Benefits advisors: Let the boss in the cafeteria plan

Benefits advisors are fighting on Capitol Hill to get owners of small businesses permission to use the cafeteria plans they sponsor.

Letting cash-strapped owners use the plans themselves would be a cheap, simple way to encourage owners to offer the plans, advisors said today in Washington, at a hearing on cafeteria plans.

Matthew Tassey, who testified on behalf of the Falls Church, Virginia-based National Association of Insurance and Financial Advisors, said the current treatment of small business owners hurts workers.

"The inability of small business owners to participate in a plan acts as a disincentive to design, implement, administer and pay for the plan," Tassey said at the hearing, which was streamed live on the web. "Allowing owners to participate would likely encourage more of them to make plans available to their workers."

The workers could use the cafeteria plans to pay for health coverage or dependent care with pretax dollars, Tassey said.

The subcommittee posted a copy of the hearing video the committee website. The video and written versions of the witnesses' remarks are available here.

Businesses offer employees cafeteria plans using Internal Revenue Code Section 125. Congress included the provision creating IRC Section 125 in the Revenue Act of 1978.

Jennifer Brown, the research manager at the Washington-based National Institute on Retirement Security, said officials at the U.S. Treasury Department worried that the plans would help highly paid owners and top executives more than ordinary workers. To ease those concerns, Congress added a provision limiting owners' ability to use an employer's plan in the Tax Reform Act of 1984.

The tale of the angry lawyer

The Internal Revenue Service added a discrimination test, based on employees' use of the cafeteria plan benefits, in regulations proposed in 2007.

In 2010, the Patient Protection and Affordable Care Act, one of the two laws in the Affordable Care Act package, created a version of the cafeteria plan free from nondiscrimination testing for employers with fewer than 100 employees.

But, even now, Brown said, the cafeteria plan program rules keep self-employed people, partners in partnerships, and 2 percent shareholders in S corporations from participating in any cafeteria plans they sponsor.

Some businesses organized as Subchapter S corporations, partnerships or sole proprietorships are large, but many are very small, and shutting them out of using cafeteria plans is unfair, Tassey testified.

Elise Feldman, president of Springfield, New Jersey-based Feldman Benefit Services Inc., testified that the problem affects a lawyer with an office in the building where she has her own office.

The lawyer "mentioned that his wife did not believe him when he told her he could not be in one of these plans," Feldman said.

Tassey and other witnesses said they would also like to see Congress let workers use cafeteria plans to pay for long-term care insurance premiums.

Encouraging workers to use cafeteria plans to pay for LTCI coverage could ease pressure on the Medicaid nursing home benefits program and families' resources, Tassey said.

Enhancing retirement benefits for owners and key executives

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