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It's also "fair" to have no plans, take the income, pay the taxes and do whatever you want outside the qualified plan "world". Sometimes the tax-deferrals aren't worth "poking the bear" of the DOL and IRS rules.

I would prefer it was not that way, but I don't think we can say It's unfair, because you have to think of what would happen without such a rule. That's where it would be unfair (IMHO). In the old days (before the rigorous controlled group rules), we could take a company and split it into two companies. Put the rank in file employees in one company, and the HCES in the other and just set up a plan for the HCEs. The controlled group rules prevent that. If you own both companies, they are ALL your employees and they must ALL be taken into account for the non-discrimination rules. If you are willing to leave out the HCEs from the plan, then you have every right to set up a plan just for one of the companies and you will never have a problem with that. It is the provision of tax favored benefits to the HCEs that requires you look at ALL your employees (defined under the controlled group/entities under common control rules).

Thanks John...that really clarified it.I appreciate your patience. Damn, you should write a book.

not necessarily. you (and apparently whomever you discussed this) are forgetting (or not realizing an important piece) the avg ben % test includes all contributions (deferrals + match + profit sharing) whereas your rate group test only includes profit sharing. or for a real simple example, imagine a young owner child deferring 10,000. it will blow the avg ben pct test out of the water. but if that child receives little or no profit sharing, the rate group for the child would be above 70% I would add a lot of people forget about this possibility happening..

You cannot have just 1 plan, you have at the least 2 plans. Plan #1 is the health insurance plan and Plan #2 is the POP which is a section 125 Cafeteria Plan which provides the employee share of the premium for Plan #1. The POP is not the health insurance plan it is only a premium paying mechanism. If you also have premiums being deducted for other items such as Vision and Dental, those are additional plans.

I respectfully disagree. The IRS doesn't require a filing. Betsy, it's best to think of the arrangment as 2 separate "animals": (1) a Sec. 125 plan and (2) the underlying welfare benefit plan. The Sec. 125 plan is a fringe benefit plan within the meaning of I.R.C. Sec. 6039D(d)(1), and its filing requirements are governed by the IRS. IRS Notice 2002-24 suspended the Form 5500 filing requirements for all types of fringe benefit plans. The medical insurance benefit, however, is a wefare benefit plan that's subject to the Department of Labor's rules. Unless the plan meets one of the filing exclusions, it's required to file a Form 5500. In summary: Sec. 125 plan -- no Form 5500 Medical benefit plan -- maybe, it depends

A cafeteria plan does not need to file Form 5500. The cafeteria plan is merely a funding mechanism. The health benefit plan (including a health FSA) or other ERISA plan funded through the cafeteria plan is subject to the reporting requirements of ERISA. If you use the cafeteria plan to wrap you ERISA plans it will look like the cafeterial plan is is filing the Form 5500.