cafeteria plans

[KimberlyC]

The proposed cafeteria plan regulations provide that a cafeteria plan may not discriminate in favor of highly compensated employees with regard to eligibity to participate in the plan (or with respect to contribuions and benefits provided under the plan). The eligiblity test is a two-part test. First, the cafeteria plan will not be discriminatory if the plan benefits a group of employees who qualify under a reasonable classification established by the employer, as defined in Treas. Reg. 1.410(b))-4(b). Second, the group of employees included in the classification must satisfy the safe harbor percentage test or the unsafe harbor percentage component of the facts and circumstances test in Treas. Reg. 1.410(b)-4©. Treas. Reg. 1.410(b)-4(b) provides that a classification must be reasonable and established under objective business critieria that identify categories of employees. Reasonable classfications include specified job categories, nature of compensation, geographic location and similar boa fide busines critiera.

The employer would like to exlude true temporary employees (e.g., who work for six months or less to fill FMLA and other leave spots), but does not wish to impose a six-month wait for all employees. In 2006 ABA Qs and As, the IRS indicated an exclusion for temporary emloyees under a qualifed retirement plan may violate Section 410(a) because it may relate to a service requirement instead of simply relating to a job catogey (contrast with on-call employees). Any thoughts on whether the exclusion of temporary employees would violate the reasonable classification test? Note: we go with the 1,000 hour rule for all retirement plans regarless of job description.

[Guest L337pwner5]

I have some experience with a qualified retirement plan that had separate eligibility requirements for temporary employees. I haven't done very much with the new 125 regs, though, so take it for what its worth.

"Normal" employees became eligible to participate immediately; "temporary" employees had a one year service requirement. If a temporary employee became a normal employee, the employee became eligible to participate immediately on becoming a normal employee.

The IRS issued a favorable determination letter to the plan containing this setup. Again, this is in the retirement plan context, but it seems like as long as you make sure that any "temporary" employee that happens to log a year of service (or maybe it's three for caf plans?) is eligible to participate, you should be ok.