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Cafeteria Plan Changes for 2011

Amid the year-end rush to comply with the reform provisions of the Affordable Care Act (“ACA”) for group health plans, it is easy to overlook the ACA’s effects on other health plan arrangements. As discussed in our May 2010 article, cafeteria plans, health flexible spending accounts (“FSAs”), health savings accounts (“HSAs”), and health care reimbursement arrangements (“HRAs”) are subject to several of the same requirements that apply to group health plans. These include:

  • Coverage of  “adult children”; and

  • Elimination of reimbursements for over-the-counter medications purchased without a prescription.

The ADA also created a nondiscrimination “safe harbor” for cafeteria plans maintained by certain small employers.

Coverage of Adult Children

Effective March 30, 2010, FSAs and HRAs may offer tax-advantaged contributions and reimbursements for an employee’s child who will not attain age 27 as of the end of the calendar year. Moreover, employees may be allowed to make pre-tax premium payments on behalf of such “adult children.”

These pre-tax reimbursements and premiums may be allowed in 2010 even if the cafeteria plan has not yet been amended to offer that option. However, an amendment to that effect must be adopted by December 31, 2010, and it must be retroactively effective as of the first date in 2010 when employees were permitted to obtain pre-tax reimbursements or make pre-tax premium payments  on behalf of their adult children (but in no event earlier than March 30, 2010).

Restrictions on Reimbursements

Beginning January 1, 2011, expenses for over-the-counter drugs (other than insulin) may not be reimbursed from an FSA, HSA, or HRA unless prescribed by a physician. Employers should review amy of their arrangements that currently allow for reimbursements of over-the-counter drugs to determine whether an amendment is necessary. If an amendment is necessary to conform with the new limitations on authorized reimbursements, employers will have until June 30, 2011, to adopt the amendment. That amendment should then be made retroactive to January 1, 2011.

Safe-Harbor Nondiscrimination Rule for SIMPLE Cafeteria Plans

Effective January 1, 2011, the ACA establishes a “SIMPLE cafeteria plan” for certain small employers. To be eligible to sponsor such a plan, an employer must have employed an average of 100 or fewer employees for each of the past two years. (This limit may be exceeded by a “growing employer,” up to a limit of 200 employees.) A SIMPLE cafeteria plan provides a “safe harbor” from the Tax Code’s nondiscrimination requirements for cafeteria plans, as well as from the nondiscrimination requirements for specified qualified benefits offered under such a plan, such as group-term life insurance, benefits under a self-insured medical expense reimbursement plan, and dependent care assistance.