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Can I Do a Mid-Year Election Change to my Section 125 Plan?

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Question:

I just went through open enrollment and now I want to change my election.  Can I?

Answer:

This question, or some similar variation, is all too common for employers to hear after the open enrollment period has ended. A response is not always a quick yes or no – per Section 125, which provides the rules for administrating a Section 125 plan (commonly referred to as a “cafeteria plan”), participant elections are generally irrevocable for the plan year. In other words, participants ordinarily may not change an election mid-year. As with many rules, there are applicable exceptions, discussed below.

If certain conditions are met, a plan may allow for a mid-year election change – that is, a change requested outside of open enrollment. In order for a participant to change an election mid-year, the change must be (1) allowed by the plan and (2) one of the IRS recognizes permitted election change events. While plans do not have to allow for employees to change their elections, most do.

For a mid-year election change to be allowed, the cafeteria plan must permit it in the written Section 125 plan document. While allowing a mid-year election change is a matter of plan design, the plan can only allow a mid-year election change as permitted by the IRS. Those permitted election change events include:

  • Change in marital status
  • Change in the number of dependents
  • Change in employment status
  • A dependent satisfying or ceasing to satisfy dependent eligibility requirements
  • Change in residence
  • Commencement or termination of adoption proceedings
  • Significant cost changes
  • Significant curtailment (or reduction) of coverage
  • Addition or improvement of benefit package option
  • Change in coverage of spouse or dependent under another employer plan
  • Loss of certain other health coverage (such as government provided coverage, e.g. Medicaid)
  • HIPAA special enrollment rights (contains requirements for HIPAA subject plans)
  • COBRA qualifying event
  • Judgment, decrees, or orders
  • Entitlement to Medicare or Medicaid
  • Family Medical Leave Act (FMLA) leave
  • Pre-tax health savings account (HSA) contributions (employees are free to change their HSA contributions whenever they wish, in accordance with the their payroll/accounting department process)
  • Reduction of hours
  • Exchange/Marketplace enrollment

While a cafeteria plan does not have to allow for all of the permitted election change events as listed above, it cannot be more generous than the IRS permits. When an employee experiences a mid-year election change event as recognized by the IRS and allowed by the plan, the change must be effective prospectively (with the exception for retroactive changes permissible under HIPAA special enrollment events such as birth or adoption). In addition, the requested change must be consistent with the event – an election change must correspond with requested change in status. For example, if an employee requests to change elections due to a divorce, the employee may drop coverage for the former spouse.

Employers should reference their Section 125 plan document to not only determine what is permitted when an employee asks about a mid-year change, but confirm that the plan allows for mid-year changes as intended.  Please contact your HORAN representative with any questions.

THANK YOU to HORAN for providing the content for this Question of the Week. HORAN serves as a trusted advisor on employee benefits, wealth management and life and disability insurance.  To learn more about HORAN, please contact your HORAN for additional information.

 

Strategic HR is ready to assist you with any of your challenging situations around Benefits and Compensation. We offer assistance with everything from job descriptions to policy development to help address your difficult issues that impact employee compensation or benefits. Please visit our Benefits and Compensation page for more information on how we can assist you.

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Do you know if you need to pay an intern or not?

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Question:

I read a notice that there are new requirements that must be met to consider someone an unpaid intern. What are the requirements and how do I make sure our company needs to pay an intern or not?

Answer:

This month, the Department of Labor (DOL) adopted a new test for determining if a company needs to pay an intern. When categorizing interns, employers should use this test—called the Primary Beneficiary Test—when determining if a worker can be properly classified as an unpaid intern or if they need to be classified as an employee and paid minimum wage and overtime. The DOL’s switch to the Primary Beneficiary Test creates a nationwide standard.

Previously, the DOL was using a six-question all-or-nothing test. An employer needed to be able to say “yes, the internship does that” to all six questions or else classify the worker as an employee. The new test is a balancing (or factors) test and has seven questions. No single question will disqualify the worker from being classified as an unpaid intern. Instead, the employer may look at the answers as a whole.

The new questions overlap significantly with the old questions. The major element missing from the new test is a focus on whether the intern is providing tangible benefit to the employer. The old test indicated that the employer should receive little to no benefit from the services of an unpaid intern, with the exception of goodwill and a qualified future applicant. The new test doesn’t ask if the employer is receiving a benefit.

In place of questions about whether the employer receives any benefits, the new test places more emphasis on the internship being academically focused. Only one of six questions in the old test asked about the training and educational aspects of the job, whereas four of seven do in the new test. Employers are free to look at factors outside of these seven, but should be careful about stretching to find new questions if these seven lead to an answer of “paid employee.”

Under the Primary Beneficiary Test, employers should consider the following when deciding if they need to pay an intern or not:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee.
  2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
  3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
  4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
  6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
  7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

A link to the new fact sheet and additional information can be found on the Department of Labor Wage and Hour Division website.

 

Strategic HR offers assistance with a variety of Benefits and Compensation needs, including understanding how DOL regulations affect your business and helping craft creative compensation plans. Please visit our Benefits and Compensation page for more information.

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Are Wellness Program Incentives Taxable?

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Question:

Is it true that employees have to pay taxes on wellness program incentives?

Answer:

With wellness programs on the rise, there is plenty of opportunity for employees to receive various incentives – from t-shirts and event tickets to gift cards and cash.  As employers consider wellness program design and how to incentivize employees (if at all), they should keep in mind that many wellness program incentives are not excluded from income tax.  Does that gift card Johnny received for participating in a wellness program need to be included in his gross income?  Per the IRS, yes.  

Cash and non-cash incentives, rewards, and payments paid through an employer wellness program are not excluded from an employee’s taxable income (see IRS Memorandum 20162031) and should be included on the employee’s W-2 and subject to federal tax withholdings.  For example, non-cash incentives subject to taxation include discounts on products/services and certain merchandise prizes.  More specifically, the employee’s gross income includes:

  • Employer-provided cash rewards and nonmedical care benefits for participation in a wellness program; and
  • Reimbursements of premiums for participating in a wellness program if the premiums were originally made by salary reduction through a Section 125 plan.  

Note that employer contributions to an HSA, reduced major medical plan premiums, and benefits and services that are medical care (e.g., biometric screenings, smoking cessation programs, and health risk assessments) are generally excluded from an employee’s gross income and are not subject to taxation.  Also, certain benefits may fall into an exception through the “de minimus” rule, defined as the value being so small as to cause accounting of it to be unreasonable or impracticable.  However, employers should note that cash rewards are never considered “de minimis”.  A practical example of a wellness reward that would be considered “de minimis” is a t-shirt.

Special consideration should be given to the incentives provided as part of your wellness program.  Failure to report wellness cash and cash-equivalent incentives can cause significant penalties, including reporting penalties assessed per employee per W-2.  In addition, employee relations issues could result as the IRS can pursue employees who received, but never paid taxes on, such incentives.

THANK YOU to HORAN for providing the content for this Question of the Week. HORAN assists clients in wellness programs and incentive design. Please contact your Benefits Account Manager or HORAN for additional information.

Strategic HR has the answers to all of your tough Benefits and Compensation related questions. Please visit our Benefits & Compensation page for more information.