The Internal Revenue Service ("IRS") has formally approved automatic enrollment of new employees in premium pass-through cafeteria plans. A premium pass-through cafeteria plan enables employees to pay their share of health plan premiums on a pre-tax basis. A cafeteria plan with an automatic enrollment feature enables an employer to enroll new employees in the cafeteria plan automatically unless an employee affirmatively elects cash in lieu of coverage under the health plan. Under the IRS’s new rule, such plans will be treated as "qualified" cafeteria plans under Internal Revenue Code ("Code") section 125.
In the same ruling, the IRS disapproved cafeteria plans that require an employee to participate in the employer’s health plan unless the employee can provide proof of other health coverage. Since, without such proof, the employee cannot opt out of the employer’s health plan and choose to receive cash instead, the employee essentially has no choice between coverage or cash. Therefore, that portion of the employer’s cafeteria plan will not be a "qualified cafeteria plan" under Code section 125. However, the remaining portion of the employer’s cafeteria plan (covering employees who can provide proof of other health coverage and who therefore may choose cash in lieu of coverage) is a "qualified cafeteria plan."
In addition, the IRS has ruled that "deemed Section 125 compensation" includes the cash that is not available to an employee who, by operation of the proof-of-other-coverage requirement, has no choice but to receive and pay for the coverage under the employer’s health plan.
A qualified retirement plan may treat "deemed Section 125 compensation" as Section 415 compensation if the retirement plan is amended to meet certain conditions. (Section 415 compensation is used to determine the maximum permissible amount of benefit accrual or contributions under a retirement plan.) All retirement plans that intend to treat "deemed Section 125 compensation" as Section 415 compensation must be amended no later than the end of the first plan year beginning on or after January 1, 2002.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
