As part of the health care reform adopted in Massachusetts, employers with 11 or more employees in Massachusetts are required to adopt and maintain an Internal Revenue Code section 125 cafeteria plan (“Cafeteria Plan”) for most employees. Now four other states—Connecticut, Missouri, Rhode Island and Washington—have followed Massachusetts’ lead and adopted Cafeteria Plan mandates of their own. Other states are also considering similar action, including California, Kansas and New Jersey.
States are interested in having employers sponsor Cafeteria Plans because these plans allow employees to make pre-tax contributions to pay for the cost of health care coverage. Proposed Cafeteria Plan regulations recently issued by the IRS confirm that employees may purchase individual health insurance coverage on a pre-tax basis through a Cafeteria Plan. This clarification has made the Cafeteria Plan mandates even more interesting to state regulators because it means employees of employers that do not sponsor group health plans may pay for individual health coverage on a pre-tax basis. As states try to find a way to ensure that residents have health care coverage, requiring employers to provide a Cafeteria Plan is an easy way for states to try and make health care coverage more affordable.
The actual requirements of each state’s mandate differ, and employers may or may not be subject to the requirements depending on size; whether health coverage is insured or self-insured; and other factors. We recommend that employers with operations in any of these four states take action to understand and, if necessary, comply with these new Cafeteria Plan mandates.
Employers may also want to be aware that the Employee Retirement Income Security Act (“ERISA”) preempts states laws that relate to employee benefit plans. While it is not yet clear whether these Cafeteria Plan mandates are preempted by ERISA, employers may want to keep this possibility in mind