A Giant Disaster or a Failure to Communicate? Or, Nonprofits Do the Darndest Things.

[Guest erisafried]

Imagine, if you will, a tax-exempt employer that maintains both a flex plan and a 403(b) plan; the 403(b) plan is of the "conduit" variety (i.e., employee contributions only, minimal employer involvement). Some of the communication materials distributed to employees could be read to suggest that opting out of medical coverage under the flex plan will send the amount that otherwise would have covered the medical premiums to the 403(b) plan. These materials also could be read to suggest that there is no cash option available under the flex plan.

Potential oopsie #1: impermissible flex plan benefits (i.e., 403(b) contributions). Potential oopsie #2: no cash option in the flex plan. Potential oopsie #3: blowing the ERISA "voluntary plan" exception by sending in deemed employer contributions (i.e., the opt-out money coming from the flex plan).

The consequences of Nos. 1 and 2 are pretty unappetizing to behold. No. 3 is fixable (at least w/r/t annual reporting), but not without tacitly conceding that you screwed the pooch on Nos. 1 and 2.

The alternative is (assuming there is something -- anything -- to back up the idea that the flex plan and 403(b) really were separate and that opt-out flex plan dollars were not getting remitted directly by the employer to the 403(b) vendor -- and I think there may be) to, well, not read the prior employee communications materials this way, revise them going forward to be really clear about how the opt-out money will flow (it goes to the employee as additional cash compensation and can then be -- at the employee's initiative -- directed in whole or part into the 403(b) plan), and hope that the statute runs before anybody from Harry Beker's office drops by for a visit.

Anyone have any bright ideas about this?

[mbozek]

Why not look at this arrangement as an election between health benefits and cash with the cash being contributed to the 403(b) annuity as salary reduction and revise the plan documents and salary reduction agreement to clarify this arrangement? Are the flex contributions that go into the 403b account subject to FICA tax?