Can S-Corp owners (i.e., 2% owners), sole proprietors, or partners in a partnership participate in a Premium Conversion Plan (PCP)?

Our PCP Plan Document states that only "Eligible Employees" can participate in the plan, and an Employee is defined as "any person providing services to the Employer or Participating Employer as a common law employee." Because S-Corp owners (i.e., 2% owners), sole proprietors, and partners in a partnership are not common law employees, none of these individuals can participate in the plan.

A 2% owner for the purposes of this exception is someone who directly or indirectly owns (at any time during the year) more than 2% of the stock of an S-Corporation, or stock with more than 2% of the voting power.

Generally, spouses, children, grandchildren, and parents of S-Corp owners would also be prohibited from participating based on the ownership attribution rules of the Internal Revenue Code.

The information above should be used for general reference purposes only, as the IRS regulations related to S-Corp owners and the ownership attribution rules are complex. Employers are strongly encouraged to consult knowledgeable benefits counsel for individualized guidance to ensure full compliance with the law.

 Do employees need to sign a document each year reflecting that they choose to have pre-tax deductions?

Employers are required under the Internal Revenue Code to have a written PCP Plan Document, and should also have some kind of enrollment form or some specific documentation that shows that employees have elected to participate in the plan and have agreed to contribute a portion of their salaries on a pre-tax basis to pay for benefits. Our Sample Section 125 Plan Enrollment Form, located in the Support Tools section of Wrap360, can be used for this purpose. An election is generally binding for the current plan year. The election may not be modified or revoked unless such modification or revocation is on account of and corresponds with certain legally specified events.

Please note that, as an alternative, some employers may have an automatic enrollment process that enables participants to be automatically enrolled into the PCP plan without submitting an enrollment form. In such a case, employers must still inform employees of the automatic enrollment process and of their right to decline coverage and have no salary reduction. To accomplish this, employees should be provided with a notice that includes: the salary reduction amounts for all available levels of coverage; procedures for exercising the right to decline coverage; information on the time by which an election must be made; and the period for which an election is effective. The notice must also be given to each current employee before the beginning of each subsequent plan year, except that the notice will also include a description of the employee's existing coverage, if any. (Note: This type of information is typically communicated to employees in open enrollment materials. Therefore, it would be prudent to check with employers to determine if their employees have previously been informed of the automatic enrollment process.)

 Do Premium Conversion Plans (PCPs) need to be included in the Wrap documents?

A Premium Conversion Plan is not covered by ERISA. Therefore, the PCP does not have to be included in the Wrap Documents.

However, some brokers choose to include the Premium Conversion Plan in the Wrap to keep all benefits together in one Welfare Benefit Plan. While it would be prudent to inform employees about the terms and conditions of the benefit in some manner, determining which non-ERISA benefits to include in the Wrap is ultimately at the employer's discretion.

You can opt out of including the PCP plan in your Wrap Documents by clicking that option under 'PCP Plan Display Settings,' which displays in the PCP benefit component screen.

 Does your system perform nondiscrimination testing for Section 125 cafeteria plans?

Wrap360 does not perform nondiscrimination testing. The basic cafeteria plan nondiscrimination tests under Internal Revenue Code Section 125 apply to premium conversion benefits offered by an employer (i.e., testing to ensure that pre-tax employee contributions under a cafeteria plan do not discriminate in favor of highly compensated employees). However, these Section 125 nondiscrimination tests are derived from 2007 proposed regulations which have never been finalized, and there is little agency guidance regarding the implementation of these regulations.

As with all nondiscrimination rules regarding the administration of employee benefits, it is best to treat all employees equally. If the premium conversion benefits offered by an employer appear to favor highly compensated employees, the employer should seek the advice of a knowledgeable ERISA attorney, benefits specialist, or the IRS.

Please note, however, that Wrap360 offers a helpful chart on Classing and Non-Discrimination Rules for Group Health Plans in our Support Tools section. Please review the chart and consult with benefits counsel for individualized guidance.

 What is a Premium Conversion Plan?

A Premium Conversion Plan (PCP) is a type of cafeteria plan that offers employees a choice between cash (in the form of salary) and pre-tax contributions for certain benefits (e.g., medical or dental). Under Section 125 of the Internal Revenue Code, which governs PCPs, an employer offering a PCP must have a written plan document in place. The PCP plan document must contain certain information, including the available benefits, participation rules, election procedures, manner of contributions, and plan year. Our PCP Plan Document meets these Section 125 requirements. Our system also generates a PCP SPD that we strongly recommend distributing to plan participants, as it is considered a best practice to ensure that employees understand their rights and responsibilities under the plan. 

 What should I enter as the Premium Conversion Plan (PCP) Effective Date?

The Effective Date could be the date on which the employer first offered a premium conversion and/or HSA contribution option, or the date on which certain amendments to the PCP became effective. The PCP Effective Date does not have to match the Effective Date for the Wrap Plan.

 What should I enter as the Premium Conversion Plan (PCP) Plan Year?

The PCP Plan Year, in general, can be any twelve-month period and does not have to match any insurance contract year or the Wrap Plan Year. The PCP Plan Year is also the effective period for plan participants' premium conversion contribution elections (e.g., January 1 through December 31), during which participants cannot change their elections unless certain specified events occur.

Please Note: Wrap360 and its employees and officers are not permitted to offer legal advice. These FAQs are provided for general information purposes only. As the answers to specific questions may vary based on federal or state law, as well as on company documents for the issues in question, it would be prudent to consult knowledgeable benefits counsel for individualized guidance.