Updated: May 9
Beginning back in 2014, cafeteria plans cannot be used to pay pre-tax premiums for individual health policies that provide major medical coverage. But this prohibition doesn’t apply to individual policies that provide only excepted benefits (such as certain dental, vision, specified disease, or hospital or other fixed indemnity coverage). So, paying for or reimbursing the premiums pre-tax through a cafeteria plan is generally allowed, as health care reform mandates don’t apply to excepted benefit coverage.
However, allowing pre-tax salary reductions for these plans can implicate other issues under ERISA, COBRA, HIPAA and possibly FMLA. Specifically, pre-tax salary reductions would likely create an employer-sponsored ERISA plan and disqualify voluntary plans from ERISA’s safe harbor.
DOL Reg. §2510.3-1(j) provides that, to fall within the voluntary plan safe harbor and thus not be considered an ERISA plan, an arrangement must satisfy the following requirements:
For purposes of Title I of [ERISA], the term “employee welfare benefit plan”…shall not include a group or group-type insurance program offered by an insurer to employees…under which:
no contributions are made by an employer or employee organization;
participation in the program is completely voluntary for employees or members;
the sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and remit them to the insurer; and
the employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.
The first and third conditions are the problem; a pre-tax salary reduction is likely considered an employer contribution under IRS and DOL regulations. In addition, allowing pre-tax payments could be seen as an employer endorsement of the program.
So, the mere act of including individual health policies that are excepted benefits (like limited scope dental/vision) under a cafeteria plan may be enough to convert the policies into employer-provided benefits subject to ERISA. And where individual policies providing health care are subject to ERISA, they will also qualify as “group health plans” likely subject to COBRA.
In addition, individual policies that provide non-major-medical (i.e., excepted benefits) coverage will raise additional compliance issues under health care reform when offered on a pre-tax basis. For example, certain specified disease and fixed indemnity coverage will be subject to W-2 reporting if funded with pre-tax salary reductions. This coverage would also have to be counted toward the Cadillac tax threshold beginning in 2022, if it remains.
The bottom line is that individual non-major medical polices that are excepted benefits CAN be offered under a cafeteria plan, but it can implicate a whole host of other compliance obligations under ERISA, COBRA, health care reform, FMLA, USERRA and other laws. This is why the employer needs to know the unintended consequences before allowing pre-tax benefits in order to make an informed decision.
In addition, here is a link to Aflac's website regarding the voluntary safe harbor under ERISA: https://www.aflac.com/business/resources/advisories/voluntary-plans-erisa.aspx