Jump to content

401(k) in a cafeteria plan


Moe Howard
 Share

Recommended Posts

I've heard for many years that a 401(k) is one of the benefit plans allowed in a cefeteria plan.

I have always wondered why any employer would want to list his company's 401(k) in his company's cafeteria plan document, because a 401(k) is pretax on its own (thus inclusion in a cafeteria plan is not necessary).

Does anyone know why the IRS would include a 401(k) as one of the plans allowabe in a cafeteria plan ?

Does anyone know, under what circumstances an employer would benefit from having its 401(k) in a cafeteria plan ????

Link to comment
Share on other sites

The 401(k) or any other "choice" of qualified benefits in a Cafeteria Plan should not be included in the Cafeteria Plan's PD, and I have never seen 1 that had it in there.

Each "choice" or "component" should have its own PD, where applicable (such as an FSA or a MERP), or it has an insurance policy that serves as the PD for that "choice".

The usual reason why a 401(k) is associated with a Cafeteria Plan is so as to use up any "surplus" that is left over in a Benefits Credit plan design, or to keep the tax free nature of any "opt out" payment.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

Link to comment
Share on other sites

GBurns: Thanks for your attempt to help me .... but part of your answer is nonsense.

According to IRC 125 ... "the cafeteria plan document must specifically describe each of the benefits available under the cafeteria plan". It's the law.

Also, what do you mean by "opt-out payment" ? I have never heard of that phrase before. (It's a payment from who to who?).

Link to comment
Share on other sites

IRS reg 1.125-2T Q/A-1 states that a cafeteria plan may offer participation in a CODA as an option under the plan. Every 125 plan that allows for contributions to a 401(k) plan provides for such option under the terms of the plan. The 401(k) contribution is usually a default option meaning that any amounts not used for other 125 benefits will be remitted to the 401(k) plan. This arrangement is used when the er dedicates a specific contribution to the 125 plan, e.g., 3% of each ee's pay. If the 125 plan document does not contain an option to contribute to a 401(k) plan then the participant could not remit the contributions to the 401(k) plan.

mjb

Link to comment
Share on other sites

If I recall the 401(k) option is an exception to the rule prohibiting deferred comp. in a 125 plan.

I think it's more of a convenience issue, although I'm not sure how it's a real convenience. You could structure a cafeteria with a cash option, but which does not have a 401(K) option as a feature of the cafeteria, but then have a separate "stand-alone" 401(k). If you have the 401(k) as an option under the cafeteria plan, you can have one election that gets the cash directly to the 401(k) plan, rather than one election to take the cash option in cash and then a separate 401(k) election that covers that cash, along with any additional salary which the employee wishes to defer into the 401(k).

Link to comment
Share on other sites

1.125-2T, Q&A 1 (first paragraph):

Q-1. What benefits may be offered to participants under a cafeteria plan?

A-1. (a) Generally, for cafeteria plan years beginning on or after January 1, 1985, a cafeteria plan is a written plan under which participants may choose among two or more benefits consisting of cash and certain other permissible benefits. In general, benefits that are excludable from the gross income of an employee under a specific section of the Internal Revenue Code may be offered under a cafeteria plan. However, scholarships and fellowships under section 117, vanpooling under section 124, educational assistance under section 127 and certain fringe benefits under section 132 may not be offered under a cafeteria plan. In addition, meals and lodging under section 119, because they are furnished for the convenience of the employer and thus are not elective in lieu of other benefits or compensation provided by the employer, may not be offered under a cafeteria plan. Thus, a cafeteria plan may offer coverage under a group-term life insurance plan of up to $50,000 (section 79), coverage under an accident or health plan (sections 105 and 106), coverage under a qualified group legal services plan (section 120), coverage under a dependent care assistance program (section 129), and participation in a qualified cash or deferred arrangement that is part of a profit-sharing or stock bonus plan (section 401(k)). In addition, a cafeteria plan may offer group-term life insurance coverage which is includable in gross income only because it is in excess of $50,000 or is on the lives of the participant's spouse and/or children. In addition, a cafeteria plan may offer participants the opportunity to purchase, with after-tax employee contributions, coverage under a group-term life insurance plan (section 79), coverage under an accident or health plan (section 105(e)), coverage under a qualified group legal services plan (section 120), or coverage under a dependent care assistance program (section 129). Finally, a cafeteria plan may offer paid vacation days if the plan precludes any participant from using, or receiving cash for, in a subsequent plan year, any of such paid vacation days remaining unused as of the end of the plan year. For purposes of the preceding sentence, elective vacation days provided under a cafeteria plan are not considered to be used until all nonelective paid vacation days have been used.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

Link to comment
Share on other sites

Moe,

An "opt out payment" is that amount that an employee receives for not taking the qualified benefits (in those plans that have the feature).

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

Link to comment
Share on other sites

What earlier post?

An "opt out" payment to an employee is taxable if the employee takes it in cash or in many cases even has the option of taking it in cash (constructive receipt). That is why the plans usual have as a sole option the deferral to a 401(k).

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

Link to comment
Share on other sites

GBurns: I mean in your earlier reply (02/24/03) in this thread.

In that reply you said that an opt-out payment is tax free.

It's hard to believe that you are really a professional benefits consultant. It appears that you think that we are interested in your guesses to our questions. I suggest that you stop posting so many replys in these message boards. Your credibility has reached an all time low.

Link to comment
Share on other sites

Apparently you do not read very well, the post was...

"The usual reason why a 401(k) is associated with a Cafeteria Plan is so as to use up any "surplus" that is left over in a Benefits Credit plan design, or to keep the tax free nature of any "opt out" payment."

It clearly states that the purpose of a 401(k) (in a Cafeteria Plan) is to "use up" "or to keep the tax free nature of any "opt out" payment."

In other words to make it simpler for you to understand...If there is no 401 (k) to "use up" "or to keep the tax free nature" THEN the payment be taxable income.

I will leave it up to the Moderator and the other posters to make any comments that they think are deserved especially regarding your personal attack.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

Link to comment
Share on other sites

"I've heard for many years that a 401(k) is one of the benefit plans allowed in a cefeteria plan.

I have always wondered why any employer would want to list his company's 401(k) in his company's cafeteria plan document, because a 401(k) is pretax on its own (thus inclusion in a cafeteria plan is not necessary).

Does anyone know why the IRS would include a 401(k) as one of the plans allowabe in a cafeteria plan ?

Does anyone know, under what circumstances an employer would benefit from having its 401(k) in a cafeteria plan ????"

Moe: this was your original post. A question that easily could have been researched in a legal guide on Section 125 Cafeteria Plans.

If you choose instead to query these type of issues here, making comments about the compentance of those who take the time to answer your query is neither gracious or permitted.

Let's keep this professional all around.

There have been too many "flame wars" in the past. First, everyone needs to extend the courtesy of completely reading both questions and answers before firing off responses. Second, in the future, if you or anyone else wishes to express comments on the competance, intelligence or other such personal remarks, do so directly to the individual in a private email, not on this forum.

Link to comment
Share on other sites

Guest
This topic is now closed to further replies.
 Share

×
×
  • Create New...