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Potential cafeteria plan problem


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Guest Balanced

I'm trying to determine if this scenario is a problem for a section 125 cafeteria plan.

Entity A (the larger employer and a state governmental entity) has a written section 125 cafeteria plan which includes a self-insured medical plan as one of its benefit options.

Entity B (the much smaller employer and a 501©(3) entity) is unrelated to A and has its own employees. The entities are not part of a controlled group, and would not be considered the same taxpayer under IRC section 125(g)(4). Entity B is not controlled by Entity A and has its own independent board of directors, which are not employees of Entity A.

A service contract exists between the entities. As long as Entity B continues to provide services to Entity A, Entity B's employees will be included as participants within Entity A's self-insured medical plan. Entity B has its own written section 125 cafeteria plan and its employees receive pre-tax benefits as a result. Entity A is effectively acting as Entity B's health insurance company and assumes risk in excess of the premium payments charged to Entity B.

Under these facts, are both entities' section 125 cafeteria plans at risk of failure from the IRS since Entity A is allowing coverage for participants other than its own employees? Or is the problem only an insurance company issue unrelated to the section 125 cafeteria plan? Thanks for any input.

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Entity A's cafeteria plan does not appear to be doing anything for entity B. Entity A's health plan might have some issues with providing benefits to Entity B's employees, but that would be a concern of the applicable state law. Your cafeteria plan question is probably something like, "Can Entity B's cafeteria plan provide for salary reduction by an Entity B employee for payment of the employee's cost of coverage by the Entity A health plan?"

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