cafeteria plan election where cash benefit is payable under pension plan

[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?

[jmor99]

This is a toughy and a wild guess on my part: Since you're saying they want to give cash if they take the lesser benefit, then can I assume there is a "greater" benefit available? If so, then it seems to me the only way to get around the catch-22 of a plan that looks and acts like a 125 plan is to place a $ value on the greater benefit i.e. deduct for it, and 00.00 dollar value on the lesser benefit.