What type of plan do you have? Do you have a welfare plan, a section 125 plan, a cafeteria plan or a premium only plan? The terminology can be confusing. It’s time for some definitions.
A Welfare Plan is any employer sponsored plan that offers one or more benefits to employees such as medical, dental, vision, life, health, disability, long term care and dependent care as well as allows contributions toward a health savings account or flexible spending account.
The terms Cafeteria Plan and Section 125 plan can be used interchangeably. A cafeteria plan is an employee benefits plan designed to take advantage of Internal Revenue Code Section 125. This type of plan allows employees to pay certain qualified expenses, such as medical premiums, out-of-pocket medical expenses, or child care, on a pre-tax basis. This allows employees to reduce their total taxable income while increasing their take home pay.
A Premium Only Plan (POP) is a type of cafeteria plan that allows employers to deduct the employee’s portion of health insurance premiums from the employee’s paycheck on a pre-tax basis. It is the simplest type of welfare plan, since it only covers the employee’s cost for medical premiums.
A Flexible Spending Account Plan (FSA) is another type of cafeteria plan. It allows employees to set aside an amount of money during the year on a pre-tax basis. The employee can use that money to pay for medical expenses or care for a dependent. The money added to an FSA must be used in full every year or it will be forfeited back to the employer.
A Health Reimbursement Arrangement (HRA) is a hypothetical account that is completely funded by the employer. The employer uses it to reimburse employees’ health insurance and medical expenses. Employers do not move this money to a separate account – they just pay the expenses as the employees incur them.
A Health Savings Account (HSA) is an account similar to an IRA that is set up by an individual employees to help pay for qualified medical expenses. HSAs must be linked with a high deductible insurance plan and both employees and employers can contribute the HSA.
Most of these plans are subject to ERISA (the Employee Retirement Income Security Act of 1974) and must not discriminate in favor of the owner or highly paid individuals. As such, there are discrimination tests that the IRS has set forth to make sure that benefits are available to all eligible employees under the same terms. Also, these plans require a Plan Document that outlines the terms of the plan and a Summary Plan Description that must be given to all eligible employees.
If you have any questions about the type of plan that you have and if you are in compliance with the laws, please contact us!