Employer flex credits – you may need to redesign your cafeteria plan
Many employers provide their employees with benefits through a section 125 or cafeteria plan. Some employers use the plan to allow employees to pay premiums on a pre-tax basis while others provide participants with the flexibility to utilize employer “flex credits” to select from a variety of benefits on a pretax basis that meet their individual needs.
For the past few years, it has been an open issue as to whether employees may count these employer flex credits when determining if the coverage they offer their full-time employees is affordable for purposes of the pay or play penalties.
This month, under Notice 2015-87, the IRS provided guidance and clarification on employer flex credits and whether they count for purposes of affordability. Under the ACA, a health plan is considered “affordable” if an employee is not required to pay more than 9.5% of their household income for single coverage. Whether or not employer flex credits reduce an employee’s required contribution for the cost of coverage depends, in part, on the conditions placed on the use of these amounts. In order for the employer flex credits to be counted as a reduction of what the employee must pay for health plan coverage, the employee must be able to use the contributions solely to pay for health plan coverage. If the employer flex credits can be used by employees for non-health care benefits (such as life insurance or dependent care spending accounts), the flex credits will not be seen as reducing the employee’s required contribution (even though the employee is paying less for the coverage). Also, flex contributions that can be used for a taxable benefit, such as cash, will not operate to reduce an employee’s required contribution towards the cost of coverage.
For example, an Employer with a Section 125 cafeteria plan may elect to make flex contributions of $350 per month for each eligible employee. If participants can use these amounts to pay for health insurance premiums, but may also elect to use these amounts for non-health care benefits, or make a cash election, then the Employer’s flex contributions will not operate to reduce the cost of coverage. Under this example, the Employer’s flex contributions would not be taken into account when determining if the Employer had made an offer of affordable coverage.
If you currently use a flex credit approach, you should review your plan in light of the new guidance.