Effective June 1, 2014 Premium Only Plan Proposal Introduction Section 125 of the Internal Revenue Code (IRC) allows employers to offer employees a choice between nontaxable benefits and cash through a Section 125 cafeteria plan. To provide nontaxable benefits and avoid taxation, an employer’s cafeteria plan must meet Internal Revenue Service (IRS) and Department of Labor (DOL) requirements. A cafeteria plan is subject to the following requirements: The plan must be in writing. The plan must be nondiscriminatory. All plan participants must be employees.* Participants must be given the opportunity to choose among two or more nontaxable benefits and cash. * The following individuals are ineligible to participate in a cafeteria plan: more than 2 percent shareholders in an S corporation; the employee/spouse, children, grandchildren or parents of a more than 2 percent shareholder in an S corporation; sole-proprietors; non-employee directors of a corporation; and partners in a partnership. Premium Only Plan An employer can establish a basic type of cafeteria plan known as a premium only plan (POP) to allow employees to purchase qualified employer-sponsored insurance on a pre-tax basis. A POP requires only a simple payroll modification to deduct elected premium amounts before payroll taxes are computed. Qualified benefits are defined in the Internal Revenue Code and include the following: Medical insurance premiums Dental insurance premiums Vision insurance premiums Group term life insurance premiums (up to $50,000 for employee-only coverage) Disability income insurance premiums* Other qualified voluntary insurance Health saving accounts (HSA) contributions * When disability insurance premiums are deducted on a pre-tax basis income received from the disability policy becomes taxable income. Non-qualified benefits include (but are not limited to) the following: Long term care policies Health reimbursement arrangements Deferred compensation arrangements other than a Section 401(k) plan Qualified scholarships or educational assistance programs Legal assistance programs CONEXIS POP Program CONFIDENTIAL AND PROPRIETARY Premium Only Plan Proposal Why offer a Premium Only Plan? Simply put – premium only plans save money for both the employer and participant. By paying their share of qualifying premiums on a pre-tax basis, participants are not taxed on the dollars they contribute to the premium only plan. This results in increased spendable income each month. The participant pre-tax deductions are exempt from federal withholding, FICA, FUTA, and most state income taxes.* Review the applicable statutes in your state or consult an accountant or payroll provider for specific information about state unemployment and workers’ compensation taxes. *Pennsylvania does not exempt state withholding for dependent care benefits, and New Jersey does not exempt state withholding for employee salary reductions. How does an employee save money? By electing to pay their share of qualifying insurance premiums on a pre-tax basis, employees lower their gross income, which in turn lowers their tax burden. Participating in a POP allows employees to reduce taxes while increasing disposable income, as reflected in the savings illustration below. How does an employer save money? Offering a premium only plan allows an employer to enhance their benefits program while reducing taxes. As outlined above, paying for premiums on a pre-tax basis lowers employees’ tax burden. Because FICA and other employer expenses are driven by employees’ gross income, the employer saves as well. Sample Employer Savings Illustration Monthly Salary With POP Without POP Monthly Salary $2,500 $2,500 Group Insurance Premiums -$150 N/A Total Monthly Salary $2,350 $2,500 FICA (7.65%) $180 $191 Workers’ Comp (4.35%) $102 $109 $282 $300 Employer Taxes Total Savings Monthly (per employee) $18 Annual (per employee) $216 This example is intended to demonstrate typical tax savings. Actual savings will vary depending on the specific tax situation. Workers’ compensation rates are not impacted in all states. CONEXIS POP Program CONFIDENTIAL AND PROPRIETARY Premium Only Plan Proposal Implementation A CONEXIS Premium Only Plan is easy to implement. Simply complete and return the following forms: Premium Only Plan Application Form Premium Only Plan Service Agreement The forms listed above are available from your CONEXIS sales representative. The completed forms must be received by CONEXIS at least 30 days prior to the desired effective date. Submissions received after this deadline will be implemented for the following first-of-the-month effective date (e.g., submissions received on January 10 will be implemented for a March 1 effective date). Upon completion of the implementation process, CONEXIS will forward the plan document, summary plan description, and corporate resolution/adoption agreement. Prior to the first day of the plan year, the employer must formally adopt the plan by executing a corporate resolution (for corporations) or an adoption agreement (for sole proprietors/partnerships) chartering the inception of the cafeteria plan. The plan document is used in conjunction with the summary plan description. These legally binding documents, when formally executed and filed, become an integral part of the cafeteria plan. These documents serve as the basis to clarify rules and policies about the plan when compliance or general questions arise. Administration Administration of a POP is easy. Simply adjust your payroll to take deductions from your employees’ paychecks on a pre-tax basis, enroll new plan participants, and monitor election changes throughout the plan year. Payroll Adjustments Generally, the only payroll adjustment required when implementing a POP is to deduct the premiums for qualified insurance coverage before calculating and withholding payroll-related taxes. Applicable taxes are then calculated based on the adjusted gross income. Deductions are exempt from the following taxes: federal withholding, FICA, FUTA, and most state income taxes.* *Pennsylvania does not exempt state withholding for dependent care benefits, and New Jersey does not exempt state withholding for employee salary reductions. Please review applicable state statutes or consult an accountant or payroll provider regarding state unemployment and workers’ compensation taxes. Automated Payroll Systems or Payroll Services Pre-tax salary deductions can easily be accommodated by most automated payroll systems by using one of the earnings categories (as opposed to a deduction category) to post plan contributions. The pre-tax salary deduction amount is entered as a negative number, effectively reducing the employee’s salary before applicable taxes are calculated. The following example illustrates this earnings categories concept: Monthly Amount Gross Wages Elected deduction Taxable Wages CONEXIS POP Program $1,000 -100 $ 900 CONFIDENTIAL AND PROPRIETARY Premium Only Plan Proposal As a result of this adjustment, applicable taxes are calculated based on $900 instead of $1,000. After taxes are withheld, any post-tax deductions (i.e., personal life insurance, charity contributions, direct deposits, etc.) are subtracted, resulting in the net take-home pay. Perform the following tasks to set up pre-tax plan deductions for your company’s plan: Instructions Explanation Manual payroll: Compute each participant’s payroll taxes based on the new taxable wages. Simply subtract the participant’s applicable deduction(s) from their gross wages and then compute the payroll taxes on the reduced wages. Computerized in-house payroll: Add deduction codes for each qualified deduction and set the deduction to be taken before taxes are computed. Consult the user manual for your particular payroll software to determine how to set up pre-tax deduction codes. Most payroll services are familiar with premium only plans. When adopting a plan, notify your payroll service accordingly. Mid-year Election Changes Participants may change their election prior to the beginning of the new plan year during the open enrollment period. Thereafter, elections may not be changed unless there is a change in status or other qualified event as defined in the IRS regulations and the plan permits such qualified changes. The SPD provided by CONEXIS contains a summary of mid-year election changes permitted under a cafeteria plan. Nondiscrimination Testing Cafeteria plans, including POPs, cannot discriminate in favor of highly compensated or key employees as defined by Internal Revenue Code. Plans are considered discriminatory if eligibility or participation of highly compensated or key employees exceeds the level allowed by the IRC. Nondiscrimination requirements cover eligibility to participate as well as availability and utilization of benefits. Although discrimination does not automatically result in disqualification of the plan, participants who are highly compensated or key employees may lose some or all of the tax advantages. Please note: Self-employed individuals are prohibited from participating in a premium only plan. This includes sole proprietors, partners in a partnership, more than 2 percent shareholders in an S corporation (including immediate family members), and members of an LLC. Nondiscrimination Testing Process If elected, CONEXIS will perform the following nondiscrimination tests annually: The Key Employee Concentration Test required under Code Section 125 The Eligibility Test required under Code Section 125 During the implementation process, CONEXIS will provide a data request packet for nondiscrimination testing. You must provide the necessary information in order for CONEXIS to complete the tests. CONEXIS will complete the nondiscrimination tests and provide a report summarizing the results. The results are based solely on the information provided in the data request packet. CONEXIS POP Program CONFIDENTIAL AND PROPRIETARY Premium Only Plan Proposal The Proposed Regulations under Code Section 1.125-7 clarify testing must be performed as of the last day of the plan year. However, it may be beneficial to also test prior to the beginning of the plan year and several months before the end of the plan year so adjustments can be made before the end of the plan year. Tests must take into account all non-excludable employees and former employees who were employees on any day during the plan year. Please note: Nondiscrimination testing is an area of great uncertainty. Numerous terms are not defined in the Internal Revenue Code and the IRS has not provided guidance on many aspects of the tests. CONEXIS is not authorized to provide tax or legal advice. You should review the results of the tests with a legal or tax advisor. Detailed information regarding nondiscrimination requirements and CONEXIS nondiscrimination testing services is included in Appendix B. About CONEXIS CONEXIS is a national leader in benefits administration services, offering comprehensive, integrated, easy-touse, and cost-effective solutions. For more than 20 years, CONEXIS has delivered employee benefits administration solutions to more than 20,000 organizations of all sizes nationwide, including major health plan carriers, third party administrators, business outsourcing partners, market leaders in various industries, and government municipalities. CONEXIS is renowned in the benefits industry for unmatched technology and commitment to service. We are exclusively a benefits administration company, founded and operated by people who understand benefits administration. Conclusion A CONEXIS Premium Only Plan can offer significant savings to both employees and employers. With unsurpassed ease of implementation and ongoing administration, every employer that offers qualifying group health plans to its employees should make a POP a part of their benefits package. CONEXIS welcomes the opportunity to assist you in administering your premium only plan while maintaining the highest levels of integrity in compliance and service excellence, which has become our trademark. Please contact me today with any additional questions. Erin Christian, CFC Senior Manager, Client Implementation & Renewals 6191 N. State Highway 161, Suite 400 Irving, TX 75038 Phone: (888) 442-6272 x7800 Email: [email protected] www.conexis.com CONEXIS POP Program CONFIDENTIAL AND PROPRIETARY Premium Only Plan Proposal Appendix A: Nondiscrimination Testing Cafeteria plans cannot discriminate in favor of highly compensated or key employees as defined by Internal Revenue Code. Plans are considered discriminatory if eligibility or participation of highly compensated or key employees exceeds the level allowed by the IRC. Nondiscrimination requirements cover eligibility to participate as well as availability and utilization of benefits. Although discrimination does not automatically result in disqualification of the plan, participants who are highly compensated or key employees may lose some or all of the tax advantages. The following is a summary of the rules regarding nondiscrimination testing. You should review this information with qualified professional counsel to ensure full compliance. Nondiscrimination Testing Definitions Key Employees Include: An officer earning more than $170,000* (for testing a 2014 plan), indexed each year for inflation. Compensation should be based upon amounts actually paid and should not be annualized for new hires or part-year employees. No more than 50 employees (or if lesser, the greater of 10 percent or three employees) should be treated as officers. A more than 5 percent owner (see definition below) A 1 percent owner expected to have compensation in excess of $150,000 in the testing year (not indexed) *The Proposed Regulations under Code Section 1.125-7 indicate the key employee determination is made based on compensation and/or status during the preceding plan year. A spouse, lineal ascendant or descendant (i.e., parents, children, and grandchildren) of an owner in (ii) and (iii) above is also a key employee. Highly Compensated under POP Include (for purposes of the Eligibility Test and Contributions and Benefits Test): An officer A more than 5 percent owner (see definition below) An employee who earned more than $115,000* (for testing a 2014 plan), indexed each year for inflation; or a spouse or dependent of any of the above *Compensation for a highly compensated employee is determined from the prior year or the current year, in the case of first year of employment. More-than-5 Percent Owner A more-than-5 percent owner is defined as someone owning more than 5 percent of the voting power or value of all classes of stock of the employer in either the preceding or current plan year. CONEXIS POP Program CONFIDENTIAL AND PROPRIETARY Premium Only Plan Proposal Summary of Premium Only Plan Nondiscrimination Tests 25 Percent Key Employee Concentration Test No more than twenty-five percent (25%) of the statutory nontaxable benefits under the plan may be provided to “key” employees. The statutory nontaxable benefits are the total value of the pre-tax coverage elected, which includes both employer and employee pre-tax contributions to the extent the employer and employee contribute to such coverage. Employer contributions for benefit levels of coverage to which the employee is not required to contribute are presumably not required to be included. Eligibility Test Code Section 125(b)(1)(A) provides that highly compensated employees (HCEs) must include cafeteria plan contributions in income if the cafeteria plan discriminates in favor of HCEs as to eligibility to participate. A plan does not discriminate in favor of HCEs as to eligibility to participate if the plan satisfies the following three conditions: 1. No employee is required to complete more than three years of employment to participate and the same employment requirement applies to all employees (“Employment Requirement”). 2. Entry into the cafeteria plan occurs no later than the first day of the plan year beginning after they satisfy the employment requirement (“Entry Requirement”). 3. The plan meets a nondiscriminatory classification test (“Nondiscriminatory Classification Test”). Contributions and Benefits Test A cafeteria plan must give each participant an equal opportunity to select nontaxable benefits. In essence, the contributions and benefits under the plan must be available on a nondiscriminatory basis and the benefit selection (utilization) must not be discriminatory. In addition, a plan must not be discriminatory in operation. This test is based on subjective facts and circumstances; therefore, CONEXIS cannot provide a conclusion as to whether this test passes or fails (see note below regarding the safe harbor). However, the circumstances below indicate that a cafeteria plan is discriminatory: Employer contributions (not salary reductions) vary among classifications. For example, the employer contributes more toward health insurance for full-time employees than part-time employees. Variations based on family status (e.g., single and family) are permissible. Although employer contributions are the same, groups with a higher concentration of non-HCEs (hourly) are charged more for coverage than groups with a higher concentration of HCEs (salaried). HCEs as a group utilize the plan at a higher concentration than do non-HCEs. Please consult with a legal or tax advisor to determine if you pass or fail this test. Please note: The Proposed Regulations under Code Section 1.125-7 provide a safe harbor test for premium only plans. Under the safe harbor, a premium only plan satisfies the contributions and benefits test if the plan passes the eligibility test. Consequences of Failing the Code Section 125 Cafeteria Plan Tests Under Code Section 125, if a plan is discriminatory, HCEs and/or key employees must include their pre-tax contributions in income. If the plan is discriminatory, non-HCEs and non-key employees are not affected. If a cafeteria plan discovers that it fails the nondiscrimination tests after the plan year has ended, the tests cannot be satisfied through corrective election adjustments. In that instance, all HCE and/or key employees will CONEXIS POP Program CONFIDENTIAL AND PROPRIETARY Premium Only Plan Proposal be taxed on the amount of their salary reductions, plus any cash or taxable benefits they could have received under the plan. For example, if an HCE could have applied an employer provided flexible credit towards the cost of health insurance or received it in cash the HCE is taxed on the “cash out” amount even if the HCE applied it towards the cost of the benefit. These amounts are subject to income tax withholding, FICA, and FUTA. Contact a tax advisor to determine the proper method for including such amounts in income and properly reporting income and employment taxes to the IRS. If the discriminatory nature of the plan is discovered before the end of the plan year, the employer may be able to satisfy the nondiscrimination tests for that plan year by making adjustments to the elections of HCEs and/or key employees. Here are some examples of potential adjustments for the various tests: Test Potential Adjustments Eligibility Test Terminate the pre-tax participation of HCEs, beginning with the highest paid participant, until the Eligibility Test is passed Key Employee Concentration Test Determine the amount of non-taxable benefits for key employees that exceeds the 25 percent requirement. Divide that amount by the number of key employees and reduce or stop the ongoing pre-tax contributions of each key employee by that amount. Alternatively, you may be able to base the allocation of reductions on the amount elected by each key employee Contributions and Benefits Test Separate the different classifications of employees into separate plans. For example, if full-time employees are required to contribute less than full-time employees, separate full-time employees into their own plan. BEWARE: This approach can result in the failure of the Eligibility Test Mid-year adjustments are not provided for in the statute or regulations; however, the IRS has informally indicated mid-year corrections are acceptable. Such an adjustment may prevent either adverse tax consequences for all HCEs and/or key employees or limit the consequences to only a few. The plan document must permit the plan administrator to adjust HCE and key employee elections in order for adjustments to be made. Nondiscrimination Testing Process If elected, CONEXIS will perform the following nondiscrimination tests annually*: The Key Employee Concentration Test required under Code Section 125 The Eligibility Test required under Code Section 125 *requires annual renewal subscription CONEXIS POP Program CONFIDENTIAL AND PROPRIETARY Premium Only Plan Proposal During the implementation process, CONEXIS will provide a data request packet for nondiscrimination testing. You must provide the necessary information in order for CONEXIS to complete the tests. CONEXIS will complete the nondiscrimination tests and provide a report summarizing the results. The results are based solely on the information provided in the data request packet. The Proposed Regulations under Code Section 1.125-7 clarify testing must be performed as of the last day of the plan year. However, it may be beneficial to also test prior to the beginning of the plan year and several months before the end of the plan year so adjustments can be made before the end of the plan year. Tests must take into account all non-excludable employees and former employees who were employees on any day during the plan year. Please note: Nondiscrimination testing is an area of great uncertainty. Numerous terms are not defined in the Internal Revenue Code and the IRS has not provided guidance on many aspects of the tests. CONEXIS is not authorized to provide tax or legal advice. You should review the results of the tests with a legal or tax advisor. Detailed information regarding nondiscrimination requirements and CONEXIS nondiscrimination testing services is included in Appendix B. Affiliated Employers Nondiscrimination tests should include employees of all affiliated employers. An affiliated employer means any entity that is considered with the employer to be a single employer in accordance with Code Section 414(b), (c), or (m) of the Code. CONEXIS POP Program CONFIDENTIAL AND PROPRIETARY
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