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Section 125 Eligibility


TomFridrich
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 I have a question on eligibility to offer a 125 plan. In this situation the employer pays 100% of the health & dental insurance premiums for the FT employees, and offers coverage for spouses & dependents but it’s at the employee’s expense. Part time employees have to pay 25% - 50% of their health and dental insurance premiums depending on how many hours they work. The employer also offers a pre-tax Flexible Spending account for paying eligible medical, dental, eye glasses, and day care expenses.  Insurance premiums are not eligible for this. The employer is a non-profit religious organization.

 

I’ve had one “benefits person” state the employer can’t have a Section 125 plan because the employer pays 100% of the (FT) employee’s health and dental premiums.  But I’ve had another “benefits person” state the employer IS eligible to have a Section 125 plan because some employees pay for spouse/dependent insurance premiums and most employees participate in the Flex plan.  

 

Does anyone have any insight they could share on this topic?

 Thank you in advance.

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Does everyone involved understand that the "Flexible Spending Plan" is a 125 plan?  Your post suggests that someone thinks otherwise.

Section 125 has coverage and discrimination testing. From a distance, the favoring of part-time employees with a cash or benefits choice for health coverage while full time employees do not have the choice (and why not if you have the plan anyway?) seems unlikely to run afoul, but you have to count noses and classify employees to determine.

A "benefits person" will immediately be interested in any kind of discrimination, but not not every instance is a violation - something that an inexperienced benefits person would overlook.  I suspect many details of the situation and comments have been lost in the train of discussions.  I do not believe anything.

 

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Obviously,  you're really referring to the two different parts of this Section 125 plan, the premium payment account and the medical expense reimbursement account. They are both part of the 125 plan.

As to who wins: the guy who said the employer can have a 125 plan; they can.

Larry.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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According to the IRS, Participants in a cafeteria plan must be permitted to choose among at least one taxable benefit (such as cash) and one qualified benefit.  FTEs with no dependents don't have that choice so the medical plan may not qualify for pre-tax treatment under Section 125.

Medical reimbursement plans, such as FSAs can qualify for Section 125 tax treatment as long as they are offered on an optional basis and meet required non-discrimination guidelines.

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Rosanne, you are making a fundamental error in your analysis.  While the issue is trivial, employees are actually choosing to have their health insurance paid by pre-tax dollars TO THE EXTENT THERE IS ANY PREMIUM.  That qualifies as a 125 plan. My original answer stands.

As to dependents, here is from the EBIA manual:

2. Spouses and Dependents Cannot Participate in the Employee's Cafeteria Plan, but Employees May Be Able to Elect Coverage for Them on a Tax-Free Basis

Spouses and dependents may not participate in a cafeteria plan—they do not have independent rights to elect or purchase benefits offered under the plan (e.g., they cannot sign the election form).However, if the cafeteria plan so provides, employees may elect certain benefits for spouses and dependents, including coverage under an accident or health plan—the regulations approve of this common plan design. Accident and health plans include traditional group health insurance, HMO coverage, self-funded medical reimbursement plans such as health FSAs, and self-funded plans providing major medical benefits.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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