REPORT TITLE:
Public Employees; Cafeteria Plan


DESCRIPTION:
Requires DHRD to develop and implement, beginning on 7/1/2000, a
cafeteria plan with flex credits or flex dollars that qualifies
under section 125 of the Internal Revenue Code as a pre-tax plan
for all public employees in Hawaii.  Allows existing county plans
offering greater benefits to continue.  Appropriates $          
for FY 1999-2000 and FY 2000-2001 to DHRD.  (HB1335 HD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        1335
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 1
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
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                   A  BILL  FOR  AN  ACT

RELATING TO PUBLIC EMPLOYEES FULL-FLEX CAFETERIA PLAN.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  The legislature finds that the implementation in
 
 2 1990 of the premium conversion plan for public employees, which
 
 3 reduces employees' gross pay by the amount of contributions
 
 4 employees made toward a health benefits plan, has enabled public
 
 5 employees to reduce their federal and state income taxes and
 
 6 Social Security and Medicare taxes, thereby increasing their
 
 7 take-home pay.  In addition, the use of the premium conversion
 
 8 plan has enabled the State and counties, as employers, to enjoy a
 
 9 significant reduction in payments for Social Security and
 
10 Medicare taxes.  The legislature further finds that additional
 
11 tax savings and increases in take-home pay could be realized to
 
12 both the state and county governments as well as state and county
 
13 employees if the State had a comprehensive cafeteria plan in
 
14 effect.
 
15      A cafeteria plan is a pre-tax general flex plan that not
 
16 only allows choices among many benefits but also features flex
 
17 credits or flex dollars.  Flex credits or dollars are allocated
 
18 to plan participants according to a predetermined formula.  The
 
19 participants can then spend the flex credits or dollars on any of
 

 
Page 2                                                     1335
                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1 the plan benefits they choose.  Prices for the plan options are
 
 2 set by the employer.  Most plans allow participants to cash out
 
 3 any excess credits or dollars that are not used to purchase
 
 4 benefits, although participants can be required to spend all flex
 
 5 credits or dollars on benefit options only.  Flex credits or
 
 6 dollars are a hybrid form of compensation, somewhere between
 
 7 direct pay and benefits.  Plan participants determine how the
 
 8 credits or dollars will be allocated between the two, rather than
 
 9 the employer doing so as in more traditional arrangements.
 
10      Implementation of a cafeteria plan with flex credits or flex
 
11 dollars would enable state and county public employers to
 
12 maximize and make more efficient choices of available benefits,
 
13 increase state and county employee take-home pay, reduce federal
 
14 and state income taxes for public employees, and minimize FICA
 
15 and Medicare taxes for both state and county public employees and
 
16 their state and county employers--thereby reducing the cost of
 
17 government.
 
18      The purpose of this Act is to take concrete steps to
 
19 implement section 78-61, Hawaii Revised Statutes, which already
 
20 requires that state and county public employees be afforded the
 
21 opportunity to participate in a wage and salary reduction benefit
 
22 program which qualifies as a cafeteria plan within the meaning of
 

 
 
 
Page 3                                                     1335
                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1 section 125 of the Internal Revenue Code of 1986, as amended.
 
 2 Based on section 78-61, several of the counties have developed
 
 3 and implemented their own versions of cafeteria plans.  However,
 
 4 the State has yet to develop its own cafeteria plan for state
 
 5 employees.  Accordingly, the purpose of this Act is to require
 
 6 the department of human resources development to develop and
 
 7 implement a cafeteria plan with flex credits or flex dollars that
 
 8 qualifies under section 125 of the Internal Revenue Code as a
 
 9 pre-tax plan for all state and county public employees in Hawaii.
 
10 It is not the intent of the legislature to preempt any existing
 
11 county cafeteria plan if the county plan is more comprehensive
 
12 than any plan developed by the department of human resources
 
13 development.  Rather, it is the intent of the legislature to
 
14 develop a cafeteria plan that is as uniform as possible for state
 
15 and county employees and to adopt a plan that is comprehensive
 
16 and offers the greatest benefits for both public employers and
 
17 employees across the State.
 
18      SECTION 2.  (a)  The department of human resources
 
19 development shall develop a cafeteria plan with flex credits or
 
20 flex dollars that qualifies under section 125 of the Internal
 
21 Revenue Code as a pre-tax plan for all state and county public
 
22 employees in Hawaii and shall implement the cafeteria plan
 

 
 
 
Page 4                                                     1335
                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1 beginning on July 1, 2000; provided that if any existing county
 
 2 cafeteria plan is more comprehensive and offers greater benefits
 
 3 for both public employers and employees than the plan developed
 
 4 by the department of human resources development, the county plan
 
 5 shall take precedence and shall be adopted for that county.
 
 6      (b)  In developing the cafeteria plan, the department of
 
 7 human resources development shall:
 
 8      (1)  Develop an equitable methodology of allocating flex
 
 9           credits or flex dollars to employees that minimizes
 
10           adverse employee reaction and employer costs;
 
11      (2)  Determine whether to use a personalized flex credit
 
12           amount system based on an employee's age, salary,
 
13           tenure, and other factors as may be necessary or
 
14           appropriate or to use a flat dollar amount system for
 
15           all employees;
 
16      (3)  Determine whether to administer the plan internally or
 
17           to outsource for administrative services in the private
 
18           sector; and
 
19      (4)  Develop an effective program to communicate with and
 
20           educate public employees about the flex credit concept
 
21           in order to gain employee acceptance and to enable the
 
22           system to operate efficiently.
 

 
 
 
Page 5                                                     1335
                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1      SECTION 3.  There is appropriated out of the general
 
 2 revenues of the State of Hawaii the sum of $            or so
 
 3 much thereof as may be necessary for fiscal year 1999-2000 and
 
 4 the same sum or so much thereof as may be necessary for fiscal
 
 5 year 2000-2001 to carry out the purposes of this Act, including
 
 6 the hiring of necessary staff.  
 
 7      The sums shall be expended by the department of human
 
 8 resources development for the purposes of this Act.
 
 9      SECTION 4.  This Act shall take effect upon its approval,
 
10 except that section 3 shall take effect on July 1, 1999.