FSA Discrimination

[IRA]

I am having one of those moments so this may seem like a stupid question. Does an FSA have to satisfy both the discrimination rules of 125 and the discrimination rules of 105(h)? For example, a person could be highly compensated under the new 125 proposed regs, but not under 105(h), and vice versa.

[J Simmons]

Yes and Yes.

[GBurns]

An FSA has to satisfy the rules of 125 which it is under and the new Proposed Treas Regs 1.125-5 state that 105(h) nondiscrimination rules apply to FSAs.

Qualifying for the 125 while not qualifying for the FSA is an issue I have not looked at as yet. There seems to be new nondiscrimination rules for 125 at new Proposed Treas Regs 1.125-7.

[Guest George Chimento]

<<Yes and Yes>>

That was way too easy a question for a person with your expertise (<:

So let's ratchet it up a notch with a concentration test question under the new regulations. Section 1.125-7(f) provides a safe harbor for cafeteria POP plans. That safe harbor facilitates passing the 125(b) and © concentration and discrimination tests.

However, the safe harbor seems to be limited to cafeteria plans described in 1.125-1(a)(5), i.e. "a cafeteria plan that offers as its sole benefit an election between cash (for example, salary) and payment of the employee share of the employer-provided accident and health insurance premium (excludible from the employee’s gross income under section 106)."

Typically, cafeteria plans have a POP and a flex account. Is the protection of the 1.125-7(f) safe harbor lost altogether because the cafeteria plan is not just a POP? That would be a tax disaster.

Or, is it possible to use the safe harbor of 1.125-7(f) with respect to the POP part of the cafeteria plan, and to test the flex account separately for 125(b) and © compliance? With that interpretation, the POP passes and the flex account is treated as if it were a separate cafeteria plan. I like that approach, because the flex account is a separate welfare benefit plan, but I'm concerned that the POP and flex accounts are typically offered under a single cafeteria plan, and that may not comply with the 1.125-7(f) safe harbor requirement that only a POP be offered.

How are TPAs approaching this under the new regulations?

Regards,

George Chimento

[J Simmons]

So let's ratchet it up a notch with a concentration test question under the new regulations. Section 1.125-7(f) provides a safe harbor for cafeteria POP plans. That safe harbor facilitates passing the 125(b) and © concentration and discrimination tests.

However, the safe harbor seems to be limited to cafeteria plans described in 1.125-1(a)(5), i.e. "a cafeteria plan that offers as its sole benefit an election between cash (for example, salary) and payment of the employee share of the employer-provided accident and health insurance premium (excludible from the employee's gross income under section 106)."

Typically, cafeteria plans have a POP and a flex account. Is the protection of the 1.125-7(f) safe harbor lost altogether because the cafeteria plan is not just a POP? That would be a tax disaster.

No, not if premiums and flex accounts are contained in the same cafeteria plan.

Or, is it possible to use the safe harbor of 1.125-7(f) with respect to the POP part of the cafeteria plan, and to test the flex account separately for 125(b) and © compliance?

Prop Treas Reg §1.125-7(h) provides that "[a]n employer who sponsors more than one cafeteria plan is permitted to aggregate two or more of the cafeteria plans for purposes of nondiscrimination testing." The regulations thus do not require all plans of an ER be aggregated, and recognize that there can be more than one. I think to get the POP exception to the testing, you'd need two separate plans--separate titles, separate three digit numbers, separate documents--one for the POP (premium-only plan) and the other for flex accounts, with neither document specifying optional aggregation with the other.

[Guest George Chimento]

<<I think to get the POP exception to the testing, you'd need two separate plans--separate titles, separate three digit numbers, separate documents--one for the POP (premium-only plan) and the other for flex accounts, with neither document specifying optional aggregation with the other. >>

Thanks for getting back so promptly. Let's work on this further. It's a huge issue for law firms and other organizations where the key employee concentration test is a stinker. That $150,000 amount in the Key Employee definition hasn't been indexed, so it tags lots of 1% owners these days.

I'll assume you were typing a little fast. Cafeteria plans don't get numbers, of course, but numbers are assigned to the underlying welfare benefit plans, in this case the group health and med-flex features (and no number for Dependent care Flex, because it's not an ERISA plan).

All of the mass-produced vendor documents I have seen fold this into a single cafeteria plan. I hate to subject clients to multiple documents (i.e. one for the POP, and one for the Flex accounts).

What do you think about a corporate resolution which says that POP shall be deemed to be delivered under a separate cafeteria plan for purposes of 1.125-7(f), and that aggregation for discrimination testing with Flex accounts is expressly prohibited? (That's actually the way this regulation should have been written.)

Regards,

George

[GBurns]

Why is there an HCE problem with law firms ? Aren't the HCE in law firms usually partners ? And aren't most law firms partnerships of some sort making the reference to 1% owners, moot ?

I doubt that the separate plan idea would work in light of 1.125-6 (3)(iii) Other arrangements.

[Guest George Chimento]

Why is there an HCE problem with law firms ? Aren't the HCE in law firms usually partners ? And aren't most law firms partnerships of some sort making the reference to 1% owners, moot ?

I doubt that the separate plan idea would work in light of 1.125-6 (3)(iii) Other arrangements.

A great many law firms are still professional corporations. Without going into detail which is irrelevant for this board, there are good reasons for that. The key employee concentration test is extremely relevant.

I'm not sure what reference you are making, because there is no 1.125-6 (3)(iii). Please send proper reference, because I would have thought that 1.125-6 dealt only with substantiation. And thanks for participating. I'm still appalled that these regulations went final with such scanty guidance on discrimination.

Regards,

George

[J Simmons]

Hi, George,

I assign a three digit number, 5XX, to the cafeteria plans that I write, and I see them assigned to a great many--but not all--cafeteria plans that clients have from other sources.

I do not think you could get to 2 cafeteria "plans" as simply as by the corporate resolution to treat a single document that speaks in terms of a single plan as being in reality two plans. But hey, they permit the document requirement to be satisfied using more than one document, so why not the opposite? two plans using one and the same document.

One technique I see used to relieve the limits of the key EE concentration test is for the ER to decide to provide under IRC 106 health insurance coverages at the ER's expense to just key EEs (and perhaps also HCEs). The EE has no choice in the matter, it's take it or leave it, but those who leave it get nothing in lieu thereof. This is documented as a 106 plan, with the ERISA document 'bells and whistles'.

Then a single cafeteria plan offers to all EEs the opportunity to elect paycheck reductions to pay for flex accounts and health insurance premiums. The key EEs already have health insurance under the take-it-or-leave-it 106 plan, and so would not elect under the 125 plan to pay premiums redundantly and bear the expense of that redundancy through payroll reduction. The real choice presented for the Key EEs would be how much to flex account per year, and of which types of flex accounts. For the non-Key EEs, they would be able to choose health insurance premiums and/or flex accounts.

This technique removes the health insurance premiums from the Key EE side of the equation in the 25% concentration test, but health insurance premiums the non-Key EEs elect to pay by paycheck reductions are counted on the non-Key EE side. This makes the 25% concentration test easier to pass.

If the ER has traditionally paid the premiums of the non-Key EEs (with no cash alternative for the EE to elect) and wants to continue to pay such, the ER can give the non-Key EEs a one-time boost in pay equal to what those premiums would be. For those non-Key EEs that elect the coverage and corresponding payroll reduction, they are in the same net place as before. Those non-Key EEs that elect to take cash instead may do so under this arrangement, the ER cannot force these dollars to be used to pay the premiums. So some ERs will survey the non-Key EEs first to determine how many have other coverage, how many might take cash instead, etc. to get a feel for the extent to which cash would be taken, non-Key EEs might have no health coverage, etc. This can help avoid a potential problem of not meeting the group health insurances minimum percentage threshold as well.

[Guest George Chimento]

<<One technique I see used to relieve the limits of the key EE concentration test is for the ER to decide to provide under IRC 106 health insurance coverages at the ER's expense to just key EEs (and perhaps also HCEs). The EE has no choice in the matter, it's take it or leave it, but those who leave it get nothing in lieu thereof. This is documented as a 106 plan, with the ERISA document 'bells and whistles'.>>

I'm taking my wife to dinner shortly, and she wants to know why I'm typing to this Simmons person. ERISA uber alles, or something like that.

I think the typical law firm would have a problem with that design, simply because some key employee "partners" have coverage elsewhere (through spouses) and would want cash. Also, we have a special wrinkle in Massachusets with health reform. We technically cannot buy a group policy unless the employer premium for the lowest paid is at least as great as for the highest paid.

I'm pretty comfortable that a corporate resolution which indicates the intent that the POP must be tested separately pursuant to the POP safe harbor works. If you hear anything to the contrary from our regulators, let me (and others) know.

Now, it's off to dinner. Enjoy the long weekend.

George

[GBurns]

Sorry. It should have been 1.125-6 (a)(3)(iii) on page 43961 of the Federal Register version.

[Guest George Chimento]

<<aren't most law firms partnerships of some sort making the reference to 1% owners, moot ?>>

I thought I might follow up on your observation, just to help out.

The 1% owner concept (to determine key employee status) applies to partnerships as well as corporations. Instead of stock, you look to the capital or income interests. I bet you know that and you were typing fast.

Regards,

George

[GBurns]

If they are partners they are not eligible to participate in the section 125 cafeteria plan. If that is correct, what does it matter if they are 1% owners in the partnership ?

[Guest George Chimento]

If they are partners they are not eligible to participate in the section 125 cafeteria plan. If that is correct, what does it matter if they are 1% owners in the partnership ?

George,

For a 125 plan, you are correct.

I thought you were making a general observation on "key employee" definition for benefits. Sorry for the red herring.

George

[GBurns]

I wondered about the general tone of the resoonses.

The Forum is for Cafeteria Plans and the OP posed a question regarding 125 plans, but the responses seemed to have overlooked both.