2 Short Plan Years in a Row?

[Guest aearle]

I hear that the IRS frowns on 2 short plan years in a row: how might they react? Slap on the hand? Stiff penalties?

Scenario:

The employer started a cafeteria plan (with FSAs) for the first time while already into their medical plan year, so they set up a short plan year so the cafeteria plan would line up with the medical renewal going forward. Then a few months into the cafeteria plan year, the medical carrier discontinued the medical plan that the employer was offering so the employer was forced to seek a new carrier, resulting in a new medical plan renewal date. The cafeteria plan short plan year is 4/1/02-1/31/03. The medical plan USED TO renew on 2/1, but the new medical plan began on 9/1/02. The employer is letting the cafeteria plan run its course through 1/31/03, but wants to do another short plan year from 2/1/03-8/31/03 -- then run a full plan year from 9/1/03-8/31/04.

Question: Is the fact that the medical carrier completely discontinued the medical plan and the employer was forced to make a change outside of their control enough reason to allow 2 short plan years in a row?? If not, any thoughts on how to handle this scenario? Thanks so much!

[Guest Dick Boever]

And just how are the IRS or DOL going to know you had two short years in a row? It sounds like this employer probably has less than 100 participants in the FSA Medical plan, if this is the case there is no Form 5500 requirement. You have sound reasons for the changes, it doesn't appear you are trying to manipulate the situation, I wouldn't be concerned.

If it makes you feel any better, this opinion is coming from a former DOL compliance officer.

[Lisa Hand]

How they would know about it is if the plan was audited, which does occur.

To make sure the plan would stand up to review, clearly document the circumstances, educate the employees and have enrollment forms which detail the short plan year and have the plan documents in line and executed prior to the start of each Plan Year, then the employer can demonstrate they were not trying to circumvent the regulations, but rather reacting to this set of circumstances.

[GBurns]

Lisa,

What would the IRS be auditing for since fishing expeditions would not be allowed?

[Lisa Hand]

The guidelines for 125 audits are in the IRS training and 125 plans are often looked at the same time as other things such as 401(k), payroll ect. The IRS is already there looking at other payroll deductions.

We have seen this a number of times. They are not conducting stand alone audits of 125 Plans, but rather part of a larger total look at the employer. Regardless of how the audit orginated, the impact would still be significant if the plan was found out of compliance or worse yet invalid.