Adoption of a Cafeteria Plan

[bzorc]

A company which is a C corporation is considering adopting a Cafeteria plan to accomodate basic benefits, i.e., insurance premiums, health expenses not covered, and dependent care coverage. They also have common ownership on a IRC Section 501©(3) foundation, which to date does not have any employees, but may end up with employees from the C-corp in the future. Can/should/may the foundation adopt the cafeteria plan, so that these employees can continue their pre-tax deductions upon transfer to the foundation? Any comments would be appreciated. Thanks.

[Lisa Hand]

Do the two organizations have separate tax ID number? Ownership aside, how are the affiliated?

[Lisa Hand]

Regardless of the ownership percentage, if they are not affiliated, then each organization would sponsor their own plan and participation would not be transferable between the two because they are separate entities.

[bzorc]

Yes, the two entities have separate EIN's. The ownership of the C-corp and the foundation is similar, i.e., same percentages in each entity.

Lisa, does that help?

[pjkoehler]

The Section 125 Proposed Regs provide that employees include all employees treated as employed by a single employer under Code Sections 414(B), © or (m). Prop. Reg. Sec. 1.125-1, Q&A-4. Assuming that there is sufficient common ownership to establish a parent-sub or brother-sister controlled gorup under Sec. 414(B), then the employees of the C-corp and the foundation will be aggregated for cafeteria plan nondiscrimination testing, so there should be no problem in expanding the cafeteria plan coverage to include the foundation employees at this time. Of course, you'll want to analyze the foundation's by-laws and its application for tax exemption (federal and state) to ensure that providing such benefits to foundation employees is consistent with its exempt purpose and the conditions on which the IRS recognized its tax exempt status. You may, for example, have to apply for a new tax exemption determination, disclosing the existence of the plan.

If one of the benefit options available under the cafeteria plan is coverage under a self-insured medical reimbursement plan, you'll want to take note of the rules applicable to "multiple employer welfare arrangements" ("MEWAs"). ERISA Sec. 3(40). In general, unrelated employers that jointly sponsor self-insured welfare benefit plans (MEWAs) are subject to complex and diverse multi-state insurance regulation, the associated cost of which makes them infeasible in this context. Special "control group" rules apply under Sec. 3(40)(B), which exempt related employers from the defintion of MEWA. You'll want to make sure that if you're thinking of joint sponsorship of a self-insured welfare benefit plan under the cafeteria plan (perhaps to enjoy administrative economies of scale), that you fall under this exception. As practical matter if the two corporations form a "controlled group," as described in Code Section 414(B), you are also a "control group" under ERISA Sec. 3(40)(B).

[This message has been edited by PJK (edited 05-26-2000).]