Statement on Cafeteria Plans for the Hearing before the Subcommittee on Economic Growth, Tax and Capital Access

The U.S. Chamber of Commerce submitted a statement for the record to the House Small Business Committees’ Subcommittee on Economic Growth, Tax and Capital Access for the hearing titled, Cafeteria Plans: A Menu of Non-Options for Small Business Owners that was held on March 16, 2017.

Statement on

Cafeteria Plans: A Menu of Non-Options for Small Business Owners

Hearing before

The Subcommittee on Economic Growth, Tax, and Capital Access

of the

House Small Business Committee

on behalf of the

U.S. CHAMBER OF COMMERCE

March 16, 2017

The U.S. Chamber of Commerce would like to thank Chairman Brat, Ranking Member Evans, and members of the Subcommittee for the opportunity to provide a statement for the record. The topic of today’s hearing—cafeteria plans and the lack of options for small business owners—is of significant concern to our membership.

The Chamber very much supports the statement given during the March 16, 2017 hearing by Paula Calimafde, who is an active and long-standing member of the Employee Benefits Committee of the U.S. Chamber of Commerce. Specifically, we concur with Ms. Calimafde's recommendations to permit owner-employees to participate in cafeteria plans.

A significant portion of Chamber membership is made up of small businesses. While many of these small businesses offer substantial benefits to their employees, they should be encouraged and—at the very least—not discouraged from offering as wide an array of benefits as possible. However, when it comes to cafeteria plans, small business owners are at a significant disadvantage and, therefore, it discourages them from implementing cafeteria plans for their employees. Consequently, we urge Congress to allow small business owners to participate in cafeteria plans and, thereby, encourage the expanded implementation of cafeteria plans by small businesses.

Introduction

Cafeteria plans are governed by IRS Section 125 which allows employees to make contributions to designated accounts before taxes are calculated; thereby, providing workers an opportunity to receive certain benefits on a pretax basis. Benefits provided under cafeteria plans include health insurance, disability insurance, life insurance, 401(k) plan contributions, dependent care assistance, adoption assistance, and contributions to Health Savings Accounts (HSAs).

Discussion

Small Business Owners Should be allowed to Participate in Cafeteria Plans. Sole proprietors, partners, members of limited liability companies and most stockholders in a Sub-S corporation are not allowed to participate in a cafeteria plan. These types of entities represent a significant portion of American business—approximately 78% of all non-farm businesses are organized in a manner under which the owners of the business are not permitted to participate in a business sponsored cafeteria plan. This rule clearly discriminates against business owners/employees based solely upon the type of entity in which they are operating their business.

Since they are not able to participate, owners are discouraged from implementing cafeteria plans. Because these entities choose not to sponsor a cafeteria plan, their employees do not have the opportunity to participate in a cafeteria plan. Therefore, changing this law would increase opportunities for not just business owners to benefit from cafeteria plans, but also their employees.

Consequently, we urge Congress to pass legislation to modify IRS section 125 to make it clear that self-employed individuals, including sole proprietors, partners, S-corporation shareholders and members in a limited liability company that has elected to be taxed as a partnership, are deemed to be employees for the purpose of eligibility to participate in a cafeteria plan. Moreover, such language should also make it clear that self-employed individuals are deemed to be employees for the purposes of eligibility to participate not just in the cafeteria plan itself, but in the specific benefits that may be offered through the cafeteria plan.

Congress Should Encourage Expansion of the Types of Benefits That Can be Provided in a Cafeteria Plan. Long-term care insurance is specifically excluded from the list of qualified benefits under a cafeteria plan. However, there are increasing concerns about long-term care. The number of Americans in need of long-term care services, either at home or in institutions, is projected to increase from 12 million today to 27 million by 2050, and 70% of people who reach age 65 will require long-term care services at one point in their lives. Moreover, 45% of Americans ages 40 and older have provided long-term care for a family member or close friend at some point. Paying for long-term care can be prohibitively expensive. Long-term care costs after age 65 is estimated to be about $138,000. These rising costs are particularly troubling because families will pay about half of the total share of long-term care costs through out-of-pocket spending, which can be a drain on personal savings, retirement accounts, and other assets. About the other half (44.8%) of these long-term costs will be borne by government programs, particularly Medicaid and Medicare.

Long-term care insurance policies are more affordable and accessible when the applicant is below retirement age. The cost of a basic policy with average benefits is $1,725 a year for a 45-year-old; however, the same policy for a 65-year-old is double that amount, at $3,451 a year. To help pay for these premiums while they are affordable, the Chamber recommends that employers be allowed to offer long-term care insurance through a cafeteria plan.

While longevity insurance is not specifically excluded, it would be helpful if Congress could encourage the inclusion of this benefit in cafeteria plans. As we are aware, life expectancy is increasing. While living longer is a great thing, it can create challenges for retirement security. The most obvious longevity challenge is outliving one’s retirement savings. In 2015, life expectancy at birth was 78.8 years for the total U.S. population. This represents an increase of approximately 30 years since 1900 and 8 years since 1971. Moreover in 2015, life expectancy at age 65 for the total population was 19.4 years. Thus, workers must plan for longer lives that could include a longer period in retirement. To avoid this situation, a retiree could purchase longevity insurance, a form of deferred annuity with a payment start date that begins at a later age in retirement. Thus, individuals can protect themselves against the financial risk of outliving their retirement savings. An effective way to encourage the purchase of longevity insurance is to allow employees to purchase it through a cafeteria plan.

Conclusion

We reiterate the importance of encouraging small business owners to implement benefit plans. Changing IRS section 125 to allow owners to participate and expanding benefits offerings under the plan would encourage more small businesses to implement cafeteria plans. We look forward to working with this Subcommittee and Congress to enact legislation that will encourage further participation by small business owners and their employees in cafeteria plans. Thank you for your consideration of this statement.