125 Plan Short Plan Year

[Guest DonbradC]

Can an employer establish a new cafeteria plan during its current fiscal year (as well as during the benefit plans plan year) (the 125 plan would be a short plan year) thereby allowing particpants to run benefit plan premiums through pre-tax? In other words the 125 plan's effective date would not coincide with the beginning of the employer's most recent fiscal year or any of the benefit plans plan years.

[Guest Paul]

Yes. The initial plan year can be less than 12 months. In no event can a plan year every exceed 12 months and, the IRS frowns on two short plan years (i.e. less than 12 months) in a row.

[Guest aearle]

Regarding the comment 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!