Full-Flex Plan

[Guest tintree73]

We have a full-flex plan that allows for employer nonelective contributions as well as a FSA account (one full plan w/ IRC and ERISA benefits). Employer nonelective contributions may only be applied toward insured benefits under the plan (health, dental, ltd, etc.) and employee salary reduction amounts are used for the FSA. Right now we offer eligibility to employees after 30 days of employment (they receive the employer nonelective contribution). Also, if an employee elects not to participate, we pay them the amount of flex credits (employer nonelective dollars) as taxable compensation spread throughout each pay period.

Could we modify this so that if an employee elects not to participate, he/she is not provided (and taxed) on the nonelective flex dollars (i.e., if you choose not to participate then no extra amont is paid to the employee and therefore no taxable amount to the employee).

Also, for employees that do not use all of the flex credits (nonelective contributions), could we provide in the plan that the employee does not receive the non-used flex credits as taxable compensation (i.e., if the employee is given 500 flex credits/nonelective employer contributions - and only uses 300 of them - can we say that the employee has rejected the 200 unsued flex credits/nonelective contributions and that they are not paid out to the employee in cash and are therefore not taxable income to the employee).

Or is this wishful thinking?

I'm looking at 1.125-1 (Q/As 5, 6 and 9) and 1.125-2 (Q/As 2 and 4) that seem to say (in my novice interpretation) that once the employee is given the choice of participating or not participating that it may be a taxable event?

[jmor99]

I'm not an expert on this, but one of the basic premises of a 125 plan is that there must be a choice between cash and a non-taxable benefit, otherwise there isn't a 125 plan. It seems to me that to get away from what you're currently doing, you need to get away from flex credits, and simply put a price on everything whether it be a stated amount for health insurance etc and a choice of contributing (via pre-tax salary reduction) to the flex plan or "keeping the cash". Same applies to the health ins. But again, I'm not an expert on this.