Setting up a cafeteria plan

[Guest nps]

I am working with a client that would like to set up a premium only plan with an effective date of 8/1. Their fiscal year, and plan year for their profit sharing plan is from 7/1-6/30.

Are there any rules stating when a cafeteria plan must start? Does it have to be for an entire year in its first year, and if it does, can it use the fiscal year instead of a calendar year?

Thank you.

[Guest kwong98]

There are no rules stating when a cafeteria plan must start. The first year can be a short plan year. The plan can choose to be on a calendar or fiscal year starting year.

[Guest JerseyGirl]

Particularly in the case of a POP, where the participants make a perpetual election, the plan year is of no great consequence. I have read somewhere that the IRS frowns upon a plan that has repeated short plan years, but I'm not sure of the validity of that one.

For full Flex plans, I would strongly suggest using a calendar year mainly for the ease it provides in tracking Dependent Care expenses for the IRS.

[Lisa Hand]

The renewal date of the health insurance, not the retirement plan or fiscal year, is one of the main issues to consider. While it is not that great of a concern with a POP, if the plan anticipates adding FSAs, an important item to consider is the strict rules on change of status as they apply to Medical FSAs. If the health insurance and 125 plan are not on the same renewal, the plan could place their employees in the situation of the 125 plan renewing and then several months later the health plan changing at renewal. While they would be able to make adjustments for any premium changes, no change to the Medical FSA would be premitted, even if the health plan has changed. (Treas. Reg. 1.125-4). The DCA tracking for off calendar plan years is a pretty simple issue to deal with most software packages and prudent plan design.

The IRS frowns on repeated short plan years when it appears that they are being used in an effort to circumvent the regulations. Establishing the first plan year as a short plan year is not an issue.