Seasonal Layoffs

[Guest Schecky]

Please comment on what you think about the following scenario. Employer has a 125 plan. Employer employs seasonal employees and employees are laid off for 3 months of the 12 month plan year (employees work 1st 6 months of plan year, are laid off for the next 3 months and work the last 3 months of the plan year). Employer wants to withhold, pre-tax, 150% of ee share of health insurance premiums for the first 6 months of the plan year while ees are working. Employees would then be laid off for 3 months and their portion of premium would already be prepaid. Employer will pay employer share of premium during lay off. When employees return for the last 3 months of the plan year, ees would pay 100% of their share of the premium. Questions/issues:

1) Is it okay to pre pay for an anticipated layoff?

2) If so, is it okay to not collect the prepayment pro rata over the entire plan year?

3) If an employee terminates during the first 6 months, can employer refund the extra 50% back to employee? (If so, refund would be taxable and employment taxes would be owed, right?)

4) Because of the front-loading, it seems that any deferred comp issue could be avoided. Do you see any issue?

5) Since this is health insurance premiums and not FSA contributions, is the use or lose rule avoided?

[J Simmons]

1) Is it okay to pre pay for an anticipated layoff? YES, from a section 125 perspective (per informal comment made by Harry Beker of IRS National Office a few years back in context of question about school teachers paid over 12 months for 9 month school year).

2) If so, is it okay to not collect the prepayment pro rata over the entire plan year? YES, see #1 above.

3) If an employee terminates during the first 6 months, can employer refund the extra 50% back to employee? (If so, refund would be taxable and employment taxes would be owed, right?) THIS might implicate section 409A deferral of compensation if the 12 month year is a fiscal, rather than calendar year. This could cause the postponement of some earnings into the next tax year. From a cafeteria plan perspective, I don't see this as problematic.

4) Because of the front-loading, it seems that any deferred comp issue could be avoided. Do you see any issue? See #3 above.

5) Since this is health insurance premiums and not FSA contributions, is the use or lose rule avoided? YES.