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August 10, 2007
(Updated January 3, 2008)

MORE STATES ENACT CAFETERIA PLAN MANDATES

Rhode Island, Connecticut, Missouri, Washington and Maryland have followed Massachusetts in enacting a requirement that certain employers establish cafeteria plans under Section 125 of the Internal Revenue Code. Cafeteria plans are vehicles that permit, among other things, pre-tax payment of health insurance premiums. Two of these state laws (Washington and Maryland) apply only to small employers that choose to participate in state-subsidized programs designed to improve access to health coverage.

BROAD-BASED CAFETERIA PLAN MANDATES

Rhode Island

Rhode Island enacted its law on June 27, 2007:¹

• The Requirement Under Rhode Island's new law, certain employers (as described below) must adopt a cafeteria plan to permit employees and their dependents to purchase health insurance. Under the statute, employers are not required to contribute to the cost of health insurance purchased through the cafeteria plan. The mandate appears to apply whether or not the employer offers group health plan coverage to its employees.
• Plan Sponsors Affected The requirement applies to employers that have annual average employment of more than 25 employees for six consecutive months of the year in Rhode Island. The term "employer" is defined by reference to the state's unemployment trust fund laws and would include the state, its political subdivisions and their instrumentalities. As written, it appears that the law would also apply to employers that contribute to multiemployer funds if they meet the employee threshold. This and other issues may be clarified by the state department of labor and training, which is given the authority to promulgate implementing rules and regulations.

The Rhode Island law took effect immediately, but does not require employers to establish a cafeteria plan until July 1, 2009.

Connecticut

The Connecticut law² requires any employer that provides health insurance benefits paid at least in part through payroll deduction to give employees the opportunity to have their contributions excluded from their gross income for state or federal income tax purposes. The law does not define the term employer or include a threshold number of employees. Unlike the Rhode Island law, however, it applies only when the employer provides health insurance benefits to its employees.

The new Connecticut law was signed on July 10, 2007, and took effect October 1, 2007.

Missouri

The Missouri law requires employers that provide health insurance coverage for which the employer pays some portion of the premium to establish a premium-only cafeteria plan.³ It is not clear why the mandate is triggered by employer contributions rather than employee contributions. It does not apply to plan sponsors of self-insured plans. A second provision in the Missouri law permits small employers to contribute through a cafeteria plan to the individually underwritten health benefit plan of an employee who is eligible for coverage under the employer's plan.

The Missouri law was signed on June 1, 2007, and although it was scheduled to take effect January 1, 2008, state regulators announced in December 2007 that they would postpone implementation pending clarification of potential conflicts with federal law.⁴

LAWS DIRECTED AT SMALL EMPLOYERS

Washington

Washington was the first state to include a cafeteria plan requirement as part of its voluntary program to help small employers and their employees obtain health coverage.⁵ This law requires small employers (between two and 50 employees) that choose to participate in the state’s “Health Insurance Partnership” to establish a cafeteria plan that will enable employees to pay their share of their health benefit premium with pre-tax dollars. Employees of small employers that participate in the partnership will receive premium subsidies from the state based on gross family income.

The Washington law was signed on May 2, 2007. While the law took effect in July 2007, small employers will not be required to take action until the partnership program is implemented in 2008. It is anticipated that health coverage through the partnership will begin on January 1, 2009.

Maryland

Maryland’s new law follows a similar approach to the one taken in Washington.⁶ The Maryland law creates a new Small Employer Health Benefit Plan Premium Subsidy Program. This voluntary program targets the very smallest employers, those with 2 to 9 full-time employees (working at least 30 hours per week) who have not been offered health coverage in the last year, and provides them and their employees with premium subsidies to make health coverage more affordable. Among the requirements for receiving subsidies is the requirement that the employer establish a payroll deduction plan under §125 of the Internal Revenue Code.

The Maryland law was signed on November 19, 2007 and took effect immediately. However, as with the Washington law, implementation of the new program will take some time.

IMPLICATIONS

As noted above, these states are following on the heels of Massachusetts, which enacted a cafeteria plan mandate in 2006. The Massachusetts requirement, which applies to employers with 11 or more employees, took effect on July 1, 2007. The state initially was going to require employers to file a copy of their cafeteria plan with the state's Health Insurance Connector Authority (the "Connector") by October 1, 2007.⁷ However, the filing requirement was removed, and now employers need only file their cafeteria plan if the Connector requests it. The Connector has issued regulations and a handbook explaining the requirement.

Whether these cafeteria plan mandates reflect a new nationwide trend remains to be seen. Some have questioned whether this type of state law is preempted by ERISA, and this is an issue that may have to be resolved by the courts. Cafeteria plans themselves are not technically ERISA plans; rather, they are funding vehicles through which, among other things, group health plan premiums (and, in some cases, individual health insurance policy premiums) may be paid on a pre-tax basis. For employers that have already established a group health plan, a cafeteria plan can be added fairly easily if one does not already exist. Compliance may be more challenging — and the requirement more objectionable — for employers that that have not established a group health plan but must nonetheless comply with the new law (as appears to be the case for some Rhode Island employers), as well as small employers that will have to administer the required cafeteria plan.

As with all issues involving the interpretation or application of laws, employers in these states, including those contributing to multiemployer funds, should rely on their legal counsel for authoritative advice on these new cafeteria plan mandates. The Segal Company can be retained to work with employers to set up a cafeteria plan.

1	To see an interim version of the law, Public Law No. 2007-125, click here. (To return to the Capital Checkup text, click here.)
2	To see the new section (23) to the general statutes, click here. (To return to the Capital Checkup text, click here.)
3	To see the new law, click here. (To return to the Capital Checkup text, click here.)
4	To see the guidance from the Missouri Department of Insurance, Financial Institutions & Professional Registration, click here. (To return to the Capital Checkup text, click here.)
5	To see the law, click here. (To return to the Capital Checkup text, click here.)
6	To see the law, click here. (To return to the Capital Checkup text, click here.)
7	For information about this law, see The Segal Company's May 2007 Bulletin, "Massachusetts' Cafeteria Plan Mandate" (To return to the Capital Checkup text, click here.)

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