125 plan with only HCEs

[Guest cshade]

Can a company have a 125 plan with only HCEs. This group employs 5 HCEs and no non-HCEs. My first thought is no because the HCEs would receive 100% of the benefit, however, since they employ no non-HCEs, the plan isn't really discriminating against non-HCEs. Any thoughts or direction would be appreciated. Thanks!

[J Simmons]

It depends on whether among the HCEs there are any Key Employees (416i) and non Key Employees. From a discrimination testing perspective, if all you have are HCEs, then generally that should not be a problem. If the 125 plan has health flex accounts, then section 105h is implicated too. The discrimination test there is between the lowest paid 75% and highest paid 25% of your all HCE group.

There is also a 25% concentration test. That is, no more than 25% of the tax-free benefits under the 125 plan can benefit key employees. So, for every dollar the key employees can receive tax-free, there must be non-key employees benefiting $3.