Alert November 04, 2013

Section 125 Cafeteria Plan Requirement for Massachusetts Employers Ends

Summary
Massachusetts recently announced that, due to federal rules under the Affordable Care Act, it will cease enforcement of its Section 125 cafeteria plan requirement for Massachusetts employers. Under that requirement, employers with more than 10 full-time employees in the state were required to allow employees who did not qualify for the employer's health care plan to purchase other health insurance and to pay for 100% of that insurance on a pre-tax basis. These Massachusetts Section 125 plan arrangements may be continued through the remainder of a plan year that began in 2013 but cannot be continued for a plan year beginning in or after 2014.

As discussed in a previous Goodwin Procter Employee Benefits Update, since 2007 Massachusetts has required employers with more than 10 full-time employees in the state to maintain plans under Section 125 of the Internal Revenue Code (“IRC”) that generally permit employees who are not eligible for the employer’s group health plan to purchase other health insurance with 100% employee contributions made on pre-tax basis (the “Section 125 Plan Requirement”).

On October 28, 2013, Massachusetts announced, in Health Connector Administrative Bulletin 03-13 (the “Bulletin”), that it will no longer enforce this Section 125 Plan Requirement.  The Bulletin explains that recent guidance issued by federal agencies concerning the Affordable Care Act (“ACA”) indicates that employers may no longer offer plans under IRC Section 125 (also known as “cafeteria plans”) to employees to purchase non-group insurance without any employer contributions.

The Bulletin states that, because this new federal rule under the ACA is incompatible with the Massachusetts Section 125 Plan Requirement, the state’s Health Connector will no longer enforce the penalty (known as the “Free Rider Surcharge”) that could previously be imposed on employers for failure to comply with that requirement.  The Bulletin notes that, for the remainder of the plan year that began in 2013, an employer may continue its Section 125 plan arrangement that has been utilized to comply with the Massachusetts Section 125 Plan Requirement.  However, to comply with the ACA, that arrangement cannot be continued for a plan year beginning in or after 2014.

Some employers have complied with the Section 125 Plan Requirement by maintaining a separate cafeteria plan solely for that purpose, in which case that plan should be terminated.  Other employers have complied with the Massachusetts Section 125 Plan Requirement by including special provisions within the cafeteria plans they use for other purposes (e.g., for facilitating pre-tax contributions by eligible employees to the health plan the employer sponsors). In that case, the cafeteria plan should be amended to eliminate the special provisions concerning compliance with the Massachusetts Section 125 Plan Requirement.  The deadline for taking action is the last day of the plan year that began in 2013 (e.g., for calendar year plans, December 31, 2013).