Mandatory contributions to avoid cafeteria status

[Guest Penelope]

A government agency is considering entering into an agreement with one of its unions to establish a medical reimbursement plan. The plan would provide for employer and employee contributions to individual reimbursement accounts, which would carry over from year-to-year and be available for reimbursement of expenses incurred by retirees. The employees' contributions would be characterized as mandatory contributions made as a condition of employment and would be made from pre-tax income.

Obviously, the "mandatory contribution" feature is designed to avoid having the cafeteria plan rules apply to this plan, since if they did, the plan couldn't cover retirees.

Has anyone encountered this design? Does it work? It seems iffy to me.

[J Simmons]

The ability to carryover unused amounts beyond the end of a plan year (and eventually into retirement) is by virtue of Rev Rul 2002-41 and Notice 2002-45. Neither quite mentions mandatory employees in describing the contributions.

Rev Rul 2002-41 "The HRA is paid for by the employer and employees do not make any salary reduction election to pay for the HRA."

Notice 2002-45 "An HRA is an arrangement that: (1) is paid for solely by the employer and not provided pursuant to salary reduction election or otherwise under a section 125 cafeteria plan;..."

I understand the 'politics' of collective bargaining with a union, and the perceptions, but if stated pay was slightly reduced so that all of the contributions (the ER would be obligated per the CBA to provide) were to be paid by and characterized as employer contributions, it would have better semantics even if in substance it is the same thing.

[Don Levit]

One of the reasons for the HRA not being subject to cafeteria plan rules is because of the carryover provision (in my humble opinion).

What you may want to look at is HSAs funded by a cafeteria plan.

HSAs are not considered deferred compensation.

Don Levit

[LRDG]

Obviously, the "mandatory contribution" feature is designed to avoid having the cafeteria plan rules apply to this plan, since if they did, the plan couldn't cover retirees.

A Cafeteria Plan may not provide retirement benefits, or deferre the receipt of compensation with exception of 401k. Nor may a Cafeteria Plan be for the exclusive benefit of retirees, but retirees can participate in a Sec. 125 plan.

[Don Levit]

LRDG:

A cafeteria plan can cover former employees, which current employees who eventually retire would be.

In addition, Sec. 125 (2)(D) states an exception to deferred compensation for HSAs.

Don Levit