June 18, 2009 – Complying with Minnesota’s New Cafeteria Plan Requirement
In 2008, Minnesota enacted Section 62U.07 of the Minnesota Statutes as part of its efforts at health care reform. Section 62U.07 generally requires employers with employees in the State of Minnesota to implement a Section 125 cafeteria plan to allow employees to pay the cost of health coverage on a pre-tax basis. The statutory requirements become effective July 1, 2009.
Yes, this is for real. We confirmed with the Department of Commerce this week that the effective date for compliance is July 1, 2009, and that the cafeteria plan requirement will be enforced.
To whom does the law apply? In general, the law applies to employers who employ at least eleven (11) full-time equivalent employees in Minnesota. Employer is defined as any type of entity or organization (including governmental entities) that (i) employs one or more persons, and (ii) files payroll tax information with respect to such employees. A number of employers are specifically exempt from the law, including:
- employers that offer a group health plan to their employees;
- employers that sponsor a self-insured health plan; and
- employers that have no employees who are eligible to participate in a cafeteria plan, such as employers with no common law employees and employers that employ only individuals who are treated under the tax code as being self-employed (e.g., sole proprietors, partners, members of a limited liability company, and more-than-2% shareholders of an S corporation and their family members).
Note: Group health plan for purposes of this law includes only insured medical plans that insure against loss by sickness and injury. A self-insured health plan for purposes of this law includes a self-insured plan providing medical, surgical or hospital care benefits. It is not clear whether a health reimbursement arrangement or a health flexible spending account constitutes a self-insured health plan for purposes of the law.
What does the law require covered employers to do? Employers subject to the law must implement and maintain a cafeteria plan that:
- allows employees to purchase an individual health policy for themselves and their dependents with pre-tax (i.e., salary reduction) dollars under the plan;
- allows employees to choose any insurance agent or broker to assist them in purchasing the individual health insurance; and
- provides that the employer sponsoring the plan will pay premiums paid through the plan directly to the insurance carrier.
In addition, employers are specifically required to provide a notice to employees that individual insurance policies purchased through the cafeteria plan “are not employer-sponsored or administered.”
Caution: This notice may conflict with federal law and, as a result, may not be binding on employees. Although the issue has not been formally addressed by the federal regulatory agencies, under current federal law, individual insurance policies purchased through a cafeteria plan may be deemed to be an employer-sponsored group health plan for purposes of ERISA, HIPAA, COBRA, and the Internal Revenue Code.
Although not addressed in the statute, to comply with the statute’s requirements, an employer must prepare and adopt a written plan document reflecting the cafeteria plan. The Internal Revenue Code requires cafeteria plans to be established through a written plan document.
Can employers opt out of complying with the law’s requirements? The law includes an opt out provision. An employer that is covered by the law may avoid the cafeteria plan requirement by completing a form available from the Minnesota Department of Commerce. The form is available on the Department’s website (available here).
The law (and the form) requires an employer wishing to opt out of the cafeteria plan requirement to certify it has received “education and information on the advantages of Section 125 Plans.” The form requests additional information regarding the reason the employer is choosing to opt out and the source of the education and information, but responding to those requests is optional.
Neither the law nor the Department of Commerce’s fact sheet regarding the new law (available here) includes any additional information regarding the nature, content, or source of the required “education and information” the employer must receive prior to opting out. It appears an employer may obtain such education and information by speaking with a benefits or tax professional knowledgeable about cafeteria plans (e.g., a benefits attorney, a Certified Public Accountant, a licensed insurance broker) or by conducting its own research.
Is there assistance available to employers to help pay the cost of implementing a cafeteria plan? In limited circumstances, the law makes available a grant of $350 to certain small employers (those with two (2) to fifty (50) employees) to assist with the cost of implementing the plan. Information regarding such grants is available from the Minnesota Department of Employment and Economic Development (651-259-7435).
Action Items. Employers with Minnesota employees should take the following actions prior to July 1, 2009:
- Determine whether the law applies to you.
- If the law applies, determine whether you will comply with the law (i.e., adopt a cafeteria plan), or opt out.
- If opting out, obtain the required education and information regarding the benefits of a Section 125 plan and complete submit the on-line form to opt out by July 1, 2009.
- If complying with the law, adopt a cafeteria plan allowing participants to pay the cost of individual health insurance policies through the plan, or amend an existing cafeteria plan to add this benefit, by July 1, 2009.
Please contact us if you need assistance with the foregoing action items.
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The information contained in this ALERT is intended for general information purposes only and does not constitute legal advice relative to a specific situation.