Request By:
Mr. Ken Campbell
Area Director for UNISERV
Route #9 Box 60A
Bowling Green, Kentucky 42101
Opinion
Opinion By: Steven L. Beshear
You have asked the Office of the Attorney General to render a formal opinion regarding the so-called "cafeteria plan" of insurance benefits for public common school teachers. Your questions are as follows:
"1. Is it legal for a local board of education, with teacher approval, to use monies allocated for teachers' salaries, including miniumum foundation program monies, to provide a cafeteria plan of insurance benefits to their teachers?
"2. Would such a cafeteria plan have to be submitted to the bidding process by the local board of education?"
The cafeteria plan benefit program is a relatively new concept in fringe benefits. It undoubtedly got its name from the fact that such a plan gives a teacher an opportunity to pick and choose an insurance program from an approved list which meets the teacher's needs or, in the alternative, to permit the teacher to receive the equivalent amount of money spent on the insurance premiums as taxable income. The legal authority for the cafeteria plan came into being as a part of the Congressional 1978 Revenue Act, P.L. 95-600. The effective date of the pertinent cafeteria plan provisions of the 1978 Revenue Act were for taxable years beginning after December 31, 1978. Cafeteria plans were a part of Congress' actions regarding deferred compensation plans and this is a part of the Internal Revenue Code. In the 1954 Internal Revenue Code as amended, the tax ramifications of cafeteria plans are taken up at Section 125. See 26 U.S.C. § 125. A "cafeteria plan" is defined at subsection (d)(1) as follows:
"(d) Cafeteria plan defined. -For purposes of this section -
(1) In general. -The term 'cafeteria plan' means a written plan under which-
(A) all participants are employees, and
(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."
Subsection (a) provides, with certain referenced exceptions, that "no amount shall be included in the gross income of a participant in a cafeteria plan solely because, under the plan, the participant may choose among the benefits of the plan."
The legislative history behind the 1978 tax treatment of cafeteria plans refers to such a plan as a "flexible benefit plan" which permits an employee to choose from a package of employer provided fringe benefits, some of which may be taxable and some of which may be nontaxable. 1978 U.S. Code Congressional and Administrative News, Vol. 6, at page 6837. While there are certain participation eligibility rules listed in Section 125, which we will not detail, we do believe it important to note that no employee can be required to complete more than three years of employment with an employer as a condition of participating in a cafeteria plan and that the service requirement must be the same for each employee.
Capsulizing the above, a cafeteria plan permits an employee of a school district to set aside a certain amount of the salary and apply this money to an individual fringe benefit program as defined by the law. The attractiveness of the cafeteria plan for fringe benefits comes from the fact the amount of a teacher's salary spent toward insurance premiums, within the guidelines applicable to a Section 125 cafeteria plan, is not subject to federal, state or F.I.C.A. taxes.
With the above information relative to a "cafeteria plan" in mind, we now address your first question. It is our opinion that it is legal for a school district in Kentucky to establish a cafeteria plan of fringe benefits. To a certain extent, we have looked at the providing of fringe benefits to teachers in this fashion in OAG 75-646, copy attached. In that opinion we referenced KRS 161.158 as authorizing each board of education to aid its employees in obtaining the advantages of insurance plans and other like kind of fringe benefits. We concluded in OAG 75-646 that:
"Therefore, in that a board of education can pay for fringe benefit cost as a supplement to the wages of an employee in consideration of the employee's services, the board can legally pay the fixed sum of money authorized for that purpose in out-right wages in lieu of the fringe benefits"
We find nothing in our school laws to preclude a Kentucky school district from establishing a cafeteria plan for its teachers, pursuant to the conditions and criteria set out in Section 125 of the Internal Revenue Code. We do point out that the money available to the teacher to be applied, if desired, to a cafeteria plan is still a part of that teacher's salary even though nontaxable. The teacher can elect to take a part of the money provided for by the school district in this regard as cash and, of course, this amount would be taxable. For the school districts, it must be remembered that the amount of money established for a cafeteria plan for its teachers must still be included in all computations required for single salary schedule determinations, including the procedure required for determining the amount of money to be received by a school district for teachers' salaries from the Minimum Foundation Fund. See KRS 157.320(12), 157.350(3) and 157.390(2)(a).
As for your second question, we believe the response is dependent upon whether or not a school district is under the local Model Procurement Code. The procurement of insurance by a school district was discussed in OAG 82-170, copy attached. See KRS 45A.345(23) and KRS 45A.380(10) and cf. KRS 424.260. Under the latter provision, insurance coverage need not be bid. Under the Model Procurement Code if a contract is for group life insurance, group health and accident insurance, group professional liability insurance, workers compensation insurance, and unemployment insurance, the contract may be non-competitively negotiated. See KRS 45A.380, supra.
We trust the above information will be of assistance to your Association and Kentucky's school districts relative to the legality of a cafeteria fringe benefit plan.