Health & Welfare | Plan Design
The terms "welfare plans" and "employee welfare benefit plans" generally refer to employee benefit plans other than retirement plans. Most welfare plans can be provided by an employer to its employees on a tax-favored basis so that the value of the benefit under the plan is not taxable to the participant. However, some welfare plans will result in additional gross income to a highly compensated employee or a key employee unless the plan meets the nondiscrimination requirements imposed by the Internal Revenue Code. We have described the most popular welfare plans below.
Group-Term Life Insurance Plan
An employer can provide up to $50,000 of group-term life insurance coverage for its employees on a tax-favored basis under Code section 79. Although it is possible to provide coverage greater than $50,000 under a group-term life insurance plan, the participant will be taxed on the value of coverage in excess of the $50,000 limit. A group-term life insurance plan cannot discriminate in favor of key employees.
Health Benefits
An employer can provide health benefits for medical expenses (e.g., major medical, prescription drug, dental and vision) on a tax-favored basis to both active employees and retired employees. Such a plan can be provided on an insured basis, a self-insured basis, or a combination of the two. There are no nondiscrimination requirements if the plan is fully insured. That is, the employer can provide different or better insurance coverage to various groups of employees or retirees so long as the benefits are all provided through health insurance policies. However, if the plan is not fully insured, there can be no discrimination in favor of highly compensated employees (e.g., a medical expense reimbursement plan (MERP) that provides reimbursement for medical expenses that are not covered by the employer's insured medical plan).
Disability Insurance
Long-term disability benefits can be provided to employees with differing income tax results depending on how the plan is structured. If the premiums for the coverage are not included in an employee's gross income, the benefits received by the employee are taxable. If, however, the premiums for the coverage are included in an employee's gross income, the benefits received by the employee are income tax free.
Cafeteria Plan
A cafeteria plan (sometimes called a Code section 125 plan or a flexible benefits plan) is a plan that allows an employee to reduce his or her compensation in order to pay the employee's share of the cost of the benefits provided by the employer. For example, if an employer offers health insurance to its employees and their dependents, but the employer is willing to pay for employee-only coverage, the employees could pay for coverage for their dependents on a pre-tax basis, instead of an after-tax basis, through a cafeteria plan. A cafeteria plan must not discriminate in favor of either highly compensated employees or key employees.
Educational Assistance
Employers can provide educational assistance to employees on a tax-favored basis in two ways. First, an employer can provide employees with benefits if the education is job related. Second, an employer can reimburse its employees for education that is not necessarily job related so long as the plan does not discriminate in favor of highly compensated employees.
Dependent Care Assistance Program
An employer can reimburse employees for their dependent care expenses (e.g., day care for children) on a tax-favored basis so long as certain requirements are satisfied, including that there be no discrimination in favor of highly compensated employees. This benefit is often part of a cafeteria plan where employees can reduce their compensation to pay their day care expenses on a pre-tax basis.
Severance Benefits
Although severance benefits are not excluded from the employee's gross income, an issue often arises as to whether such benefits are welfare benefits or a form of deferred compensation. The difference can be significant under both the Code and ERISA.
VEBA
A voluntary employees' beneficiary association (VEBA) is not really a separate welfare benefit. Instead, it is a method for delivering welfare benefits to employees. A VEBA is an entity (e.g., a trust or a corporation) to which one or more employers make contributions in order to provide benefits such as health benefits. The VEBA is exempt from taxation. In order to be a VEBA, an application for a tax exemption must be filed with the IRS and the benefits must not be discriminatory.