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A small number of states, including Rhode Island and Connecticut, have laws requiring certain employers to sponsor a cafeteria plan so that employees can pay their share of group health premiums on a pre-tax basis. In June, Missouri enacted its own cafeteria plan mandate.

The Missouri law requires employers that provide insured health coverage for which the employer pays any portion of the premium to establish a cafeteria plan. Self-funded health plans are exempt from this requirement.

The mandate is found at Section 376.453 of the Missouri Revised Statutes. It takes effect on January 1, 2008. This means that many Missouri employers who sponsor insured health plans have a very limited time in which to draft and adopt a written cafeteria plan.

The document, in its simplest form, can be designed as a premium-only plan that provides employees with the option to pay their portion of health premiums on a pre-tax basis via payroll deduction. There is no requirement to also offer a medical flexible spending account for out-of-pocket medical expenses, to offer dependent care (child care) spending accounts or other premium payment options that can be part of a cafeteria plan.

The Missouri law is unusual in that it applies to insured health plans for which the employer pays any portion of the premium. Technically, that would exempt those plans for which the employee pays the entire premium. At this point, we do not know if this was an error in drafting the statute or if it was an intended outcome. We await further guidance. We do understand that the law will NOT apply to situations in which the employer pays 100% of the premium.

In the meantime, employers who sponsor insured health plans and who pay a part of the premium should adopt a premium-only cafeteria plan no later than January 1 if they have not already done so. Those who have a plan should confirm that they could produce the written plan document in the event of audit by either the state or the Internal Revenue Service (IRS).

In August, the IRS issued new proposed regulations governing the operation of cafeteria plans under Section 125 of the Internal Revenue Code. The regulations are generally effective for plan years beginning on or after January 1, 2009, but employers can rely on them until final regulations are issued. The tone of the regulations is fairly strict. They emphasize the written document requirement and specify the key elements that must be included. They also emphasize the need to operate a plan in accordance with its written terms. Operational noncompliance could mean plan disqualification and characterization of pre-tax contributions as taxable income. The IRS currently has no formal program for correction of cafeteria plan operational mistakes.

Employers should review their current plan documents to determine if any desired changes should be made or other changes made based on guidance in the proposed regulations.

As a reminder, certain individuals are not eligible to participate in a cafeteria plan. Ineligibles include sole proprietors, partners, and more than 2% S Corporation shareholders. Certain family attribution rules also apply to the determination of eligible status. Employers are encouraged to check the eligibility provisions of their plan documents.

For more information, contact:

Dolores Lawrence, CPA, QKA
Manager 
RubinBrown Benefits Group
314.290.3224
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