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May 31, 2007 (updated July 2, 2007)

MASSACHUSETTS' CAFETERIA PLAN MANDATE: WHAT SPONSORS OF MULTIEMPLOYER HEALTH PLANS (AND THEIR CONTRIBUTING EMPLOYERS) NEED TO KNOW

The Massachusetts Health Care Reform Act (MHCRA) is a landmark health care reform law, which requires nearly all state residents to have health insurance coverage effective July 1, 2007.¹ It also places significant new obligations on contributing employers that both the employers and multiemployer plan sponsors should understand. A key element of the new law requires most employers with 11 or more employees in the state to establish and maintain an Internal Revenue Code (IRC) Section 125 cafeteria plan in accordance with rules set forth by the Commonwealth Health Insurance Connector Authority (the "Connector"). The cafeteria plan requirement is effective July 1, 2007. However, as discussed below, many employers that contribute to a multiemployer health plan should be exempt from this requirement.

The Connector issued "emergency" cafeteria plan regulations on March 20, 2007.² The regulations were issued with the force of law to provide employers with reliable guidance on which to base their compliance efforts in time to meet the requirement's effective date. After publication of the rules and a public hearing, the emergency regulations were amended and draft final regulations were proposed for discussion on May 10, 2007.³ Final regulations were approved on June 5, 2007 with additional changes. Also, on June 29, 2007, the Connector issued an Administrative Bulletin with further guidance.

This Capital Checkup briefly summarizes this new mandate, and sets forth several issues that multiemployer plan sponsors and contributing employers need to know.

Two Exemptions in the Current Regulation Have an Impact on Multiemployer Plans

A cafeteria plan allows participating employees to contribute to the cost of their health coverage on a pre-tax basis, thus lowering their taxable income and reducing their federal and state income tax and FICA burden. A cafeteria plan is a written plan established under IRC §125 in which all participants are employees who choose among two or more benefits.

Generally, under the MHCRA, employers with 11 or more Massachusetts employees during any applicable determination period are subject to the cafeteria plan requirement.⁴ The initial determination period began on April 1, 2006 and ended on March 31, 2007. An employer with 11 or more Massachusetts employees during this period must have a compliant cafeteria plan in place by July 1, 2007.⁵ However, most employers that contribute to multiemployer health plans should be exempt from this requirement, if they meet one of the following conditions:

• Exemption from Providing a Cafeteria Plan for Participants for Whom an Employer Contributes to a Multiemployer Plan Under draft §125 final regulations, all employees whose employer is required to contribute to a multiemployer health plan would be excluded from participating in a cafeteria plan if the employer contributes to the multiemployer plan based on their employment. Accordingly it appears that any amount of employer contribution on behalf of an employee to a multiemployer plan would effectively exempt the employer from having to offer that employee participation in a cafeteria plan. Whether the employee currently satisfies the plan's rules for health coverage is not a factor. This also means, however, that some union workers who must contribute towards their multiemployer plan's premiums may not be able to take advantage of the savings available through a pre-tax salary reduction program available under §125 because their employers will not be subject to the cafeteria plan requirement. Of course, a contributing employer may still implement a cafeteria plan for these workers.
• No Requirement To Establish a Cafeteria Plan If No Employee Contributions Employers do not have to contribute towards the cost of their employees' medical coverage to comply with the MHCRA's cafeteria plan requirement. In fact, the law does not apply to employers that provide medical coverage that is fully employer-paid for all employees. It is common for multiemployer health plans to have no employee contributions toward the cost of coverage. In that event, an employer will not be subject to the cafeteria plan requirement if the employer pays a multiemployer plan the full monthly cost of medical care coverage for all of its employees as well as any dependent coverage (to the extent it is elected by the employee).

Some Contributing Employers Will Still Be Subject to the Cafeteria Plan Requirement

Despite these broad exceptions for employers that contribute to multiemployer health plans, some of these entities will, nonetheless, still be subject to the cafeteria plan requirement for certain employees. For example, provided they reach the 11-employee threshold (which includes both collectively bargained and non-collectively bargained employees) that triggers a cafeteria plan, employers that do not contribute to a multiemployer plan for certain classes of their collectively bargained employees "based on their employment" will not be able to exclude those employees from the requirement. In addition, contributing employers that meet the 11-employee threshold and have employees who contribute towards their coverage's cost and are otherwise not excludable⁶ from the rule will be affected.

Affected employers will have to meet the cafeteria plan rules by July 1, 2007. Under the Connector's regulations, the §125 cafeteria plan must, at a minimum, be a premium-only plan offering access to one or more medical coverage options. A premium-only plan enables participants to elect to have their employee contributions to pay for medical coverage (or other qualified benefits) deducted from their salary before it is taxed for federal, state and Social Security purposes.

The cafeteria plan must be in writing and satisfy all applicable IRC §125 requirements. Other requirements include:

• A written cafeteria plan document that describes each benefit available under the plan, including the periods during which benefits are provided; the plan's eligibility rules; the plan's procedures governing participants' elections; how employer contributions are made; and the plan year on which the cafeteria plan operates.
• Employers must submit a copy of their §125 cafeteria plan document to the Connector. In its June 29, 2007 Administrative Bulletin, the Connector postponed the date employers must file a copy of their cafeteria plan document with the state from July 1 to October 1, 2007. Affected employers must also designate an individual to certify the accuracy of the information submitted.
• Eligible employees must be offered participation in the cafeteria plan during any applicable election period. Employers that make any contribution to the cost of health coverage may impose an eligibility waiting period on participants, as long as it is no longer than any waiting period for the medical coverage options. Employers that make no contribution to the cost of health coverage cannot have a waiting period that exceeds two months.

In addition to the categories of employees noted above, other categories that that can be excluded from participating include: those who are less than 18 years of age; temporary employees (i.e., a worker whose employment does not exceed 12 consecutive weeks during the period from October 1 - September 30); part-time employees working, on average, less than 64 hours per month; and certain others (e.g., student interns).

The Connector recently issued a "Section 125 Plan Handbook for Employers." Included in the handbook are model cafeteria plan documents and forms to enable small employers subject to this requirement to adopt a compliant cafeteria plan.⁷

Other Issues Contributing Employers and Multiemployer Plans Should Consider

Due to the special nature of multiemployer plans, sponsors and contributing employers that must comply with the cafeteria plan rules will have some additional issues to consider when implementing this requirement:

• Free Rider Surcharge Does Not Apply to Collectively Bargained Employees The enforcement mechanism for the cafeteria plan requirement is the MHCRA's surcharge for state-funded health costs (i.e., the "free rider" surcharge). Under that provision, employers of 11 or more that do not adopt a cafeteria plan as required may be assessed a charge equal to a portion of the state's cost of providing health benefits to the employer's uninsured employees or their dependents. However, employers subject to collective bargaining agreements (CBAs) are exempt from the surcharge for those individuals covered under the agreement. This raises the question of whether an employer subject to a CBA will remain exempt from the surcharge if the cafeteria plan requirement applies to that employer, but it fails to adopt a plan. According to informal guidance provided by the Connector, the surcharge should not apply to a collectively bargained employer if the employer does not adopt a cafeteria plan by July 1, 2007 and the individual receiving free state care is covered by a CBA. This informal guidance is subject to change pending final review and approval from the Connector.
• If the Requirement Applies, Each Contributing Employer Must Have Its Own Cafeteria Plan If the cafeteria plan requirement applies, each contributing employer with 11 or more affected employees would have to establish its own cafeteria plan. This will result in some administrative challenges, since each employer would have to create and maintain its own cafeteria plan document, administer mid-year election changes, and fulfill other IRC requirements. Under the regulations, a single §125 cafeteria plan document can cover the employees of two or more related employers. However, the related employers must all be members of the same controlled group. Since that is not typically the case in the multiemployer plan environment, to the extent they are subject to this requirement, each contributing employer would have to adopt and maintain its own §125 plan.

These and other issues will make understanding and, where necessary, complying with the MHCRA's cafeteria plan requirements somewhat more complex for multiemployer plans and the employers that contribute to them.

Steps for Multiemployer Plans

Assuming that the draft final §125 regulations are approved by the Connector's Board of Directors at its June meeting as expected, employers that contribute to a multiemployer health plan for their collectively bargained employees will not have to adopt a cafeteria plan for those employees. In addition, employers that pay the full cost of health coverage for all their employees and their dependents (if elected) are exempt from this requirement.

Contributing employers to multiemployer health plans should review the cafeteria plan regulations with legal counsel to determine: (1) if they are potentially a covered employer with 11 or more employees in Massachusetts; (2) whether they will need to adopt a cafeteria plan or are excluded from the requirement under either of the two general exemptions; (3) if they are not exempt and presently have a cafeteria plan in place, whether it will need to be amended to meet the new state law requirements by July 1, 2007; and (4) if they are not exempt and do not have a cafeteria plan in place, take the necessary steps to put one in place by July 1, 2007. Where applicable, plan trustees should begin now to work with their contributing employers and fund office staff to establish the necessary protocols to successfully administer these plans effective July 1.

As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their fund counsel for authoritative advice on the interpretation and application of the Massachusetts Health Care Reform Act. The Segal Company can be retained to work with plan sponsors and their fund counsel to comply.

1	For a summary of the law, see The Segal Company's August 2006 Bulletin, "Massachusetts Health Care Reform May Affect Multiemployer Health Plans". (To return to the Capital Checkup text, click here.)
2	To see the regulations, click here. (To return to the Capital Checkup text, click here.)
3	To see the draft final regulations, which are contained in the minutes of the May 10, 2007 Connector Authority Board meeting, click here. (To return to the Capital Checkup text, click here.)
4	Under the rule, an employer has 11 or more employees if the total payroll hours worked by all employees during the determination period, divided by 2,000 payroll hours, is greater than or equal to 11. According to the regulations, an "employee" is any individual working at a Massachusetts location, whether or not the individual is a Massachusetts resident. The term "employee" includes full-time, part-time, temporary and seasonal workers, regardless of whether their employer is subject to a collective bargaining agreement, as well as the self-employed. Independent contractors are not included. (To return to the Capital Checkup text, click here.)
5	After July 1, 2007, there will be a new determination period beginning April 1 - March 31. An employer with 11 or more employees during a subsequent determination period will be subject to the cafeteria plan requirement by the following July 1. (To return to the Capital Checkup text, click here.)
6	The cafeteria plan regulation exempts other categories of individuals from the requirement, including part-time employees working less than 64 hours per month. (To return to the Capital Checkup text, click here.)
7	To see the handbook, click here. (To return to the Capital Checkup text, click here.)

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