Transferring funds from Section 125 to Qualified Plan

[buckaroo]

I am a qualified plan administator for 401(a) plans. This is my first entry into the cafeteria plan forum so please be kind as to my terminology. If additional details are needed, please let me know and I will try to get them.

I received a call from one of my colleagues regarding an ADP/ACP test he was processing. He said that the Plan Sponsor has a Section 125 plan and that any money that is "left over" can be transferred from the cafeteria to their 401(k) Plan. From speaking to some of other colleagues, they thought that this may have been an option many years ago for a very short period of time.

1) Has anyone heard of this? Is this possible?

2) If so, can anyone provide details and a good reference to read?

3) Would this be considered a pre-tax (401(k)) deferral and be tested in the ADP test?

4) If not, was it ever possible?

Thanks in advance. Any help is greatly appeaciated.

[SLuskin]

You cannot do that and I don't think you ever could.

There is always some legislation or another pending to permit this, but it has never passed.

You might be thinking of the once in a lifetime ability to roll FSA balance into an HSA (not a qualified plan) as long as the Section 125 document has been amended to permit this.

[GBurns]

What do you mean by "left over"?

If this is the unused amount in a "Benefits Credit" type of cafeteria plan there usually is the option to apply this amount to a 401(k).

If this is the amount "left over" in the FSA at the end of the year, then No, you cannot.

[Ron Snyder]

Perhaps what they meant was that the employer elects to take any unused funds left over in the 125 plan and make an elective employer contribution to the 401(k) plan.

[buckaroo]

Thanks for all of your replies. One of my colleagues has provided me with some research which helped me better understand the problem and provide an answer. (I do not know know the source, but I may be able to provide if necessary.) Here is some of what he sent me:

Q: Can a 401(k) plan be offered as part of a cafeteria plan?

A: Although a cafeteria plan generally cannot include any plan or option that provides for deferred compensation, this restriction does not apply to 401(k) plans. Thus, elective deferrals and after-tax contributions may be made to a separate 401(k) plan through a cafeteria plan. The rules on change-in-family-status changes under a cafeteria plan cannot be applied to 401(k) plan contributions, and elective deferrals to a 401(k) plan should not be included in the benefits amounts that are tested under the Section 125 nondiscrimination test.

401(k) Plans

Flex credits intended for benefits may sometimes backfire. If an employer gives each employee $1,200 in flex credits each year, it’s very possible that the more healthy employees will not use up their flex credits before the end of the year and end up forfeiting them back to the employer.

Try offering a 401(k) inside of the flex credit plan. Everyone now has a spot to use their flex credits while building a nest egg for retirement.

The advantage? It’s a simple benefit change if a 401(k) plan has already been established and the flex credit plan may boost participation in the cafeteria plan.

The only real drawback is that 401(k) contributions are taxed differently than cafeteria plan contributions — FICA is withheld from 401(k) contributions.

[QDROphile]

You can run a 401(k) plan through a 125 plan but it has to be set up properly before the salary reductions for the 401(k) feature are made. It is too late to amend to treat "left over" as 401(k) elective deferrals. Timing and proper plan terms are everything.