POPs

[jpod]

Client has a Section 125 plan document that covers both "premium conversion" for health and dental insurances, and medical and dependent care FSAs. While there is only one document, the dollars elected for premium conversion are unrelated to and not in any way dependent upon the dollars elected for either FSA, and vice versa. We are in the middle of the first plan year (calendar year), and realize that if the plan is tested for discrimination on a combined basis, the plan will fail the nondiscrimination tests. However, if the premium conversion component can be viewed as a separate POP, that component passes via the safe harbor. Under the proposed regulations, can we treat the premium conversion component as a separate POP which automatically passes? If not, can we amend the plan retroactively mid-year to break it up into two plans: a POP and a plan for FSAs?

[Guest Quicksilver]

Since no one has offered a reply, I will give you some thoughts. I reviewed the new 125 Regs and the definition of a POP plan, could not find anything about having to mandatorily aggregate separate plans. It sounds like you just have bad demographics, to many keys. If the FSA passes as a stand only plan, the keys are not making the same allocation as their percentage of the employee population. So this does seem to violate the spirit of the testing rules.

What about just having the company directly pay more of the premium for the KEY’s, to make the testing pass, not sure how that option would work mid plan year. This is another fine mess we have to deal with!!

[SLuskin]

I am not reading the question that way. The POP is passing. It's the FSA which has not passed. Disaggregating the plans would still mean that the FSA has not passed. So, the KEY and HCE would be taxed on their entire contribution. Not the end of the world.

In the future, see if they are small enough to qualify for the Simple Cafeteria Plan. Or else, have them make employer contributions only into the accounts of the NHCE.

[oriecat]

Not sure if this will help, but one thing we did a couple years ago when having trouble with our testing was use the top 20% for the HCE, instead of just based on the salary amount. It gave us a much larger employee base to spread the HCE contributions over and brought their average down to where we passed.