Automatic Cost Change - Change in Status

[Guest rocnrols2]

Company X rolls out a new cafeteria plan in 2003. To improve its sales and save on medical costs, X ties the employer subsidy for insured medical to the salesperson's prior year sales, with the highest group obtaining an 80% subsidy, and each other group getting a 60%, 40% or 20% subsidy. Assume that all cafeteria plan nondiscrimination and coverage rules are satisfied.

To further incent its sales force, X proposes to give those salespersons in the 20, 40, and 60% subsidy brackets two chances to go to the next higher bracket during the year. If A's first quarter sales, on an annual basis would result in 150% of the level needed for the next higher subsidy level, then A will receive the higher subsidy level for the third and fourth quarters. If B's second quarter sales, on an annual basis, would result in 125% of the level needed for the next higher subsidy level, then B will receive the next higher subsidy level for the 4th quarter.

My question. Would the ability to increase mid-year the level of company subsidy qualify for the automatic cost or coverage change in status event?

[Guest ybahti]

With this set-up I would think you might be in violation of 125 in that this appears to favor highly compensated employees.

[mroberts]

I could several problems with administering the plan this way. First, as roc points out, it could favor highly compensated employees, depending on how many sales people there are, how many other employees there are, and what percentage of premium is paid for by the company for the other employees. Second, even if a Section 125 plan could allow for this, which I don't think it could, what does the underlying plan say about this? I don't think too many medical carriers out there would allow for this kind of change unless you had some heavy negotiating clout.

Instead of making this so complex, why not just give your sales people an extra bonus if they increase their sales significantly? Chances are there is no direct correlation between the increased sales output and the desire to have medical insurance. Additionally, if a sales employee declined to have coverage because the costs are too high, what's to say he or she didn't elect it under his or her spouse's plan during open enrollment?

[Guest rocnrols2]

vbahti and mroberts,

Thank you for your responses. As I pointed out in my initial post, the nondiscrimination issues were completely followed through and, based on recent census data, the 125 coverage test was easily passed and a stong argument can be made that the plan, as structured, passes the nondiscrimination as to benefits requirement. My only question, therefore, was, assuming these tests are not a problem (recognizing, of course, changes in demographics, more detailed IRS guidance and future tax law changes), would the ability to increase a level of coverage, mid-year, satisfy the requirements for the automatic prospective change in coverage qualifying change in status event?

[GBurns]

Complicated but I do not see why this cost change imposed by the plan sponsor would not satisfy the requirements.

[mroberts]

How about making it easier. Instead of dropping them to a level where they can be increased, why not give them a probationary period to get their sales up or else they would be dropped to a lower level, thus causing a "significant increase" in the cost of coverage and allowing them to drop the plan if they wish?

Again, I don't see a correlation between sales output and medical insurance. I suppose one could argue that if a person made more money they are likely to spend more money, thus paying for medical insurance, but I think it's a little bit of a stretch. I see it as any bright individual, which sales people generally tend to be in the scheme of things (I know, arguable!!), understands the risks associated with not having healthcare and would particpate in the plan even if they had to pay the lion's share of premium.

Additionally, this is an example of someone with waaaaaay too much time on his or her hands. Why even think of something this complicated? If a sales person isn't pushing his or her weight, why not just get rid of him? By keeping a standard contribution ratio, this will also allow an above-average sales rep to have a down year every now and then. Let's face it, even the best sales people have peaks and valleys.