Academic journal article Journal of Accountancy

New Rules for Accident and Health Insurance Cafeteria Plans

Academic journal article Journal of Accountancy

New Rules for Accident and Health Insurance Cafeteria Plans

Article excerpt

Cafeteria plans are benefit plans that allow employees to choose certain nontaxable benefits (such as accident or health coverage) in lieu of cash, without the employee having to include the cash in gross income. In effect, such plans enable employees to convert what would otherwise be taxable compensation into excludable benefits suitable to employees' own particular needs.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) was enacted to improve health insurance availability for individuals who lose health care coverage due to changing or losing their jobs. As a result, some of the rules applying to cafeteria plans needed to be changed to conform the accident and health insurance provisions to the new special enrollment rights provided under HIPAA.

In a cafeteria plan, employees have the right to choose among two or more benefits consisting of cash and qualified benefits. A qualified benefit is any benefit excludable from gross income because of an express provision in the IRC, including employer-provided accident or health insurance, group-term life insurance, elective contributions under a cash or deferred arrangement, dependent care assistance and adoption assistance.

Qualified benefits do not include: long-term care-insurance, medical savings accounts, qualified scholarships, educational assistance programs, and certain other fringe benefits.

An employee may elect to choose between the cash and the qualified benefits before the beginning of the coverage period (generally, the plan year of the cafeteria plan); changes in the election during the plan year usually are allowed only under very limited circumstances.

NEW RULES

The IRS recently issued new rules that allow employees to change health coverage (in light of the HIPAA changes) and permit plans to allow changes in coverage during the plan year for a variety of "changes in status. " Such changes are limited to specific events, including

* Changes in marital status--because of marriage, death of a spouse, divorce, legal separation or annulment. …

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