Merit Increases

[Guest tintree73]

We currently have a straight health insurance arrangement.

However, we are batting around the idea of modifying the arrangement to add a 125 feature to shift some of the cost to employees.

Here's the question - if we do this, can we use employee merit increases (assuming they are used for premium conversion in the year received - no deferral of compenstion per 1.125-2 Q&A7) to do this?

I was looking at the regulations and they appear to allow an employee to elect to forgo an increase in compensation (1.125-2 Q&A6) - but my question is whether there be a problem with discrimination (if highs have a significantly higher merit increase) or cafeteria plan election/salary reduction agreement issues re timing, etc.?

Or anything else that I didn't think of?

I would appreciate any help you are able to send my way!