Plan Termination - Implementation of New Plan

[Guest JimD-EBR]

If the cafeteria plan document allows for termination of the plan, is there anything that would prohibit and employer from terminating the plan effective 8/31 and establishing a new cafeteria plan effective 9/1? The current plan year is a calendar year.

If the plan can be terminated, could the new plan also have a calendar year (short from 9/1 - 12/31)?

[sloble@crowleyfleck.com]

I don't think this would be permissible because it would result in two consecutive short plan years. The IRS does not approve of consecutive short plan years because they perceive this as the employer trying to get around the irrevocability requirement. I think the consecutive short plan year filings on the Form 5500 might be a red flag.

Even if you wait a year, the IRS is still skeptical of short plan years, and you need to make sure (and document) that you have a legitimate business reason for amending or terminating and re-starting a plan. Advance notice should be given to participants so they can make their FSA elections in light of the short plan year.

[oriecat]

I'm just curious what the point of terminating a plan one day and starting a new one the next would be... why not just amend the plan? What are they wanting to change that couldn't just be amended? It seems fishy to me...

[Guest JimD-EBR]

Reason for the change is that the employer will be implementing a new fully insured health plan with an age-rated premium structure. The employer currently contributes a fixed dollar amount to the cafeteria plan. Some participants directed a portion of the employer contribution to cover their health insurance premiums and the rest to the health FSA. The new premium structure will cause increased premium costs to about half of the participants - this would be an allowable change in cost to increase their premium election, but they would have to use part of their salary (pre-tax) to cover their increased premium cost - so they have to use their own money where they didn't before the health plan change.

The employer is trying to implement this change without adversely affecting employees, but there are so many twists that not everyone will be happy.

Short of bumping compensation, we were wondering if the plan termination option would work. A new plan would provide the employer the option to redesign their benefit program objectives and would allow employees the opportunity to make new elections based on the employer's new objectives.

[stephen]

Would it work to let the current plan continue through 12/31 and start the new plan 1/1?

[Guest JimD-EBR]

Yes, but we were trying to address before then.

[rcline46]

Change of health insurance permits change of 125 elections. I don't see how terminating the plan does anything at all.

[Guest JimD-EBR]

Yes, participants could change their premium election and redirect a portion of their wages to cover the increase pre-tax. However, many directed a portion of their unused employer contribution dollars (after covering premiums) to the health FSA. So, being unable to reduce their health FSA election and direct the amount toward premiums, the money will need to come out of the employee's pocket.

The converse occurs for those whose premiums decreased. They have left over employer dollars, but they can't use them - can reduce premium election, but not able to move the difference to an FSA.