in its cafeteria plan regulations. For example, an employer may not permit an employee to change a salary reduction agreement to reflect the addition of an existing spouse when the spouse becomes pregnant. (However, the cafeteria plan may permit an employee to change a salary reduction agreement to reflect the increased cost associated with adding the spouse and child when the baby is born.) Thus, employers must limit mid-year permissible election changes to those outlined by the IRS and must administer their cafeteria plans accordingly. Note, however, that an underlying benefit may permit an employee to change coverage for a wider range of reasons. Nonetheless, the employer may only permit the employee to change the amount taken out of his or her paycheck on a pre-tax basis for
- Recognize. Consult. Apply. In order for a cafeteria plan to permit a mid-year change in an individual’s salary reduction agreement, not only must the change be recognized by the IRS, but the change must be specifically adopted in your written cafeteria plan document. Often, cafeteria plan documents recognize permissible election changes based upon life events, but do not recognize significant changes in cost or changes in coverage. In contrast, some cafeteria plans make a general reference to IRS regulations and thus adopt all permissible changes. Without the proper adoption, a pre-tax change in a salary reduction agreement should not be permitted. Thus, it is important to consult your cafeteria plan document to determine whether your organization has adopted a specific election change permitted by the IRS. If your cafeteria plan documents do not recognize a specific change, then you should not permit the employee to make a change to his or her pre-tax salary reduction amount. Which election changes has your organization permitted that are not specifically adopted in your cafeteria plan documents?
- Ascertain. Conform. Approve. If both the IRS and your cafeteria plan document recognize a specific change in status, there are some additional hurdles to cross before approving the change. One of those hurdles is the requirement that the change must be on account of the employee’s change in status. In other words, the change must relate to the underlying event. For example, adding a new dependent would correspond with an increase in a salary reduction amount to reflect a change in a salary reduction amount from the cost of employee-only coverage to employee + family coverage. However, adding a dependent would not correspond with changing from employee-only coverage on one PPO plan option to employee-only coverage under a different PPO plan option. What limitations does your plan have in place to make sure that election changes correspond to the underlying events triggering the request for a change?
And, there are six more action items this month. This is just a preview of the April issue of Compliance Checkpoints. If you would like the full version of Compliance Checkpoints or would like additional information on how Gallagher constantly monitors laws and regulations impacting employee benefits and supports employers in their compliance efforts, please contact your Gallagher representative or click here to Contact Us via ajg.com.
Compliance is a series of checkpoints, not a final destination. As a trusted advisor, Gallagher has developed this Compliance Checkpoints series to help you pursue a path through employee benefits compliance issues as part of an overall compliance plan.
The intent of this analysis is to provide you with general information. It does not necessarily fully address all your organization’s specific issues. It should not be construed as, nor is it intended to provide, legal advice. Questions regarding specific issues should be addressed by your organization’s general counsel or an attorney who specializes in this practice area.