Characterization of contribs to 401(k) plan thru 125 plan

[JJD]

An employer wants to contribute a sum certain to a 125 plan for each employee. The contribution may be used only for medical insurance but, if the employee has other coverage or meets certain other criteria for declining medical insurance coverage, may also be contributed to the company's 401(k) plan. The contribution is not otherwise available to employees. In other words, an employee may not take the contribution as additional wages.

Where an employee contributes the sum to the 401(k) plan, are the contributions treated as elective deferrals or as nonelective contributions? In the latter case, may a 401(k) plan provide for alternative allocation rules for nonelective deferrals, namely, in proportion to compensation for "regular" profit sharing contributions but as flat amounts in the case of employer monies coming through the 125 plan?

On the other hand, if the contributions to the 401(k) would be treated as elective deferrals notwithstanding their source, would an employee have constructive income if the employee failed to make any election?

Thank you in advance.

[JJD]

I think I found my answer (underlining added):

1.401(k)-1(e)(2)(i) Cash Must Be Available.

A cash or deferred arrangement satisfies this paragraph (e) only if the arrangement provides that the amount that each eligible employee may defer as an elective contribution is available to the employee in cash. Thus, for example, if an eligible employee is provided the option to receive a taxable benefit (other than cash) or to have the employer contribute on the employee's behalf to a profit-sharing plan an amount equal to the value of the taxable benefit, the arrangement is not a qualified cash or deferred arrangement. Similarly, if an employee has the option to receive a specified amount in cash or to have the employer contribute an amount in excess of the specified cash amount to a profit-sharing plan on the employee's behalf, any contribution made by the employer on the employee's behalf in excess of the specified cash amount is not treated as made pursuant to a qualified cash or deferred arrangement, but would be treated as a matching contribution. This cash availability requirement applies even if the cash or deferred arrangement is part of a cafeteria plan within the meaning of section 125.

Thank you,

John

[Guest morris]

John--I was gonna say--for their to be a cafeteria plan, there must be a choice between cash and at least one tax free benefit.