Massachusetts Issues Guidance Addressing ACA’s Conflict With State Cafeteria Plan Requirement

The Massachusetts Health Connector plans to pursue a path of “non-enforcement” with respect to the state’s free rider surcharge, which can be assessed against employers with 11 or more full-time-equivalent employees that do not offer a Code Sec.125 plan to qualified employees.

Health Connector Administrative Bulletin 03-13 (Bulletin) states that because recent federal guidance on the Patient Protection and Affordable Care Act (ACA) appears to conflict with an existing state regulation, the state administration plans to pursue legislation to repeal the Sec. 125 requirement, Employer Health Insurance Responsibility Disclosure (Employer HIRD) requirement, Free Rider Surcharge, and the recently created Sec. 125 notification requirement.

Purchase of non-group coverage prohibited. Recent federal guidance issued by the Department of Labor and the Internal Revenue Service via Technical Release 2013-03 and IRS Notice 2013-54 states that under the ACA, starting in 2014, employers can no longer offer Sec. 125 plans to employees to purchase non-group health insurance without an employer contribution. The Bulletin notes that this language appears incompatible with the provisions of a Massachusetts regulation (956 CMR 4.07(3)), which requires employers to offer Sec. 125 plans under which an employee can purchase health insurance without any employer contribution.

Effect on employers. Employers that currently permit non-benefits eligible employees to use Sec. 125 plans to purchase individual plans on a pre-tax basis may leave those plans in place until the expiration of the employee’s plans in 2014, according to the Bulletin. The federal guidance states that individuals may use Sec. 125 plans to continue paying for plans with a plan year that commenced in 2013.

For plan years starting in 2014, under the federal guidance, employers may no longer offer Sec.125 plans that permit their non-benefits eligible employees to purchase their own non-group health insurance policies using pre-tax income. Sec. 125 plans can continue to be offered to employees for other purposes, such as the purchase of group health insurance or other benefits.

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