Eligibility for Cafeteria Plan.

[Guest Scott Fielding]

Can an employer, with two classes and waiting periods for benefit eligibility, offer a Cafeteria plan with two waiting periods?

[papogi]

Two points of view taken from an earlier thread covering the same topic:

1. Section 125(g)(3)(B)(i) says that if the plan has an employment requirement in order to be eligible to participate, it must be the same for all employees. For example, you can exclude part time employees if you wish, but if you include them, they can't have a longer waiting period than fulltime employees. Also, you can't have managers or salaried eligible at 30 days, and hourly eligible at 90 days in the same cafeteria plan. This view is taken from the EBIA Cafeteria Plan manual, p. 201 which says, "Whatever the plan's actual employment requirement, it must apply the requirement equally to all employees. For example, the plan cannot provide that one group of employees is eligible to enter the plan immediately, while another group must complete 6 months of employment." On p. 828 of the same manual, EBIA gives more examples of the same.

2. On the other hand, Section 125(g)(3)(B)(i) says "...if the plan benefits a group of employees described in section 410(B)(2)(A)(i), and meets the requirements of clauses (i) and (ii)..." Section 410 addresses fair classifications of employees. The inference could be that as long as all employees within a classification have the same waiting period, you are within 125. A company could have multiple waiting periods, as long as they are divided among classifications of employees, and applied uniformly within each classification.

Therein lies the reason that nobody has responded to this question.

[Guest hooktx]

Hi Papogi:

Please help. I found your response and found it very useful, however, to complicate matters can you have 2 different eligibility dates if you are offering the 125 for health premiums and for FSA accounts such as medical and child care. In other words could new employees join for health premiums withing 3 months of employment but join after 1 year for medical or child care savings accounts? Any guidance would be greatly appreciated.

[papogi]

I don’t see any problems with that. Remember that the Section 125 plan is separate from the underlying benefit plan, and the 125 serves only as a way to use pre-tax dollars to pay for those benefits. In your example, the medical plan goes into effect after 3 months. That doesn’t mean that all benefits that will be paid for with pre-tax dollars must also become effective on that date. The effective dates of each of the benefits is governed by the provisions in the document for that underlying benefit, not that of the 125 plan.

[Guest gdburns]

There are problems that different dates might create.

If the employee signs a Salary Reduction Agreement that only covers the Health Insurance premium, then there will have to be either a second or a new Agreement done when the FSA etc takes effect. Although it could be done on the initial Agreement but with different effective dates.

The problem is getting Benefits and Payroll to properly handle this.

The second problem, is whether or not changing the Salary Reduction Agreement, which means changing an election, is allowed under 1.125-4. What is the eligible or permitted change?

The first year might be okay since this is the first time that the benefits are available, but what happens in the subsequent years? This would not then be the addition of a new benefit or option.