Avoid Non Discrimination Testing

[Guest NeophiteTPA]

An employer allows rank and file employees to pay insurance premiums through Cafeteria Plan and also to participate in flexible spending plan and dependent coverage.

Physicians, whether they are considered key employees or not, are not allowed to participate in the Section 125 plan.

The corporation (C corp) pays the cost of insurance coverage for the physicians. These and other "physician specific" expenses are deducted from the share of compensation which each physician receives.

Does this allow the plan not to take the physicians into account when doing their discrimination testing?

[Guest b2kates]

I do not think so. There is an old case where the employee contract required the employer to "reduce" salary and purchase benefits for the employee. The IRS determned that this was a cafeteria arrangement and without a formal plan impermissable. Your scenario seems similar.

[jmor99]

I don't think so either. What if you have a young physician just starting out who doesn't make enough to qualify as a key employee? What is the excuse or reason for excluding him? Can you start classing out secretaries or nurses as well? Don't think so. So you have more than 1 problem here. You can't exclude them from the testing, and you can't exclude them from the plan. The particular TEST may exclude some or all of them from participation but the plan cannot class them out. Or so I think.

[LRDG]

b2kates is correct. Irrespective of Sec. 125, the 'agreement' you describe is compensation, according IRS. Employers have attempted this type of arrangement with employees, examples pre-dating the adoption of Sec. 125 to the tax code, and IRS has been clear on what defines 'compensation'. The premiums are compensation.

[Guest mjb]

Before the initial Q can be answered you need to determine how the employee's comp is being reduced to pay for HI. If the Doc negotioted the HI payment as part of his employment agreement/comp package and the employer pays the reduced amount as salary after deducting the HI premium the HI will not be taxable for income or FICA purposes b/c the tax law does not prohibit salary reduction plans for HI. Express Oil Change Inc. v. US 1996 WL 679423 where the fed ct rejected the IRS position in Rev. Rul 65-208 that HI premium w/held from employee's comp was taxable income to the employee.

Doc are excluded from consideration under 125 plan b/c they are not eligible to participate.