Change in Employment Status?

[Guest rocnrols2]

Company X maintains a 125 plan for its employees and the employees of its affiliates. One of the coverages provided under X's 125 plan is LTD for many of its employees. The employee portion of premiums is collected on a pre-tax basis through salary reduction. Employees above a certain grade level are immediately eligible while those below that grade level must wait one year to participate. Company Y is an affiliate of Company X and participates in its 125 plan. All employees of Y have to wait one year to become eligible to participate in Y's LTD coverage. During 2004, Y has decided to eliminate its separate LTD plan, to participate in X's LTD plan and change all of its employees' pay grades to be identical to those provided by Company X. This means that those Company Y employees whose new pay grade is above a certain level will be immediately eligible to participate in X's LTD coverage, even if they did not complete one year of service. The issue is: is this a change in employment status sufficient to justify a change in status under the 125 regs? Essentially, nothing is changing for Y's employees except the LTD plan in which they participate and their pay grade. Thoughts? Comments?

[oriecat]

I wouldn't consider that a change of employment status, I would consider that a change of benefit options.

(f)(3)(ii). Addition (or elimination) of benefit package option providing similar coverage.

If during a period of coverage a plan adds a new benefit package option or other coverage option (or eliminates an existing benefit package option or other coverage option) the cafeteria plan may permit affected employees to elect the newly-added option (or elect another option if an option has been eliminated) prospectively on a pre-tax basis and make corresponding election changes with respect to other benefit package options providing similar coverage.

[Guest JerseyGirl]

My first thought is why would you be pre-taxing LTD premiums? The premiums are classically very low, translating to pennies in tax savings. Because the premiums are being pre-taxed, should anyone ever go on long term disability, they will be required to pay taxes on the benefits at a much higher rate and at a time when they are least able to afford it.

I agree with 'oriecat' that this is not a change in employment status but a change of available benefits.

[oriecat]

Yeah, I wondered that too, JerseyG. We don't allow any of our disability benefits to be pre-taxed just for that reason.

[Guest rocnrols2]

Thanks for your prompt replies. When I looked back, there was one minor change in the facts. Y's employees have always participated in X's LTD plan. The mere change in pay grades will result in certain newly hired employees becoming eligible earlier than they otherwise would have. So, I am not sure whether it fits into a significant curtailment with loss of coverage, and not even a significant curtailment without loss of coverage. Any thoughts?

[oriecat]

I am not sure I understand. It sounds like they just have a new eligibility date. I would think that if employees become eligible for a benefit that they weren't eligible for before, then they should be able to make an appropriate election for that...

[Guest rocnrols2]

That's true and there is one other fact. New employees at pay grades who qualify for immediate eligibility get a specified percentage of their pay replaced (let's say D%) from their date of hire, which is fully employer-paid. X intends to provide Y employees qualifying for immediate eligibility with such coverage as of the effective date of the change in pay grade. At open enrollment, all employees can elect either D%, D+10% or D+20% LTD coverage with the differential being paid by the employee through salary reduction. Effectively, the "Y employees at the eligible pay grade and above would not get any election on the effective date of the pay grade change. Instead, they would be treated the same as new X employees at the eligible pay grade and above, except that the Y employees would be eligible for such coverage as of the effective date of the pay grade change.