Joe Priselac

The answer to your first two questions is yes, it is permissible. The last paragraph would describe an impermissible plan design. The HRA can not pay before the annual deductible has been satisfied unless it is reimbursing certain excepted benefits like dental.

Proposed IRS regulations state that administrative fees can be paid on a pre-tax basis through salary reduction. It could be argued that the FICA tax savings that the employer would get could more than offset the administrative cost without having to make the individual participants pay.

Mal, I work with many unionized governmental groups. Many of the typical concerns or rules do not apply in these situations. ERISA along with most of the nondiscrimination rules one would normally be concerned about do not apply. You can bargain a Cafeteria Plan with the eligibility rules you specified. I believe that the newest incarnation of the Section 125 regulations allows for such an eligibility rule for "regular" groups.

Jala, Welfare benefit plans ex. medical, dental vision, etc. are required to file an annual 5500 if they have more than 100 participants. The plan numbers for welfare plans should be 501, 502, 503, etc. Do not use the same number for more than one plan. If the medical plan is 501, the dental plan would be 502. The 5500 filing requirement for welfare benefit plans is independent of your cafeteria plan. Some employers get confused and think they do not have to file a 5500 if they do not have a Section 125 plan. As an example, an employer (no cafeteria plan) with 250 covered employees in a dental plan should file a 5500.

Nancy, To answer your question directly, the one person c-corporation could not have a IRC Section 125 cafeteria plan because it could not pass the key person concentration test. The Section 105 plan is an excellent alternative.

As far as I know there is no requirement to perform actual calculations and have a permanent record of the test results. In some situations it is obvious that certain non discrimination requirements are being met without actually performing the calculations of a discrimination test. For example, an employer whose plan prohibits key employees from participation would not be required to perform the calculations of the key employee concentration test to determine that the plan was in compliance. In other situations it is less obvious if a plan is in compliance and therefore the tests should be performed.

There is no requirement that a cafeteria plan have a trust. Benefits are typically paid out of the general assets of the employer and as such can be invested in an interest bearing account. The interest earned would belong to the employer.

Yes, The employee can change their election due to a shift change.

I had a similar situation where there were 18 doctor/owners and two employees. It was a C corp. I had them put in a 105(h) plan. Each employee, doctors included, had a $2,000 reimbursement account for eligible expenses. The accounts are employer funded. No Section 125 key employee concentration test to worry about.

Are you trying to put in a spending account type of program for these doctors so they can pay for eligible items on a pre-tax basis?

How would this group pass the key employee concentration test? No more than 25% of the benefits can go to "key" employees. Since everyone is "key" in your example, I would assume they would fail the test which would make the benefits taxable.

Yes, They could add the health FSA.

One question no one asked was whether the school district employees were unionized. I work with many school districts here in New York and they are all unionized which means that some of Kathleen's analysis would not be applicable. I recently was invloved in a contract negotiation where the unionized administrators negotiated for a 105(h) plan in which they would have $2,500 available. The other unions representing the teachers and support personnel did not have a similar provision in their contracts. The administrators make more money than the teachers and the support staff, BUT because all these employees are covered by a collective bargaining agreement the discriminiation rules do not apply. In addition, ERISA doesn't apply to governmental employers. For example, the 5500 filing requirement for welfare plans does not apply to school districts.

Once the employee becomes ineligible to participate because of their stock ownership, they are treated like a terminating employee.

The employer could in effect operate the dependent care plan like a POP plan- withhold the monies pre-tax and pay the daycare center. The plan document and SPD should describe this option to the potential participants.