Eligibility for Sec 125 vs. Underlying Benefits

[Guest aearle]

Can the underlying benefits in a cafeteria plan have different eligibility rules than the cafeteria plan itself? For example, if an employer wants only full-time employees to be eligible for major medical, but wants part-timers to have access to other benefits, like dental or other voluntary, can all of the benefits be set up under the cafeteria plan? The cafeteria plan eligibility would be "all employees", but only the major medical would say "full-time employees".

If this is permissible, is there a reg or TAM you can direct me to??

[E as in ERISA]

Yes. The eligibility requirements for the 125 may be broader than those of the underlying benefits.

[KJohnson]

Another question that has always bothered me is where an employer, such as in the restaurant business, has a number of part-time employees who will never have the 30 hour "actively at work" requirement that is typical for insured health coverage. They will, however, have 1000 hours during the year. You therefore may have a coverage issue for your 125 Plan.

Can an employer with only a POP make everyone eligible for the cafeteria plan and therfore not worry about coverage while knowing that there would never be a reason for employees who are not eligilble for health insurance to actually reduce their salaries?

[Guest llerner]

1,000 hours does not apply to cafeteria plans or health and welfare benefits. You are thinking pension/410(k).

[KJohnson]

Code § 125(g)(3)(A) specifically refererences Code § 410(b)(2)(A)(i) and I think that the majority view is that you can use the same exclusions that exist under 410(b) in running a nondiscriminatory classification test.

[E as in ERISA]

Section 125 provides that a 125 arrangement is not discriminatory if it benefits a nondiscriminatory group described in 410(b)(2)(A)(i) and meets the following service requirements -- the eligibility requirement is the same for all employees (but not more than 3 years) and employees enter no later than the first day of the next plan year.

I don't see the 1,000 hour rule applying because it is a service requirement and 125 has its own service requirement (same for everyone, but no more than 3 years).

I think that you look to 1.410(b)-4 for the nondiscriminatory classification requirement. It requires that the classification be based on objective business criteria and that reasonable classifications include "job categories, nature of compensation (i.e., salaried or hourly), geographic location, and similar bona fide business criteria." It also requires that the classifications meet certain numerical tests.

Unless someone is running those calculations, I believe that the best thing to do is just make the 125 arrangement available to all employees and then select the appropriate eligibility requirements for each of the underlying benefits. This will make almost all employees eligible participants of the 125. However, in many cases, the discrimination requirements for the underlying benefits will be satisfied based on the entire population of employees -- and not just eligible participants. You might have to distribute communications to more employees; however, the cafeteria arrangement itself (not considering any FSA) is not subject to ERISA so the disclosures would be limited.

[KJohnson]

My reference to the 1,000 hours was not to the initial eligiblity test uner 125(g)(3)(B) but to the nondiscriminatory classification test under 125(g)(3)(A). This test refers you over to the non-discriminatory classification test under 410. In running this test, I think you can use any exclusions that exist under 410(b). For what it is worth, EBIA comes to the same conclusion in the "Green Binders" but states that to exclude them from testing you actually have to exclude them from the Plan (Even if you had a 3 Year requirement as permitted under 125(g)(3)(B) I think you would still have to include those with over a year of service for 410(b) purposes in your test under 125(g)(3)(A).

I have seen certain situation where an employer may have 60 or 70 employees who work 20-25 hours a week and are never entitled to health insurance. That employer may only have 7 or 8 full time employees who are covered under the group health plan (1 or 2 who are HCEs). If you limit your eligibility under a 125 POP plan to those who are eligible for health insurance you would undoubtedly fail your non-discriminatory classification test (even after weeding out those that can be excluded for age and service under 410(b).

What I was wondering is whether, in the alternative, you could simply say that everyone is eligible for the 125 POP knowing full well that the only people who would ever receive any benefit from the Plan are those working more than 30 hours a week and eligible for the group health plan. Can you consider someone "benefitting" for the non-discriminatory classification test just because they meet the Plan's eligibility criteria? However, I think that even if you could you would fail the benefits and contributions test under 1.125-1 Q&A 14 of the proposed regs.

[Don Levit]

The last several years, I have been collecting information applying to retirement and medical plans. Enclosed is an excerpt from Rev. Rul. 65-178. I am curious if anyone knows if these provisions are still applicable.

(g) Burdensome Contributions Sec. 1.401-3(d) - if a contributory plan is offered to all employees, but the contributions required of employees are so burdensome as to make the plan acceptable only to the highly paid employees, the classification will be discriminatory. For example, if the plan requires employee contributions of 10% of compensation, one must determine if lower paid employees are kept out of the plan because of such a requirement. If so, the plan may be discriminatory. As a general rule, however, employee contributions of 6% or less are not deemed to be burdensome. Don Levit

[Guest jashendo]

Don --

65-178 was long since declared obsolete, and was replaced a number of times (even before the enactment of ERISA). Since ERISA, Rev Rul 80-307 (which has also been declared obsolete) had expanded the "6%" rule, and said that mandatory contributions could be discriminatory even if limited to 6% (or less), depending upon the circumstances.

Since RevRul 93-87, which "obsoleted" many Rulings in favor of the nondiscrimination regulations (under 401(a)(4), 410, etc.), discrimination in employee contribution rates would be determined under the regulations (such as 1.401(a)(4)-6).