Cafeteria plan where there are no nonhighly compensated e/ee's

[chris]

In other words, can a professional service corporation with 5 doctor shareholder/employees and no other employees set up a cafeteria plan? Wouldn't appear to be any discrimination because there are no non-highly's employed by the corp. Am I missing something or is it time to call it a night?

[Joe Priselac]

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.

[chris]

I agree as to the issue. The purpose for the test is to keep any discrimination in favor of highly compensated e/ee's in check and if it still occurs based on the testing, there are adverse tax consequences. I didn't know if there was something I was missing as to the availability of a cafeteria plan where all e/ee's are highly compensated/key e/ee's. For instance, a profit sharing plan is available to an employer where all e/ee's are highly compensated e/ee's. From a policy perspective, if there are no non-highly's to discriminate against how is there discrimination in favor of highly's?? Thanks for your help...

[Joe Priselac]

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?

[chris]

Basically, yes.

[Joe Priselac]

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.