Q: What is a flexible spending account? Is it different from a Section 125 cafeteria plan?
A: A flexible spending account is a type of cafeteria plan. Section 125 refers to the section of the Internal Revenue Code that specifically pertains to cafeteria plans. There are two other types of cafeteria plans: premium only plans (POPs) and full cafeteria plans (also known as full flex plans).
If they meet all the legal requirements of Section 125, cafeteria plans provide tax advantages to both the employees and the employer. The employee uses pretax dollars to pay for health and certain other benefits, which reduces the employee’s taxable income. Because of the reduced taxable income, the employee’s take-home pay increases while the employer’s payroll taxes decrease.
An FSA lets employees use pretax dollars to pay for dependent care expenses and medical expenses not covered by the employee’s group insurance. With an FSA, an employee decides how much of his or her salary should be set aside before taxes are figured.
The amount is deducted from the employee’s paycheck, just like any other payroll deduction, and is deposited into the employee’s FSA account. Out-of-pocket expenses for dependent care or medical care are paid upfront by the employee. After the employee submits a claim and documentation, the employee is reimbursed for those expenses from his or her own FSA account.
Q: One of our employees decided not to enroll in our group medical plan when he was first eligible. Now he’s gotten married and wants to enroll both himself and his new spouse, even though it’s not open-enrollment time. Do the special enrollment provisions of the federal Health Insurance Portability and Accountability Act allow him to do so?
A: Yes. HIPAA specifies that an eligible employee who acquires a new dependent upon marriage, birth, or adoption and who is not already enrolled in the group health plan must be permitted to enroll in the plan. Enrollment must be requested within 30 days of the event. Even though you are not in an open-enrollment period, your plan must allow this employee to elect coverage for themself and their new spouse. Coverage must begin no later than the first day of the month after the special enrollment was requested.
Q: We’re considering getting short-term disability coverage for our employees. One of the supervisors thinks the policy would not have to cover pregnancy because it’s not a disability. Besides, says this supervisor, since employers are not required to offer STD, we can choose to exclude pregnancy if we want. Is this so?
A: No, it’s not. Inability to work because of a medical condition related to pregnancy is considered a disability and must be treated the same as all other medical disabilities in terms of sick-leave pay and disability insurance. It doesn’t matter that an employer offers STD voluntarily. Once the employer decides to offer sick-leave pay or STD, employees disabled by pregnancy must be covered the same as employees disabled by other types of medical conditions.
Q: Our company sold part (less than 85%) of its assets to another, unrelated company. On the date of the sale, the employees associated with these assets were terminated by our company and hired by the new company. The employees continued performing the same work as before. We would like to distribute the 401(k) plan assets to those employees under the separation of service rule without penalty. Will the IRS accept that the employees have separated from our company?
A: Yes. Generally, the IRS has not considered employees to have separated from service in cases involving mergers or consolidations. But in a recent ruling, the IRS allowed this interpretation when an employer sold less than 85% of its assets to another company. The ruling stated that when less than 85% of the assets are sold, there must be a sufficient change in the employment status of the employees to constitute a separation. The employees must not still be working for the same company.
Q: We have an employee who has a live-in partner. He says we have to cover her under our benefits plan because they are in a common-law marriage. Do we?
A: Probably not, but you should check the terms of your benefit plan. Your benefit plan probably provides benefits to employees and spouses, which is generally defined as partners who are married in a manner sanctioned by the state.
Connecticut does not recognize common-law marriages; chances are your benefit plan does not either.
Q: I know we have to issue a summary plan description for our benefit plans. We already issue a lot of information on our benefit plans. Could that information serve as a summary plan description?
A: A summary plan description (SPD) does not need to be identified as such. Any document that is distributed to plan participants that contains essentially all of the information the average participant needs to understand his or her benefits under the plan can be deemed a summary plan description.
Note, however, that Employee Retirement Income Security Act (ERISA) requires that certain information be included in an SPD, including such things as: (1) the plan’s official name; (2) the name and address of the employer or employee organization maintaining the plan; (3) the employer identification number assigned to the plan sponsor; (4) the three-digit plan number; (5) a description of what type of employee pension or welfare benefit plan is involved; (6) a description of how the plan is administered; (7) the name, business address and business telephone number of the plan administrator, each plan trustee, and the designated agent for service; (8) a description and explanation of the plan’s requirements for eligibility and benefits; (9) a description and explanation of how the plan determines years of service for eligibility and vesting, years of participation for benefit accrual, and breaks in service; (10) a description of the events that would result in disqualification or loss of benefits; (11) if applicable, a statement that the plan is maintained pursuant to one or more collective bargaining agreements; (12) a statement describing joint and survivor benefits; (13) a statement of participants’ rights under ERISA; (14) the source of the contributions to the plan and method used to calculate the amount of contributions; (15) a statement that benefits are or are not insured by the Pension Benefits Guaranty Corporation (PBGC); (16) a summary of the plan sponsor’s right to terminate the plan, summary of participants’ subsequent benefits, rights and obligations of participants, and allocation and disposition of plan assets; (17) identity of funding; (18) year-end date of plan; and (19) claim procedures.
While strict compliance is not absolutely essential as a matter of law, it is as a practical matter. A document designed specifically as an SPD announces to both the employees and the regulatory agencies that you have attempted to meet the statutory obligation. Consider the lead of most employers; label it a summary plan description and make sure it has the essential information.
Q: What is the definition of a part-time employee? And are we required to offer benefits to part-timers?
A: There is no set number of hours an employee must work to be considered part time or full time. It’s a matter of company policy. Many employers consider an employee who works fewer than 30 or 32 hours per week to be part time.
Eligibility for benefits is also a matter of company policy, with a few exceptions.
Under the federal Employee Retirement Income Security Act (ERISA), employees who have completed 1,000 hours of service in a benefits-plan year are eligible to participate in any company pension or profit-sharing plan. Part-timers may also be eligible for family and medical leaves of absence under state law (employees who have worked 1,000 hours in the previous 12 months) or federal law (1,250 hours in the previous 12 months). Finally, many insurance policies limit benefits to employees who work a particular number of hours each week.
Other than these exceptions, you are free to set your own policies regarding eligibility for vacation, paid sick leave and other benefits.
Q: We know the federal Family and Medical Leave Act requires us to treat employees out on FMLA leave the same as active employees for purposes of group health coverage. We’ve always done this, with the employee on leave continuing to pay his or her portion of the premium and the company paying its share of the premium. An employee who is going to be out on leave to care for an ill family member has asked if she can opt out of group health coverage during the leave. Is that okay?
A: Yes, it is. An employee may choose to discontinue group health coverage during FMLA leave, as long as the decision is truly voluntary.
When she returns from leave, your employee must be reinstated to group coverage just as if leave had not been taken and the insurance had not been dropped during that time. She does not have to meet any qualification requirements imposed by the plan, such as waiting a certain period of time or passing a physical exam, before coverage is reinstated.
Ask the employee to put her request in writing, and, as with most FMLA-related matters, be sure that she understands her rights and that the arrangement is documented.
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