Untitled Texas Attorney General Opinion ( 1984 )

The Attorney General of Texas
April 11, 1984
JIM MATTOX
Attorney General
Supreme Court Building Monorable Carl A. Parker Opinion No. JM-143
P. 0. Box 12546 Chairman
Austin. TX. 76711.2546
Senate Education Committee Re: Whether a community college
51214752501
Telex 9101874-1367
P. 0. Box 12068, Capitol Station may establish a "cafeteria plan"
Telecopier 51214750266 Austin, Texas 78711 of employee benefits in accor-
dance with Internal Revenue Code
section 125.
714 Jackson, Suite 700
Dallas. TX. 76202.4506
2141742-6944
Dear Senator Parker:
You have asked whether a community college has authority under
4624 Alberta Ave., Suite 160 article 3.50-3 of the Insurance Code, section 130.084 of the Education
El Paso, TX. 79905.2793
Code, or other law to set up a "cafeteria plan" of employee benefits
9151533.3464
in accordance with section 125 of the Internal Revenue Code
r [hereinafter I.R.C.].
lW1 Texas, Suite 700
Houston, TX. 77002-3111 Section 125 of the I.R.C. provides in part:
7131223-5666
(a) In general. -- . . . [N]o amount shall be
606 Broadway, Suite 312
included in the gross income of a participant in a
Lubbock, TX. 79401.3479 cafeteria plan solely because, under the plan, the
6061747-5236 participant may choose among the benefits of the
plan.
4309 N. Tenth. Suite S
McAllen, TX. 78501-1665 . . .
512,682-4547
(d) Cafeteria plan defined. -- For purposes of
this section --
200 Main Plaza, Suite 400
San Antonio, TX. 76205.2797
5121225-4191 (1) In general. -- The term 'cafeteria plan'
means a written plan under which --
An Equal Opportunity/
(N all participants are employees, and
Affirmative Action Employer
(B) the participants may choose among two or
more benefits.
The benefits which may be chosen may be
nontaxable benefits, or cash, property, or other
taxable benefits.
p. 615
Honorable Carl A. Parker - Page 2 (JM-143)
A cafeteria plan is an employee benefit plan under which an
employee may choose between taxable compensation and one or more tax
exempt fringe benefits, such as accident and health insurance,
financed by the employer's contribution. [1984] 2 Stand. Fed. Tax
w (CCH) li 1197T.01; S. Rep. No. 1263, 95th Cong., 2d Sess. 6,
reprinted in 1978 U.S. Code Cong. (L Ad. News 6761, 6771. 6838.
Although the cafeteria plan effectively permits the employee to
convert taxable cash compensation into nontaxable fringe benefits,
section 125 of the code maintains the tax exempt status of those
fringe benefits. Nontaxable employee benefits paid for by the
employer include group term life insurance up to $50,000, I.R.C. 579,
disability benefits, I.R.C. 5105(d), accident and health plans, I.R.C.
5106, group legal services plans, I.R.C. 5120, and dependent care
assistance payments, I.R.C. $129. See S. Rep. No. 1263, supra, at
6838. Taxable benefits include group%rm life insurance in excess of
$50,000 as well as cash, property, or other tangible compensation.
-Id. at 6837.
The essential feature of a cafeteria plan is that the employee
may choose between taxable and nontaxable benefits provided at the
employer's expense. A cafeteria plan is more flexible than a plan
under which the employer pays only for specific benefits and does not
allow his employees to choose among alternative benefits financed by
him. See, e.g., Attorney General Opinion H-859 (1976).
With this background in mind, we will consider whether a
community college may establish a cafeteria plan for its employees.
Community colleges are subject to Insurance Code article 3.50-3. See
Ins. Code art. 3.50-3, 153(a)(4), (8); 4(b)(4)(D), (E), (F); Attorney
General Opinion NW-215 (1980). A stated purpose of article 3.50-3 is
to provide uniformity in the basic group life,
accident, and health insurance coverages for all
employees of Texas colleges and universities.
Art. 3.50-3, 02(s). Moreover, community colleges must comply with
basic coverage standards developed by the administrative council. &
§4@)(4)(A), CD). Once the college provides a basic coverage plan
that complies with article 3.50-3, it may be able to add enough
optional elements to establish a cafeteria plan.
Section 11 of arti.cle3.50-3 provides that no eligible employee
may be denied any of the coverages provided by this act unless he
waives them in writing. Each full tine employee is entitled to
automatic protection under a basic plan of insurance unless he waives
basic coverage or chooses optional coverage. Id. 511. The premium
for basic coverage must be fully paid for by the employer. Id. Thus,
article 3.50-3 itself requires community colleges to provide one
nontaxable benefit -- basic accident, life and health coverage funded
p. 616
nonorable Carl A. Parker - Page 3 (JM-143)
at the employer's expense. See 19 T.A.C. 525.33 (Basic Coverage
Standards).
Sectfon 4(b)(4)(F) provides in part:
All contracts for basic coverages negotiated from
the effective date of this Act shall be in
compl~isncewith basic coverage standards . . . .
Each governing board may provide such additional
or optional insurance programs and coverages as it
deems desirable for its employees. (Emphasis
added).
A cormnunitycollege may be able to construct a cafeteria plan by using
its power to provide additional or optional coverages. For example,
it could provide, at its expense, optional life insurance coverage in
an amount in excess of $50,000, a taxable fringe benefit. See I.R.C.
$%79, 125. It may also be able to provide at its expense other
nontaxable fringe benefits in the form of health and accident
insurance. See I.R.C. 0106. Article 3.50-2, section 5(a) and article
3.51 of theInsurance Code authorize a community college to provide
another nontaxable employee fringe benefit, disability insurance, paid
for in whole by employer contributions. See I.R.C. 5105(d).
The Administrative Council established by Insurance Code article
3.50-3 has issued the following regulation: "Provisions shall be made
for the payroll deduction for premiums of the optional coverage." 19
T.A.C. 825.34(c). In our opinion, this regulation does not require
that the employee pay premiums for optional coverage. It merely
requires that the college arrange for payroll deduction of premiums
for which the employee is responsible. See also Ins. Code art. 3.51
(express authority for public employer to pay entire premium for
employees' health, accident. and disability insurance).
We believe articles 3.50-3 and 3.51 of the Insurance Code
authorize community colleges to establish a "cafeteria plan"
consisting of a choice of fringe benefjts in the area of life,
accident and health. and dissbility insurance. Though the range of
benefits is narrow, section 125 of the Internal Revenue Code only
requires that the participants be able to choose among "two or more
benefits." You have not j~nquiredwhether a junjor college may provide
such nontaxable benefits ss group legal services or dependent care
assistance payments. We therefore do not address this question,
except to say that a community college may not grant these employee
benefits unless it has express or implied statutory authority to do
SO.
Any cafeteria plan established by a community college must comply
with all appl~icable requirements of section 125 of the Internal
p. 617
Donorable Carl A. Parker - Page 4 (JM-143)
Revenue Code to realize the benefits of that provision. You have not
presented a specific plan for our consideration and we express no view
ss to how a community college might implement a plan, or the validity
of =v such plan under federal law. If a community college
establishes a cafeteria plan and it wishes to know whether
participants in the plan qualify for the favorable tax treatment
accorded by section 125 of the code, it should seek a Revenue Ruling
from the Internal Revenue Service.
SUMMARY
A community college may set up a "cafeteria
plan" for its employees consisting of a selection
of taxable and nontaxable fringe benefits in the
area of life, accident and health, and disability
insurance.
Very/truly yod
JIM MATTOX
Attorney General of Texas
TOM GREEN
First Assistant Attorney General
DAVID R. RICEARDS
Executive Assistant Attorney General
Prepared by Susan L. Garrison
Assistant Attorney General
APPROVED:
OPINION COMMITTEE
Rick Gilpin, Chairman
Jon Bible
David Brooks
Susan Garrison
Jim Moellinger
Nancy Sutton
Bruce Youngblood
p. 618