TO: Participants in the Rainbow Plan
FROM: Brian C. Meekhof, Benefits Administrator
Changes to the Rainbow Plan
Cash Compensation in Lieu of Medical Benefits
To help reduce costs some schools offer a cash incentive to employees who are eligible to opt out of the school’s insurance plan. Those employers who elect cash in lieu of benefits must pay taxes on the additional compensation. However, all other employees covered by the school’s insurance plan could also face increased taxes.
The problem is that giving the choice of a cash incentive is considered by the IRS to create an inadvertent cafeteria plan. The result is that those who do not take the cash option are deemed to have received the cash as taxable compensation and have used it to purchase health insurance. In other words, all employees covered by the school’s insurance plan end up being taxed as if all had elected the cash payment option.
The Rainbow Plan has been amended and can now be used as a solution to this problem. Employees electing cash in lieu of benefits must complete an enrollment form (attached) and return it to the CAS office. By doing this, only those employees choosing cash in lieu of benefits are required to pay taxes on the cash benefit. There is no additional charge or fee for this service.
Clarification of Eligibility and Effective Dates
Employees are eligible for coverage on the first day of the month coincident with or following the date of his or her employment if they meet the eligibility requirements. The effective date of participation will be the first day of the month coincident with or following the date the enrollment form is received by the school office. For example, if an employee is hired on October 15 and signs their enrollment form on October 20, their coverage effective date would be November 1. However, if the enrollment form is dated November 5, their coverage would not take effect until December 1.
The Change in Benefit Election form must be signed and submitted to the school office prior to or coincident with the first day of the month in which the change is effective.