Opt out plans

[jaemmons]

I am helping an employer design a 125 plan with a cash option in lieu of benefits (paid as additional wages). The employer has asked whether or not they could give the employees who opt out a lump sum payment at the end of the year, instead of with each payroll. I cannot find anything which would not allow for this, but I want to make sure that my bases are covered. Does anyone know of any cite which provides clarification to this issue??

[papogi]

I don't have a cite for you, because I don't think it's addressed specifically. I have seen plan designs like this, however, and know they exist. My opinion is that you would have no compliance problems.

[QDROphile]

Be careful to make sure that the section 125 amount (the opt out cash) is properly reflected in the employer's retirement plans for the persons who do not opt out. The persons who opt out will get the cash as taxable w-2 income, which should show up properly in the retirement plan unless the payroll system is inadequate.

[Kirk Maldonado]

What would the employer do if an individual's employment is terminated during the year?

[papogi]

Hopefully they're prorating the cash out credit and giving that amount to the employee in his/her last paycheck. That's the only fair way to handle it.