Different contribution amounts?

[SLuskin]

This is for the gurus.

I have had 2 similar questions today. Both have to do with the employer providing different amounts based on length of service.

The first is for a POP plan. They want to contribute 75% of the premium for anyone there over 10 years, 65% for those with between 5 and 10 years of service, and 60% for those with less than 5 years of service.

My initial response is no, you can't do that. Do any of you think that if we make the contributio 60% for all the HCE that we can have this differential for the NHCE?

The second is for an FSA. Employer wants to seed the accounts as follows: over 1 year of service $100 per year, over 2 years of service $250 per year, over 3 years of service $350 per year. Again, my initial response is no. If we exclude the HCE or give any HCE only $100, would this plan arrangement fly?

Thank you.

[J Simmons]

Let's take up the POP plan first.

Suppose that you adopt a 106a plan that says the employer will pay 75% of the premium for anyone there over 10 years, 65% for those with between 5 and 10 years of service, and 60% for those with less than 5 years of service. Under 106a, you can so differentiate.

Then you also adopt a 125 POP with no employer contribution. It is solely to allow employees to pay for health insurance premiums. Since those with more than 10 years of service already have 75% of the premiums paid for them (via the 106a plan), they may use the POP to pay the other 25% through pre-tax payroll deductions they elect. Those with between 5 and 10 years of service may use the POP to pay their other 35%, and those with less than 5 years may use the POP to pay their remaining 40%.

If the FSA issue is part of the same employer, you might be able to further 'contort' the 106a plan and use an HRA for some of the employer dollars so that the net effect is what the employer is aiming for.

[SLuskin]

Let's take up the POP plan first.

Suppose that you adopt a 106a plan that says the employer will pay 75% of the premium for anyone there over 10 years, 65% for those with between 5 and 10 years of service, and 60% for those with less than 5 years of service. Under 106a, you can so differentiate.

Then you also adopt a 125 POP with no employer contribution. It is solely to allow employees to pay for health insurance premiums. Since those with more than 10 years of service already have 75% of the premiums paid for them (via the 106a plan), they may use the POP to pay the other 25% through pre-tax payroll deductions they elect. Those with between 5 and 10 years of service may use the POP to pay their other 35%, and those with less than 5 years may use the POP to pay their remaining 40%.

If the FSA issue is part of the same employer, you might be able to further 'contort' the 106a plan and use an HRA for some of the employer dollars so that the net effect is what the employer is aiming for.

Thank you. The FSA is not for the same employer. It is for a prospect that has no plan at all. The broker asked me the question. I don't have access to this prospect yet.

[Jacmo]

sluskin: the reason that you can do what you're proposing (re the 125 plan) is because you can treat different classes of employees differently.

However, you could run afoul of discrimination as to contributions and benefits. (Actual election and receipt of benefits).

Regarding the FSA--as above, yes, you can discriminate by class (length of service). But again, if it turns out that the only persons who have been there more than 3 years also happen to be HCEs (or predominantly HCEs), then you could run afoul of the contributions and benefits test.