Discrimination Rules

[Guest Johnny]

I've tried this questions before and didn't get any responses so I thought I'd try again.

Any thoughts on how the nondiscrimination rules for 125 plans apply to government employees where the lines between entites are often gray?

For example, could a plan be put in a one state agency but not another if they are on the same payroll and use the same EIN?

Thanks,

Johnny

[E as in ERISA]

I don't have a lot of experience with government plans and I'm not sure how the IRS applies discrimination requirements in a government setting like this. However, I will add a couple of comments (since no one else is).

Section 125 (g)(3) basically provides that eligibility requirements are not discriminatory if they benefit a nondiscriminatory classifcation of employees and the service requirement for all employees is the same.

Most "class" exclusions I've seen involve part time employees, etc. (because they are often excluded from underlying benefits). However, that is generally not a nondiscriminatory classification of employees. My rule of thumb is that the 125 plan should be available to all employees (even if many can't use it because they are eligible for underlying benefits).

However I would note that it is my understanding that the IRS 125 auditors are not looking at discrimination testing. They focus on the plan and payroll aspects. (But we should probably expect expansion of the program in the future.) I would also note that, until recently, the IRS had not even focused much on controlled group issues during qualified plan examinations.

Some considerations:

1. Look at whether the agencies have similar demographics in terms of percentage of HCEs and nonHCEs -- so that if they must be counted as one employer, you have a nondiscriminatory classification covered by the plan.

2. Make sure the plan identifies the class to whom the plan is available ("all employees of Agency A").

3. Consider the impact of using two EINs and payrolls.

4. Consider the impact of allowing Agency B employees in the 125 plan (not only the administration, but also look at whether the underlying benefits are the same -- or might you have additional nondiscrimination issues if you do that?)

5. Consider hiring an attorney who is an expert with nondiscrimination issues in 125 plans (if one exists!).

[Guest Johnny]

Hi Katherine,

Thank you for your informative response about a matter that is not well defined in the Code. I can't help but wonder how federal government agencies (like the IRS itself) deal with such issues. Thanks again, Johnny

[Kirk Maldonado]

Johnny:

Who is going to audit the IRS to determine if there is compliance with the non-discrimination rules?