discriminatory

[wsp]

A client is looking into setting up a cafeteria plan for himself. He is the only non-bargained employee of 15 person company. He would like to set up a Health Care Reimbursement account to pay for the uninsured medical expenses. As the others are bargained, they would be excludable from discrimination testing leaving only himself. Is this ok? What reporting requirements are there? Is it something he could administer himself easily enough? any pitfalls?

[rcline46]

If he is an LLC, Sub S, or sole prop he cannot set up a plan.

[wsp]

If he is an LLC, Sub S, or sole prop he cannot set up a plan.

It's a partnership and he's not a partner. The partners only receive partnership compensation and all of the other employees are part of a CBA.

[jmor99]

If there's a 125 plan, there are discrimination tests. Is he an HCE or Key employee? If so, looks to me like there's an automatic failure. In addition to discrimination testing, he must have a plan document and a summary plan description, election forms, etc. Form 5500 is an annual reporting requirement. He could possibly "self administer" it, but is he prepared to do all the above plus adjudicate claims (he'll need to understand Publication 502)? The pitfalls are self evident.

Cheers!

P.S.--The owners DO know this is about to happen, don't they? After all, they're the one(s) that will have to draft and sign a "board"

resolution adopting the plan, and sign the documents themselves. Oh, and by the way--they DO know they'll have some potential liability don't they? i.e., your man makes a nice big election, uses it all in, say, the first few months and then quits. And your man DOES understand the use it or lose it rule, right?

[wsp]

This was the initial inquiry....I'm not sure to what degree the owners are aware of the liability nor his background and knowledge re: a plan of this nature. He's their legal counsel, but we all know that means nothing when it comes to the benefits arena.

As for the discrimination part...is a cafeteria plan not able to exclude individuals who are covered by a CBA as you can in retirement plans?

And the 5500 is required since they essentially have a trust arrangement to hold the money until it's being used, correct? But if it's a pop then no reporting is required?

Sorry questions are so basic, I'm a retirement plan guy who was asked to do the research. Blech...whole new level of respect for you H&W folks!

[jmor99]

Is/will the 125 plan be bargained in good faith? How is the health being handled? Yes, they can be excluded if it's bargained in good faith. But I'm not an expert in this area

If he's their legal counsel, better take a close look at the key employee definition. Parts of it are based on income. If it turns out he's a key employee, then the 25% test will automatically be failed. Formula is as follows: K=key employee, N=non-key employee _____K_______= 25%. or less.

N + K

"Key employees shall receive no greater than 25% of all benefits received by all employees" You plug in the total annual $ pre-taxed by each category of employee. If he's a key employee, you can see that the test is automatically failed, because there are no other participants.

The 5500 is required whether it's a POP or not. If 5500's are required because of a "trust arrangement", then it is necessary for a POP because pre-taxed insurance premiums are held by the employer until the insurance carrier bill is paid each month.

As you can see, I know just enough to be dangerous. Hopefully others will jump in here and correct or clarify what's been said

I've had to edit this post because the formula doesn't show correctly. The formula is "K over N+K equals 25% or less"

[wsp]

Is/will the 125 plan be bargained in good faith? How is the health being handled? Yes, they can be excluded if it's bargained in good faith. But I'm not an expert in this area

If he's their legal counsel, better take a close look at the key employee definition. Parts of it are based on income. If it turns out he's a key employee, then the 25% test will automatically be failed. Formula is as follows: K=key employee, N=non-key employee _____K_______= 25%. or less.

N + K

"Key employees shall receive no greater than 25% of all benefits received by all employees" You plug in the total annual $ pre-taxed by each category of employee. If he's a key employee, you can see that the test is automatically failed, because there are no other participants.

The 5500 is required whether it's a POP or not. If 5500's are required because of a "trust arrangement", then it is necessary for a POP because pre-taxed insurance premiums are held by the employer until the insurance carrier bill is paid each month.

As you can see, I know just enough to be dangerous. Hopefully others will jump in here and correct or clarify what's been said

I've had to edit this post because the formula doesn't show correctly. The formula is "K over N+K equals 25% or less"

Thanks for your input, it's very much appreciated. I'm on board with the documents, filing requirements, claims adjudication, etc etc but the discrimination test has me baffled. Assuming that the union has negotiated a similar benefit, then it seems natural that a single non-excludable employee, even a key employee, should be able to have that benefit as well. To me, it's being offered to 100% of the employees so long as the plan document doesn't exclude any non-union participants. I see the math, butthat means that he will never be able to receive any benefits like this, as all employees are union employees. Thus he's penalized for running a union shop. Is there a facts and circumstances option available for cases like this?

[GBurns]

You stated that what is desired is a "a cafeteria plan for himself" but you also stated "He would like to set up a Health Care Reimbursement account to pay for the uninsured medical expenses.". Does he really need either or both?

What will be the purpose of the cafeteria Plan? Is he paying a portion of the health insurance premium or pre-taxing salary reduction contributions to the "Health Care Reimbursement account" or both?

The reason for these questions are primarily caused by your use of the term "Health Care Reimbursement account" rather than FSA etc. I suspect that there might be more to this issue.

Also as the only executive, it is quite possible that his insurance premium will be fully provided and he would not have an employee share to pay. It also is possible that his out-of-pocket might be covered under a standard MERP with the employer reimbursing him for any expenses incurred.

If this is the case, he might not even need a cafeteria plan and what you referred to as a Health Care Reimbursement account might be a simple MERP which is employer funded.

Also note that jmor99 pointed out "Yes, they can be excluded if it's bargained in good faith. But I'm not an expert in this area". The key employee issue might not be applicable if there is an Executive only (or similar) class carve-out that is possible. So let's hope that someone will chip in.

[wsp]

I suspect that we are talking about the same things, but my lack of knowledge on the topic is getting in my way. Thanks to you both for taking the time to explain things.

Person asking us the question is an HCE and key employee but is not an owner, so it's unknown if employer will pay for expenses through a MERP. And yes, premiums are fully employer paid so we are talking about wanting to pay unreimbursed medical expenses only on a pre-tax basis. But as you suggest, a better alternative would be the MERP as it's nontaxable for the employee while still deductible for the employer. Am I correct in assuming that unused amounts in a MERP can be carried over from year to year? Maximums the same as HSA? What are reporting requirements? Form 5500?

If company won't pay for expenses but will take on the liability involved in a employee deductible plan, then we really are talking about a FSA rather than an HSA or MSA as deductibles aren't likely to be very high for this employee. Or am I wrong in that?

I would imagine that he could self administer the plan since he's the only covered and eligible employee. If not, no worries, we will be sending them elsewhere for administration. We are accountants and retirement plan admins only.

Is there a single sheet pro-con comparison of various plans out there?

[GBurns]

If there are employee contributions, it will be either an FSA (through a Cafeteria Plan) or an HSA (could be through a cafeteria Plan).

There is no rollover of unused money with an FSA.

A standard MERP would be where the employer reimburses the employee for any out of pocket medical expenses as they are incurred and claims submitted. Since there is no funding there is nothing to rollover. It also has no employee contributions and is entirely funded by the employer as in a HRA.

An HRA is a MERP with rollover of unused funds if pre-funded, no rollover if not funded.

There are some charts that were published when HRAs came out and also when HSAs came out, but I do not have links readily available. Many were published in Benefits Buzz so you might want to do a search there. I recall things coming from Groom Law Group, Kilpatrick Stockton, Alston & Bird, the ECFC to mention a few.

Try Haynes and Boone for a copy of what they presented at a JCEB conference and Tax Management Compensation Planning Journal (I think) for the article by Chip Kerby of Kilpatrick Stockton.

If you have too much difficulty finding them let me know. If they are not what you need also let us know, someone else might have some suggestions for you.

[Bob R]

I'll throw in a few comments -

What we don't know is whether the IRS would give us a free pass on the 25% concentration test if there are no non-key employees. In the 401(k) arena, if there are no nonexcludible NHCEs (e.g., if no HCES because all are excluded under the union exclusion), then you get a free pass on the ADP test. Yet, if you ran the math for the ADP test you'd fail. Same situation here - we just don't have anything formal or informal from the IRS on this so it's open to a reasonable interpretation of the rules.

For the underlying benefit (the health FSA or if you over a self-funded health plan outside of a cafe plan), then I think you pass nondiscrimination if there are no HCEs.

[jmor99]

You can find a nice HSA chart done at this website under the HSA forum. Done by the moderator.

P.S.-- Even if you get a pass on the 25% test, there's still the "facts and circumstances" HCE test, which is a very gray area, but it seems to me from the details given that this is an outright failure.

P.P.S.--Basically, the IRS doesn't care if HCE's are "discriminated" against. You'll find this especially where Day Care reimbursement under a 125 is a benefit, in small (under 100 ee's) groups. It is almost a guarantee that HCE's can't participate because of the 55% formula, i.e., a virtually guaranteed failure, thus no participation by HCE's.