August 10, 2007

MORE STATES ENACT CAFETERIA PLAN MANDATES

Rhode Island, Connecticut and Missouri recently followed Massachusetts in enacting a requirement that certain employers establish cafeteria plans under Section 125 of the Internal Revenue Code. Cafeteria plans are vehicles that permit, among other things, for pre-tax payment of health insurance premiums.

Rhode Island's Cafeteria Plan Mandate

Rhode Island enacted its law on June 27, 2007:¹

• The Requirement Under Rhode Island's new law, certain employers (as described below) must adopt a cafeteria plan to permit employees and their dependents to purchase health insurance. Under the statute, employers are not required to contribute to the cost of health insurance purchased through the cafeteria plan. The mandate appears to apply whether or not the employer offers group health plan coverage to its employees.
• Plan Sponsors Affected The requirement applies to employers that have annual average employment of more than 25 employees for six consecutive months of the year in Rhode Island. The term "employer" is defined by reference to the state's unemployment trust fund laws and would include the state, its political subdivisions and their instrumentalities. As written, it appears that the law would also apply to employers that contribute to multiemployer funds if they meet the employee threshold. This and other issues may be clarified by the state department of labor and training, which is given the authority to promulgate implementing rules and regulations.

The Rhode Island law takes effect immediately, but does not require employers to establish a cafeteria plan until July 1, 2009.

Connecticut's Cafeteria Plan Mandate

The Connecticut law² requires any employer that provides health insurance benefits paid at least in part through payroll deduction to give employees the opportunity to have their contributions excluded from their gross income for state or federal income tax purposes. The law does not define the term employer or include a threshold number of employees. Unlike the Rhode Island law, however, it applies only when the employer provides health insurance benefits to its employees.

The new Connecticut law was signed on July 10, 2007, and is effective October 1, 2007.

Missouri's Cafeteria Plan Mandate

The Missouri law requires employers that provide health insurance coverage for which the employer pays some portion of the premium to establish a premium-only cafeteria plan.³ It is not clear why the mandate is triggered by employer contributions rather than employee contributions. It does not apply to plan sponsors of self-insured plans. A second provision in the Missouri law permits small employers to contribute through a cafeteria plan to the individually underwritten health benefit plan of an employee who is eligible for coverage under the employer's plan.

The Missouri law was signed on June 1, 2007, and takes effect January 1, 2008.

Implications

As noted above, these states are following on the heels of Massachusetts, which enacted a cafeteria plan mandate in 2006. The Massachusetts requirement, which applies to employers with 11 or more employees, took effect on July 1, 2007, and requires employers to file a copy of their cafeteria plan with the state's Health Insurance Connector Authority (the "Connector") by October 1, 2007.⁴ The Connector has issued regulations and a handbook explaining the requirement.

Whether these cafeteria plan mandates reflect a new nationwide trend remains to be seen. Some have questioned whether this type of state law is preempted by ERISA, and this is an issue that may have to be resolved by the courts. Cafeteria plans themselves are not technically ERISA plans; rather, they are funding vehicles through which, among other things, group health plan premiums (and, in some cases, individual health insurance policy premiums) may be paid on a pre-tax basis. For employers that have already established a group health plan, a cafeteria plan can be added fairly easily if one does not already exist. Compliance may be more challenging — and the requirement more objectionable — for employers that that have not established a group health plan but must nonetheless comply with the new law (as appears to be the case for some Rhode Island employers).

As with all issues involving the interpretation or application of laws, employers in these states, including those contributing to multiemployer funds, should rely on their legal counsel for authoritative advice on these new cafeteria plan mandates. Sibson Consulting can be retained to work with employers to set up a cafeteria plan.