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Where to Start
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Working with your Combined Services Representative, your employer should create an outline of the features they would like their plan to include.
There are some legal restrictions which your representative can go over but here are some elements to consider for your Premium Conversion Plan:
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Should the plan include insurance premiums for medical, dental, life and disability? |
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Should automatic enrollment be included in the plan? |
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Will employees be allowed to change their elections outside of open enrollment? |
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Important Points to Consider
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Employer Eligibility
Any Employer can sponsor a Premium Conversion Plan, but certain individuals are not eligible:
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Self-Employed Individuals* |
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Partners in a Partnership* |
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A Shareholder who holds 2% or more in a Subchapter S Corporation* |
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Members in an LLC |
*These individuals are allowed to sponsor Premium Conversion Plans.
Disability Insurance Premiums
If disability premiums are included in the plan document, premiums paid with pretax dollars by the employee will be subject to tax on disability benefits at the point of claim.
These taxes will include FICA, State and Federal income tax. The employer will also be responsible for matching FICA taxes on the disability benefits.
Effects on Social Security
Because the money in the Premium Conversion Plan is taken out of the participant's salary before taxes, the pre-tax amount is no longer considered part of the employee's gross salary.
The participant's Social Security withholdings will only be deducted from the lower, adjusted gross salary which means less money will be allocated toward the employee's Social
Security earnings. Generally, the overall impact on the participant's Social Security benefit is small.
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Plan Implementation Requirements
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Written Plan Document
The Internal Revenue Service (IRS) requires that any employer implementing a Premium Conversion Plan, have a Written Plan Document in place with required language
detailing: the benefits under the pre-tax plan; participation and eligibility requirements; open enrollment; qualifying status change events (if applicable); and
plan administration. Once your employer decides how the Premium Conversion Plan will be administered, Combined Services can provide a Written Plan Document that
will meet the IRS requirements.
Key Items to be Included in the Written Plan Document:
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Participant eligibility requirements |
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Waiting periods if elected - Open enrollment time |
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List of which events will merit a change in enrollment between open enrollments - if qualifying events are adopted |
Adoption
Once the Written Plan Document has been completed and reviewed, it must be adopted by the employer before the effective date. This adoption process should pass through
the same channels the employer uses for any other major business transaction.
Summary Plan Description
The Department of Labor requires that ALL of your eligible employees receive information on how your specific Premium Conversion Plan works. When the plan becomes
available to your employees, or when you have new hires or newly eligible employees, you should give them a Summary Plan Description. The Summary Plan Description
outlines, in simplified terms: the Premium Conversion Plans' advantages and limitations; the name and address of the Plan Administrator; and a person who employees
can contact if they have questions or complaints regarding the benefits of the plan. Combined Services can create a Summary Plan Description for you to distribute
to your employees that meets these requirements. Once in place, the Summary Plan Description should remain available for employees to review.
Non-Discrimination Testing
The IRS requires that companies implementing a Premium Conversion Plan complete Non-Discrimination Testing each plan year. This is to ensure that "key employees" in a company
do not receive an unfair tax advantage from the plan.
The IRS has a series of non-discrimination tests that your employer or Combined Services can administer. The testing for a Premium Conversion Plan tends to be less
complicated than that of Medical or Dependent Care Reimbursement Accounts. (see Non-Discrimination Testing in Forms & Samples Section)
Constructive Receipt Doctrine
According to the IRS, if the requirements for Premium Conversion Plan are not met, such as the adoption of a Written Plan Document, the participating employees will be taxed on their Premium
Conversion Benefits under the Constructive Receipt Doctrine. Rather than treating this plan as a non-taxable benefit, it would be treated as a taxable benefit.
Irrevocable Election Requirement
Before enrolling, employees must be made aware that the Premium Conversion Plan has what is known as an Irrevocable Election Requirement. Once an employee elects to participate in the Premium
Conversion Plan, they cannot make any changes to the plan until the next open enrollment. However, if the employer chooses, the plan document can be set up with a list of IRS approved,
qualifying events that will allow for a change in election prior to the next open enrollment. (see Qualifying Events)
Qualifying Events
The Irrevocable Election Requirement limits when participants can change the elections to their Premium Conversion Plan. However, an employer can choose to include a set of Qualifying Events in the
plan document which would allow the Premium Conversion Plan to be changed or terminated in accordance with a participant's life changing event during the plan year. According to the IRS, an employer
is not required to make any exceptions to the Irrevocable Election Requirement. If an employer chooses to make exceptions, the IRS does have some specific guidelines for which events can be
considered qualifying events for a change in election outside of open enrollment.
If your employer decides to include qualifying events in the Written Plan Document, the events chosen must fall within the guidelines laid out by the IRS. Keep in mind, employers
may choose as many or as few of the IRS's exceptions as they feel necessary. Your Combined Services Representative can walk you through the options available to you. Below is a
list of the more common IRS approved qualifying events for election changes to a Premium Conversion Plan:
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Change in Marital Status |
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Change in Number of Dependents |
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Significant Change in Insurance Contribution Mid-Year |
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Loss of Insurance Coverage for Spouse/Dependent |
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Change in Employment Status for employee/spouse/dependent |
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Legal Decree Ordering Change in Coverage |
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Plan Administration
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Enrollment Forms
There are two methods of enrollment that can be used for the Premium Conversion Plan:
Automatic Enrollment:
Employees only submit an election form if they choose to opt out of the Premium Conversion Plan.
Positive Enrollment:
Employees who elect the plan fill out a form which authorizes payroll to make the pretax deductions.
Key Items to be Included in the Written Plan Document:
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Participant eligibility requirements |
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Waiting periods if elected - Open enrollment time |
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List of which events will merit a change in enrollment between open enrollments - if qualifying events are adopted |
Payroll Changes
For those employees who elect the Premium Conversion Plan either by automatic or positive enrollment, payroll will deduct their premiums (which has been outlined in the Written Plan Document and Summary Plan Description) before Federal and State income taxes and FICA withholdings. Once the Premium Conversion Plan is in place, it should remain the same all year because of the Irrevocable Election Requirement. However, if your employer puts a qualifying event clause in the plan document, there could be a change to the Premium Conversion Plan before the next open enrollment period.
Termination of Employment
If a participant's employment is terminated, the enrollment in the Premium Conversion Plan ends with employment. There are no additional forms to be completed to end enrollment.
Annual Non-Discrimination Testing
Companies that adopt a Premium Conversion Plan must complete non-discrimination testing each plan year. The IRS requires this Annual Non-Discrimination Testing to ensure that "key employees" in a company
do not receive unfair tax advantages from the plan. (See Non-Discrimination Tests in Forms & Samples Section)
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Contact Us
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The laws regarding Flexible Benefits can be complex. This online guide is only meant to be used as an overview to administering
those benefits. If you have specific questions that are not answered here, you should refer to your Company's Plan
Document or Summary Plan Description for more details. You should also feel free to contact a Representative at
Combined Services LLC if you need assistance.
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