Code Section 125 Cafeteria Plans

1. Code Section 125Cafeteria Plans Commonwealth Health Insurance Connector Authority February 8, 2007

2. Intent Behind M.G.L. c. 151F • Increase employer sponsored access to health insurance • Make it more affordable for individuals to comply with the mandate through net tax savings • Give employers some tax incentive as well as relief from the Free Rider surcharge

3. Example: Employee Savings _______________ * In this example, Employer saves $230 in annual FICA taxes

4. Ch. 151F - The Carrot Increase access to health care by adopting and maintaining a plan satisfying Code §125 and Connector rules. A win/win for the employer and the employee Ch. 118G - The Stick An employer who complies with 151F with respect to an employee is not subject to the Free Rider surcharge if the employee receives free care. Two Pages from the Reform Story

5. M.G.L. c. 151FEmployer-Sponsored Health Insurance Access Section 2.  Each employer with more than 10 employees in the commonwealth shall adopt and maintain a cafeteria plan that satisfies 26 U.S.C. 125 and the rules and regulations promulgated by the connector.  A copy of such cafeteria plan shall be filed with the connector.

6. What’s In a Name? Common Cafeteria Plan Names • Cafeteria Plan • Cafeteria Benefit Plan • Section 125 Plan • Section 125 Cafeteria Plan • Flexible Benefit Plan • Flexible Compensation Plan • Premium Only Plan • Premium Conversion Plan

7. Traditional Cafeteria Plan Concepts • A Federal tax code animal - §125 • An employer sponsored plan • Provides choices among other employer sponsored group plans – a conduit or election vehicle. Benefit = right to make choices. • Does not provide any substantive benefits • Does not trigger ERISA compliance issues

8. Cafeteria Plan Defined A cafeteria plan is a separate written plan under which: • all participants are employees; and • participants may choose among two or more benefits consisting of cash and qualified benefits. A cafeteria plan generally may not offer benefits which provide deferred compensation.

9. The Plan Must Be In Writing • Proposed cafeteria plan regulations require a written plan document • Containing at least these 6 elements: • specific description of benefits available and the periods during which the benefits are provided • Connector plans would need to be listed or scheduled as part of the cafeteria plan document if they are to be available to plan participants

10. The Plan In Writing (con’t) • eligibility rules regarding participation • plan year on which the plan operates • Procedures governing participant elections under the plan • The manner in which employer contributions may be made to the plan • The maximum amount of elective employer contributions available to any participant under the plan

11. All Participants Are Employees • Only employees may participate in the plan • Employer defines those eligible to participate in the plan document • Self-employed individuals are not employees and may not participate in a cafeteria plan

12. Qualified Benefits Under a Cafeteria Plan • Primary benefit provided is accident and health coverage • Other qualified benefits include: • Group-term life insurance • Accidental death and dismemberment insurance • Disability insurance • Dependent care assistance plans • 401(k) cash or deferred arrangements • Contributions to health savings accounts (HSAs) • Sale or purchase of elective vacation days

13. Elections Are Irrevocable General Rule: Once a participant has elected and begun to receive a benefit under the plan, the election cannot be revoked during the period of coverage, even if the revocation relates only to the remaining portion of the coverage period. This rule will apply to individual Connector policies

14. Permitted Election Changes A cafeteria plan may permit a participant to revoke an existing election and to make a new election for the remaining portion of the coverage period if: • A change in status occurs; and • The election change is consistent with the change in status

15. Change in Status Events • Events changing employee’s legal marital status • Marriage, death of spouse, divorce, legal separation, annulment • Events changing employee’s number of dependents • birth, adoption, placement for adoption, death of a dependent • A covered dependent satisfies or ceases to satisfy the eligibility requirements for coverage • due to attainment of age, student status or similar circumstance

16. Change in Status Events (Con’t) • Events changing the employment status of the employee, spouse or dependent, including: • termination or commencement of employment, • strike or lockout, • commencement or return from an unpaid leave of absence, • change in worksite, • any other change in the individual's employment status that results in the individual becoming (or ceasing to be) eligible under a benefit plan of the employer. • A change in the place of residence of the employee, spouse or dependent • moving outside of a medical plan's service area

17. Other Permissible Change Events • Mid-year elections changes may be permitted by a Cafeteria Plan, resulting from: • Electing or cancelling medical coverage for a dependent child related to a Qualified Medical Child Support Order ("QMCSO") • Becoming covered by, or losing coverage under, Medicare or Medicaid • Experiencing significant cost or coverage changes • Elections made by spouse or dependent under another employer’s plan • Special enrollment rights under HIPAA

18. Connector ObjectivesFor Regulation • Promote increased access to health insurance • Facilitate ease of administration for employers • Do not impose unduly burdensome requirements • Coordinate with other state agencies implementing Health Care Reform • Do not invite ERISA challenges

19. Connector Section 125 Regulations • Currently in progress • Definitional Issues • Number of Employees / determination periods / effective date • What is a Section 125 Plan for Connector purposes? • Filing Plans with the Connector

20. Policy Issues • Should our regulations require anything beyond premium only plans for medical coverage? • Individual Connector vs. other individual, creditable group vs. mini-med • Should employers be encouraged to offer the Connector in their Section 125 plan?

21. Policy Issues • Which classifications of employees must be included in Section 125 plan eligibility? • MA residents only, part-time employees, seasonal employees? • Which classifications of employees should be excluded from Section 125 plan eligibility? • Seasonal employees, temporary employees, intern/co-op students, those under age 18?

22. Policy Issues • Should there be employer waivers from the 151F requirement? • Employers paying 100% of premium costs for all employees, or all employees covered by collective bargaining agreements? • If an employer drops below 11 employees, may the employer terminate its Section 125 plan, or must it be maintained (and for how long)?