LisaLiza

Thank you! I knew it had to be simple - or it would be done frequently by family businesses. I knew it wouldn't fly for an S Corp, if only because the owner and parent wouldn't be allowed to participate anyway. It totalled out to ~$1500 in avoided FICA/SUTA on the profit sharing contributions, plus an extra 10% of sick leave accrual on the additional 'wages.' I'm unsure whether 'unreasonably' low compensation is a legitimate issue for C Corp employees, but that might be above my pay grade. Total comp is significantly higher than just wages, which might mitigate that concern. This begs the question, though, are they asking for trouble maxing out their health FSAs, if they aren't making a concerted effort to spend it down annually? It's used appropriately, to cover all incurred medical expenses, but I don't think there's ever been a year where they were able to make the full $2750 contribution each after allocation of prior year funds. It seems to me that this is the very definition of a self funded insurance plan, but it still might not pass muster up against 'reasonable belief.'

The primary goal is to allow key employees to stave off voluntary after tax contributions for a larger chunk of time/income - ACP testing wouldn't be welcome. Additional accrued sick leave for future retiree benefit is an attractive perk. FICA/SUTA avoidance seems like an obvious benefit, though, which is why I'm pretty convinced it must not be kosher. And yes, everyone would be on board with the forfeitures because the whole situation is mutually beneficial. No one is excessively compensated by any measure, the siblings are paid minimum wage for work that runs the gamut from menial to legitimately professional.

The employees (a parent and several siblings of a C Corp owner employee) would voluntarily elect to fully fund their own DCAPs - $5000 per year - via cafeteria plan salary reduction. None have dependents, it would be reasonable to expect that all plan balances would be forfeited annually for the foreseeable future. FWIW, they are already doing this with Health FSAs, but those funds are used as intended - with experience gains being allocated appropriately within the plan.

Can someone point me towards any applicable rules prohibiting cafeteria plan contributions without a reasonable expectation of use? I feel sure this can't be allowed, but I'm struggling to find specifics. Obviously, the goal is to increase compensation on paper to allow for a larger profit sharing distribution annually. The non-ERISA plan funds would typically all be forfeited back to the business each year. You could argue that anyone could 'acquire' a dependent any given year, but I wouldn't try to argue that's a reasonable expectation. It doesn't seem to pass the sniff test, but I can't even find what sniff tests might apply. Any help would be much appreciated.