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Increased pension in exchange for reduced retiree health benefit

Guest Darrell

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Guest Darrell

I have a governmental client that would like to offer an increased monthly retirement benefit (flat dollar amount) under its defined benefit plan to any retiree who elects (while retired and in pay status) to receive a lesser prescription drug benefit under its retiree health plan. Because the pension plan is a governmental plan, I do not see any pension nondiscrimination issues. However, this looks like a cafeteria plan election to me (choice between cash, albeit paid under a pension plan, and a nontaxable health benefit). Should the employer's cafeteria plan (in addition to its pension plan) be amended to provide this election? I do not believe this proposal violates Code section 125(d)(2)(A) (cafeteria plan cannot provide for deferred compensation), because there would be no election to defer compensation--retiree can simply elect to receive additional compensation if he/she is willing to accept a lesser prescription drug benefit (higher co-pays). Can anyone think of a reason why this will not work? Does the fact that the cash payment will be made under the pension plan (rather than directly by the employer) cause a problem?

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