Can a Pay Cut be a Change in Status?

[Guest Livia]

We are looking for a way to treat an across the board cut in pay as a change in status under Section 125. As a cost-savings measure, the employer is considering cutting compensation and hours for all non-union employees. This would not affect anyone's eligiblity or the cost of benefits under the group health plan. However, the cost of benefits would be a bigger chunk of employees' checks since they would be paid less.

Because this would affect all employees, the employer would like to treat this as a change in status so participants can elect lower cost options (such as moving from PPO to HMO or dropping coverage). However, Treas. Reg. Sec. 1.125-4 doesn't seem to cover a drop in compensation since plan eligibility is not affected. Additionally, it doesn't seem to fit under the change in employment status since only compensation is changing, not any other aspect of employment. Finally, the change in costs rules don't seem to apply because the actual cost is not changing, it is just a larger percentage of compensation.

any ideas on whether this can work?

[LRDG]

The cleanest option is to terminate the current plan.

Termination of the plan could potentialy allow employee the remainder of the year to submit claims for the FSA balances at date of plan termination.

Termination of the plan would make tt possible to adopt new plan that allows employees to make new premium and FSA elections.

Amending the current plan is also a possibility. It's possible to amend the plan's description of part time employment to coincide with the reduced hours to be worked, thereby allowing election changes due to status changes from full time to part time status.

[Chaz]

I have a similar circumstance: Part-timers' hours are being reduced from 30 to 20. There is no loss of eligibility but some of the part-timers will not have enough pay to pay for the amount of their benefits election. Is a solution to withhold the benefits amount from each affected employee's pay check, bill the employee for the difference, and cut off the benefits if and when the employee does not pay the full amount?

Any other thoughts?