Tax Sheltered Annuity & Flex Plan

[Guest Sara H]

A not-for profit client has a flexible benefits plan where the employer contributes a flat dollar amount to each eligible employee per month. The employee can use the money toward their premium, in the spending account or take it as cash. If an employee exercises his/her cash option, the money then becomes taxable compensation. Can the employee then turn around and put that money into a TSA pre-tax? I know that a TSA/403b cannot be part of a flex plan, but if the money is taken as cash, I would think that this would be an available option.

[Guest Yanikoski]

The only way an employee can contribute new money to a 403(b) plan is by salary deferral. If s/he takes it in cash, therefore, it cannot go into the 403(b).

[Guest Harvey Carruth]

This reminds me of one of my wife's wonderful traditions. If she receives money as a gift, then those very dollars must be set aside and used for something special. It is not acceptable to deposit the money into a checking account and then write a check for something special, unless the bank can assure her that they will distribute the same dollars she received as a gift.

Now, back to the case at hand. If the employee knows how much is available from the employer in the flex plan, elects to receive this amount in cash, and has enough gross pay exclusive of the flex plan cash to support an elective deferral of at least the amount of the flex plan cash, then s/he absolutely can defer that amount into a 403(b) plan, and who is to say which dollars in her/his aggregate compensation were actually remitted to the 403(b) investment company?

My wife wouldn't like such an arrangement, but the employer, the employee, the investment company, and the IRS would be quite content with it.

[joel]

Is this the same Harvey Carruth, Prof. of Mathematics at the University of Tenn?

[Guest Harvey Carruth]

Yes, but now Professor Emeritus. I retired from UT in 1997 and now have a small consulting practice in Oregon.