There are many components to successful plan management. We will focus on three areas that often present difficulties and how they can be overcome.
- Plan funding vs deductions
- Timeline for employer funding
When will you fund the plan vs. when will you take deductions from employees?
This funding decision commonly arises in regards to Commuter Benefit Plans. There are a variety of factors which may come into consideration.
An employer may choose to fund the monthly commuter benefit on a specific day each month in anticipation of when employees are likely to buy their transit passes. This approach, however, may result in the employer funding employees’ monthly elections prior to collecting the funds from employees through payroll. This method follows a predictable schedule that employees can come to rely on.
Alternatively, employers can use a payroll model in which funds are available to employees as they are collected through payroll. This method may be preferred to ensure funds are collected from employees and limits any risk of lost funds if an employee leaves mid-month.
We recently wrote a blog addressing how to select the best plan funding option. It addresses this question and provides insights for commuter benefits and other pre-tax plans.
Beyond the question of plan funding versus deductions, another common obstacle to successful plan management is non-discrimination testing.
When should you do non-discrimination testing?
The question of when to do non-discrimination testing is common. While a non-discrimination test is only required at the end of the plan year, in certain circumstances, it is highly advised that a sniff test is completed earlier in the plan year.
From a legal perspective, cafeteria plan tests should be performed as of the last day of the plan year. Ideally, they will take into account all individuals who were employed throughout the year.
However, from a practical perspective, employers may have a “sniff test” completed in the beginning or middle of the year. A sniff test often “sniffs out” if there are any parts of your plan(s) that are non-compliant and provides time for corrections to the plan(s). If you have highly compensated employees who are utilizing benefit accounts, a sniff test can aid in making plan adjustments to keep your plan compliant.
We address the purpose of non-discrimination testing and what a sniff test can do to help you identify compliance issues in our blog Were you “sniffed” this year?
Finally, in addition to non-discrimination testing, you may be looking at when to manage the timing of funding.
Should employer funding be provided at the beginning of the plan year?
This question is most often related to Health Savings Accounts and Health Reimbursement Accounts.
Employers need to determine their risk tolerance. Providing funds to employees’ accounts or making funds available at the beginning of the plan year can aid employees in paying for expenses incurred early in the plan year. This up-front funding approach can also reduce the fear of a “high deductible health plan”.
However, employers may want to reduce their own financial risk by funding accounts throughout the year. This allows employers to prorate available funds based on the months that an individual is employed. If an employee leaves mid-year, the employer has not “over-funded” the benefit.
Some employers will take a “middle-of-the-road” approach by providing employer funds semi-annually or quarterly. This approach can provide the best of both worlds.
Successful Plan Management
Successful plan management involves a combination of factors. While the three components touched on in this blog might play a role in your pre-tax plans for the upcoming year, you can round out your plan management with our other blogs on the subject: