katieinny

I can't do any follow up with the IRS since we haven't been retained by the employer. The issue was brought up to us by an employee who knows the letter hasn't come in yet, and realized that his account balance might be in jeopardy. The employee probably doesn't have access to the board resolutions, only the plan document and SPD.

Locust, I agree with your "as a practical matter" response. I'm trying to determine what the worst case scenario would be. Based on mjb's response, the worst case is that the assets revert to the employer and the employees get nothing. I was hoping that if the IRS deemed the plan to be disqualified, the employer would be obligated to make taxable distributions to the employees. The employer is continuing to operate the plan under the assumption that a favorable determination letter will be issued, although I bet you're right, the IRS is probably not even looking at it.

Yes, there is a vesting schedule, and some of the employees are about to become 100% vested. They've been getting statements telling them about "their" plan assets. One of the issues is that the company also as a 401(k)/PS plan and ER contributions have been going into that plan. However, when they started the cash balance plan, the contributions to the PS plan were reduced. Naturally, the employees would have a valid complaint if the cash balance plan was deemed to be not qualified and the assets reverted to the employer.

An employer has been operating a cash balance plan for the past 4 or 5 years. The employer is waiting for an IRS Determination letter relating to the plan's initial qualification. It is my understanding that the Service goes to great lengths to issue a favorable letter, having the employer make whatever changes to the plan that might be necessary in order for the IRS to give their blessing. But what if, for whatever reason, the plan does NOT get IRS approval. Or perhaps the employer terminates the plan before IRS approval is granted? In either case, I'm thinking the employees would be entitled to whatever assets had accumulated over these last few years. Obviously, if the IRS determines that the plan has not achieved qualified status, the participants would receive taxable distributions with no option to roll. Could there be a circumstance where the assets would revert to the employer?

Just to make sure I am understanding the gist of things: The employer reduces the compensation of the HCEs that need the family health care coveage by the amount of the extra premium that's required to get the family coverage (the employer is already paying for everybody's single coveage). Now, the employer is making the premium payments for everybody, whether they've elected single or family coverage. He doesn't have to worry about any discrimination issues even though only the HCEs are getting family coverage. If an NHCE comes along that needs family coverage, he can tell the NHCE that he will NOT pay for the additional coverage for him even though he's doing it for the HCEs. He scraps the idea of putting in a cafeteria plan until some point in the future when the employee demographics change and enough NHCEs need family coverage so that the plan will pass discrimination tests. Do I have it right?

Leevena: No, I don't have percentage information. The employer is waiting to put the plan in place until we can answer the discrimination question. Gburns: Yes, the family coverage is available to all employees and the dollar amount the employer has made available pays for single coverage and is provided to all employees. Only the employees who want the extra coverage (family) would be participating in the plan. Even though it is available to everyone, it seems that the NHCEs don't need the extra coverage, either because they are getting it elsewhere, or because they don't have families. The stuff I've been reading is confusing. Some of it says that as long as it's available to everyone, it isn't discriminatory even though only the HCEs are participating. Other articles imply that it's strictly numbers driven.

An employer pays X toward the premiums for everybody's health insurance. Some people want family coverage that costs more than the amount the employer pays. Therefore, they want to put in a plan that would allow these employees to pay the additional amount on a pre-tax basis. Here's the rub -- it just so happens that the employees who need the family coverage are HCEs. The NHCEs are fine with just the amount the employer is paying so they don't need to use the plan. The NHCEs would be able to jump in anytime they have a change in family status and need family coverage, but until then, is the plan discriminatory just because HCEs are the only ones using it?

Thanks to one and all for straigtening me out. It seems that I have been mistakenly interchanging the names Flexible Spending Accounts, Cafeteria Plan and Section 125 plan. I guess I need to research some definitions before I confuse more people. The bottom line is that the employer can do what he has in mind as long as he finds somebody to amend his current plan to permit HSA contributions.

I'll take all the help I can get! I can't afford the luxury of hurt feelings when somebody tells me I'm not getting something. I've been reading that employees can make HSA contributions through an employer's cafeteria plan, which is what this employer wants to permit. So far, so good. He will also continue to allow employees to defer salary to pay health insurance premiums. I'm thinking that he can set up a 125 plan that will allow employee contributions for both purposes. It sounds like there could be a problem with that?

I hope this is just an issue of semantics more than substance. The employer currently has what is often called a "premium only plan." In other words, employees are allowed to defer part of their salary into the plan on a pre-tax basis, and the money is used to pay their health insurance premiums. Since there are no other options for the employee to chose from, I guess calling it a cafeteria plan or flexible spending account doesn't quite fit the bill. Beginning in 2006, the employer wants to add an HSA component, so it's no longer a POP. Employees would be allowed to defer into the health insurance premium component of the plan to pay the premiums for the HDHP, AND they would also be allowed to defer into the HSA component of the plan to pay those health care expenses up to their deductible amounts, all on a pre-tax basis. It makes perfect sense to me, but maybe I'm making it too simple?

The intention is for employees to be able to contribute to one portion of the cafeteria plan account (or FSA) for the HDHP premiums. The other component of the cafeteria plan (or FSA) will be used to make pretax HSA contributions. Several of our clients have cafeteria plans with more than one component, such as medical expenses, health plan premium payments and dependent care expenses -- all under one cafeteria plan. I just want to make sure that there is no prohibition against including the HDHP premium component under the same plan with the HSA component as long as the recordkeeping keeps the two separate.

An employer has an existing cafeteria plan for the payment of health insurance premiums. Beginning in 2006, he is adding an HSA component. We know that the premiums can't be paid with HSA dollars, but as long as the employer keeps a separate accounting, is there any problem with having the 2 components under the same cafeteria plan?

We're not concerned about 409(A). That part's easy. We are concerned about qualifying for the ERISA Top Hat exemption, because, perhaps, 50% of the workforce will be included in this arrangement.

It's my understanding that 403(b) plans need to be updated for EGTRRA, but not necessarily by 12/31/05. According to a Corbel person, we don't have a specific date by which these amendments must be adopted. I went on to ask if there are EGTRRA amendments that would be specific to 403(b) plans and the answer was to just use the standard QP EGTRRA amendments. However, I read that EGTRRA eliminated the maximum exclusion allowance, and also changed the definition of 415 compensation so that Employer contributions can be made for 5 years after an employee terminates. Shouldn't those 2 items be included in the EGTRRA amendments adopted by a 403(b) plan? There may be other issues specific to 403(b)s as well.

Thank you for your insights. I will see what I can find on those recent cases you mentioned.

An employer plans to hire a sales person. The employer is planning to offer this person a substantial sum of money to be paid over 10 years AFTER the employee terminates service in exchange for the book of business he or she builds up over the years. Is that a nonqualified deferred compensation arrangement -- or a non-compete agreement?

I asked the employer how the health insurance premium was paid. The employee was not getting wages, so there was no payment at all through the cafeteria plan. The employer simply paid the premium out of the corporate checking account. If I understand mbozek, there's no discrimination issue in that case, even if the employer decides not to pay the premium for another employee out on disability. The employer can continue to decide on a case by case basis whether or not he will pick up the employee's portion of the premium.

This is a relatively small employer. The cafeteria plan is only for the payment of medical insurance premiums, no dependent care or medical expense reimbursements, etc. For some reason, the employer simply kicked in the employee's portion (60%) of the premium along with the employer's 40% while the employee was out on disability -- just to help out. I don't think he paid it by giving the employee more salary, but I can find out more details of exactly how it was paid if that will help.

Now, to put the icing on the cake, the employer is saying that the company contributions toward the employee's welfare premiums will be suspended until the amount of the excess distribtution is paid back.

I forgot to answer the question about whether the plan is fully insured or self-insured. It's a fully insured plan. Employees pay their portion of the premiums through the cafeteria plan. So, it sounds like the only issue the employer would face is an employee morale issue if it were discovered that the employer can pick and choose the circumstances under which they will pick up the entire premium.

We are talking about a participant who, more than 3 years ago, went through the process of trying to determine if he could afford to retire. His decision was based on information provided by the employer. Everything the employer provided gave "X" as the dollar amount that the participant would receive. The spouse waived her right to the QJ&S benefits based on the lump sum dollar amount the employer provided. The retiree and his wife have been using those dollars for living expenses for 3 years now. The employer is not asking for a few hundred, or even a few thousand dollars back. The employer is asking for 43% of the money back! After all this time, I think the employer has a better case against the actuary than he does against the participant.

Employees pay 60% of the medical insurance premiums and the employer pays the other 40%. In this case, the employer stepped in and paid 100% for the employee who was out on disability.

The participant is asking us for guidance.

QDROphile: I just want to confirm your position, since your answer does not agree with the first 2 responses. The employer is not violating any discrimination rules (since there are none) by continuing to pay the employee portion of medical premiums on a case by case basis.

An employee (not an HCE) was out on disability, so the employer decided to cover the employee's portion of his medical premiums for a few months. I asked if the employer has a policy of doing this for every employee in similar circumstances and the answer was no. The employer decides on a case by case basis whether to cover the employee's payments. If the the employee was an HCE there would be no question about the answer. But can an employer discriminate among NHCEs?