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Connector Clarifies Section 125 Cafeteria Plan Requirements And Other Updates From The Connector

Emergency regulations recently promulgated by the Commonwealth Health Insurance Connector Authority (the “Connector”) clarify Massachusetts employers’ obligations to establish and maintain a Section 125 Cafeteria Plan under Mass. Gen. Laws ch. 151F of the Health Care Reform law (An Act Providing Access to Affordable, Quality, Accountable Health Care) (the “Act”).

Effective July 1, 2007, Massachusetts employers with 11 or more employees must: (1) adopt and maintain a Cafeteria Plan that satisfies Internal Revenue Code Section 125 and the regulations of the Connector (a “Section 125 Plan” or “Plan”); and (2) file a copy of such Plan with the Connector by July 1, 2007, or face the Employer Surcharge for State-Funded Health Costs for employees or dependents who receive state-funded health services.  The new regulations describe, among other things, how to calculate the number of employees for purposes of determining employer obligations, requirements for the written Plan document, and employee eligibility requirements for participation.

New Standards for Section 125 Plans

Under the new regulations, an employer will be considered to have 11 or more employees, and thus be subject to the Section 125 Plan requirements as of July 1, 2007 (a “151F employer”), if the sum of total payroll hours for all employees during the period from April 1, 2006 through March 31, 2007, divided by 2,000, is greater than or equal to 11.  In calculating total payroll hours, the employer must include the payroll hours of all full-time, part-time, temporary, and seasonal employees employed at a Massachusetts location, regardless of whether the employee is a Massachusetts resident.  For each employee with more than 2,000 payroll hours, however, the employer need only include 2,000 payroll hours for purposes of the calculation.  Payroll hours include all hours for which an employer paid wages, including regular and overtime hours, vacation, sick and holiday time, paid leaves of absence, short term disability and long term disability.

Notably, there are exemptions:  (1) non-profit entities, exclusively staffed by volunteers, and (2) employers that pay the full monthly cost of medical coverage for all of their employees.  These entities are not considered 151F employers, and are thus exempt from the Section 125 obligations.

The new regulations mandate that a Section 125 Plan must, at a minimum, be a premium-only plan, offering access to one or more medical care coverage options.  Flexible spending accounts are not required to be offered as a coverage option.  Further, non-elective employer contributions to the Section 125 Plan are not required.

In addition to satisfying the Internal Revenue Code Section 125 requirements, a 151F employer’s written Plan documents shall include at least the following seven elements:

  • a specific description of each of the benefits available under the Plan, including the period during which the benefits are provided;
  • the Plan’s eligibility participation rules;
  • procedures governing participant elections under the Plan, including the period during which elections are irrevocable, and the periods with respect to which the elections are effective;
  • the manner in which employer contributions may be made to the Plan, such as by salary reduction agreement between the participant and employer or by non-elective employer contributions to the Plan;
  • the maximum amount of elective employer contributions available to any participant;
  • the Plan year on which the Section 125 Plan operates; and
  • the effective date of the Plan.

With regard to the regulations governing eligibility for participation, a 151F employer may include an eligibility waiting period in its Section 125 Plan that corresponds with (and is no longer than) any waiting period for enrollment in medical care coverage options available under the Section 125 Plan, as long as it is 2 months or less. Further, a 151F employer may specifically exclude from eligibility to participate in its Section 125 Plan the following classes of employees: (1) employees who are less than 18 years of age; (2) temporary employees; (3) part-time employees working, on average, fewer than 64 hours per month; (4) employees who are considered wait staff, service employees or service bartenders (as defined in Mass. Gen. Laws ch. 149, §152A) and who earn, on average, less than $400 in monthly payroll wages; (5) student employees who are employed as interns or as cooperative education student workers; and (6) seasonal employees who are international workers with either a J-1 student visa or an H2B visa and who are also enrolled in travel health insurance.

The regulations mandate that: “each 151F Employer shall take such actions as it deems necessary or appropriate to adopt its Section 125 Cafeteria Plan(s) in accordance with its own internal governance procedures and with applicable law, regardless of whether the Section 125 Cafeteria Plan is intended to be a newly established plan, a plan amendment to an existing plan or an amended and restated plan.”  A 151F Employer must also “designate a responsible individual authorized to verify and certify the accuracy of the documentation submitted [to the Connector]”.  The regulations set forth that a Section 125 Plan is not “an ERISA welfare benefit plan and nothing in these regulations is intended to require any Employer to establish an ERISA welfare benefit plan.”

In light of these new regulations, 151F employers should consider: (1) drafting and/or updating their Section 125 written plan documents for filing with the Connector by July 1, 2007; (2) updating employee handbook or personnel policy provisions relating to Section 125 plans; and (3) designating an employee to verify and certify the Section 125 written plan documentation.

Other Recent Developments

As we approach the one year anniversary of the Act, the following is a brief update on some additional recent developments.

Health Insurance Responsibility Disclosure (HIRD)

Chapter 450 of the Acts of 2006, An Act Further Regulating Health Care Access, (“Chapter 450”) the second technical corrections amendment to the Act, postpones the Health Insurance Responsibility Disclosure (HIRD) requirement effective date from January 1, 2007 to July 1, 2007.  Effective July 1, 2007, Massachusetts employers with eleven (11) or more employees will be required to submit an Employer HIRD Form, which the Division of Health Care Policy and Finance (“DHCPF”) is in the process of developing.  The HIRD form will likely ask for limited information such as: the Employer’s Federal Employer Identification Number, Division of Unemployment Assistance (DUA) Account Number, number of employees, whether the employer offers subsidized health insurance to its employees, and whether the employer offers a Section 125 Plan that meets the regulations of the Connector.

Effective July 1, 2007, Massachusetts employers with eleven (11) or more employees will also be required to collect and retain, for three years, a signed Employee HIRD form for each employee who declines the employer-sponsored health plan and/or declines to participate in the employer’s Section 125 Plan.

Once the DHCPF Employer and Employee HIRD forms are finalized, they will be available on the Connector’s website.  The DHCPF has repealed its regulation providing guidance on the implementation HIRDs and will issue a new proposed regulation before July 1, 2007.

Insurance Products Endorsed by the Connector

The Connector recently endorsed affordable insurance products for individual consumers and small businesses to purchase beginning May 1, 2007.  The Connector will offer three levels of insurance plans that vary by price and cost sharing, but all offer comprehensive coverage, including inpatient and outpatient medical care, emergency care, mental health and substance abuse services, rehabilitation services, hospice, and vision care.  The plans offer a choice of deductibles ranging from zero to $2,000 with prescription drug coverage.  The Connector has promised a “state-of-the-art” website by this Spring to assist consumers in navigating through the benefits and pricing levels when choosing a plan.  July 1, 2007, remains the effective date for the Act’s universal participation requirement that all Massachusetts adults carry health insurance.


We are available to answer any questions that you may have with regard to the new regulations regarding Section 125 Plans, effective dates for provisions under the Act, or any other aspect of the Act.