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ACA impact on the Section 125 Cafeteria Plan

Celebrating 40 Years -- The Section 125 Cafeteria PlanWhen the Section 125 Cafeteria Plan was first put into law, the goal of the Treasury was to promote equal access to health insurance for all employees. That is what the non-discrimination rules pushed on Congress (in exchange for tax breaks) were meant to accomplish. About 30 years later, Congress intended to make access to health insurance even more equal by passing the biggest change ever to hit the Section 125 Cafeteria Plan: The Affordable Care Act (ACA), popularly known as Obamacare.

ACA Coverage Mandate for Larger Employers

The first area of change ACA rules put on benefits in the Section 125 Cafeteria Plan is the mandates. Prior to the ACA, employers of any size could choose whether or not the company would offer health benefits to employees. Most larger employers would, but some did not. It was their choice.

Today, employers with 50 or more employees (known as Applicable Large Employers, or ALEs) are required to provide health insurance to all full-time employees or face potentially huge fines.

Loss of Options for Smaller Employers

Alongside an employer mandate on ALEs, the ACA has eliminated coverage options that used to make it easier on a small employer (Qualified Small Employer, or QSE) to offer benefits through the Section 125 Cafeteria Plan.  For example, in the pre-ACA world, any employer could offer a health plan having high deductibles, co-pays, and co-insurance, as well as a lower annual or lifetime limit, and with no coverage at all for specific care such as maternity, preventive, or mental health benefits.

Today, the ACA dictates that any company wishing to provide a health plan in the Section 125 Cafeteria Plan must offer insurance that the ACA calls Minimum Essential Coverage (MEC). Whether an employer has 1 or 10,000 employees, if the company offers health insurance, it must include coverage for women’s health services, maternity care, preventive services, mental health care, and a slate of other Essential Health Benefits — at no cost to the covered employee and their dependents. This has priced many small employers out of providing any health coverage at all to employees.

Many people think the *Affordable* Care Act has made benefits offered in the Section 12 Cafeteria Plan *less* affordable.

Another choice employers (and employees) once had was the stand-alone Health Flexible Spending Account (FSA). The “stand-alone” property meant that the FSA could be used by the employee to pay for medical expenses with pre-tax dollars with or without health insurance. If an employee determined that their family would be best served by the Health FSA alone, they could put money there and not pay insurance premiums on top of it. Originally, the Section 125 Cafeteria Plan was flexible enough to do this.

Under the ACA, however, the Health FSA cannot be offered as a stand-alone. The employee must first have qualifying MEC health insurance.

Plan Document Requirements

The ACA has put greater emphasis on the plan document requirements for employers offering a group health plan. Its reason for that is because the Section 125 Cafeteria Plan document SPD and ERISA Wrap SPD communicate to employees, in plain language, the coverage and limits of the plan as well as rights and obligations.

The Section 125 Cafeteria Plan Document

First, the written plan document (with FSA, DCAP, and HSA modules, as applicable) must be accepted and signed by the employer. Then, the Section 125 Summary Plan Description (SPD) has to be given to every eligible employee participant within 90 days of their becoming eligible to participate in the plan.

Without the written plan in place, the employer has no authority to provide benefits to employees on a tax-advantaged basis. During an audit, an employer without it may be found owing back taxes (and, perhaps, penalties) on the improperly pre-taxed premiums.


The second, and now necessary under the ACA, is the ERISA Wrap SPD. This is an ACA- and DOL-required document – in addition to the Section 125 SPD – that must be distributed to every participant in an employee benefit plan. ACA law brings new penalties of up to $110 per employee, per day, for employers found to be in non-compliance with this rule.

While audits specifically focused on Plan Document compliance are rare, non-compliance can be discovered during the course of a more general audit, such as a routine tax audit. With the introduction of new ACA rules and penalties, it is now considered a best practice for all employers offering a group health plan to have all plan documents in place.


Section 125 has come a long way from its beginnings with few formal guidelines, allowing employers to develop all sorts of tax-free medical reimbursement plans (like the FSA).  Today’s ACA laws apply strict rules (with stiff penalties) to shape the benefits offered in the Section 125 Cafeteria Plan and its documentation. All in an effort toward the original Treasury goal of providing equal access to health care for one and all.

Up next: Pre-Tax Section 125 Plans — A look to the future

More in the Section 125 Plan’s 40th birthday series:

Learn more about the ACA impact on Section 125 Plans: