unusual benefit arrangement

[K2retire]

We have a 403b client who tells us that they provide a fixed dollar benefit to each employee with the stipulation that the employee can either use the funds to pay their company sponsored health insurance premiums, or have them deposited to the 403b plan. If they choose not to do either of those two things, they do not receive the benefit.

Is that allowed? What would such an arrangement be called?

[Lou S.]

What would such an arrangement be called?

Strange?

It sounds like a flexible benefit to allow for a choice between health care or retirement. I don't know if it is allowed, 403b not really my specialty, but it does sound like something the govenemebt would not have a real problem. It may be subject to dicrimination testing in operation especially if most NHCEs choose to pay healtcare premiums and most HCEs opt for additional retirement benefefits.

[QDROphile]

Who is responsible for 403(b) compliance? That person needs to be able to explain how it fits the rules. By implication under 403(b), employee choice concering contributions is allowed only with respect to salary reduction agreements. There is no salary reduction aspect of the arrangement. If you take away the the wierdest part of the arrangement - the election by the employee for the 403(b) contribution and the possibility that the employee would fail to elect and therefore lose the contribution (how would that happen ???) - the arrangement would be an employer credit for healthcare (e.g. for elective coverage), with the employer making a choice about contributions to the 403(b) plan based on cost of health coverage (how much of the credit was used). The allocation of the contributions would be based on individual circumstances and not uniform, so the allocations would have to be be tested. That is the closest I can come to rationality and convention. the employer's employee-by-employee choice of contributions is still bothersome. I can tell you it is not a section 125 arrangement even though it has some appearances of section 125 features. This looks like it was dreamed up by a partially informed good heart or some informed person who had no fear of boundaries.

[BG5150]

How does the plan document account for this contribution to the retirement plan?

[Everett Moreland]

see the prior discussion here: http://benefitslink.com/boards/index.php?/topic/18034-health-ins-vs-403b/

[oldman]

We have discovered information concerning 403(b) contributions relating to a cafeteria plan type of arrangement. I have attached a link providing discussion on this matter. It appears that healthcare benefits similar type of benefits become taxable to all employees.

http://benefitslink.com/boards/lofiversion/index.php/t2501.html

Ellie Lowder in her book "The Source", pages 7-19, talks about inadvertent cafeteria plans. She states, "if the program permits a choice between taxable (or tax deferred) benefits and nontaxable benefits such as a choice between receiving cash value of unused sick pay, contributions to a flexible spending account or contributions to a 403(b) plan, the employer may have inadvertently set up a Section 125 cafeteria plan".

According to the IRS, if an employee can choose between a taxable benefit - such as 403b contributions which are taxable but tax deferred - and non taxable benefit such as the healthcare benefits - the employer has created a Section 125 plan. However, under Section 125, only certain benefits may be offered. Contributions to a 403b plan are not permitted. Any arrangement offering such choices to employees that does not satisfy Section 125 would be an unqualified cafeteria plan. This would result in immediate taxation of benefits to all employees. NOTE - she does not state which benefits are taxable. the assumption would be the healthcare.

It seems the solution should be to payout in income the opt out money, and then the participant can elect to defer is as an employee contribution to the 403b if they do not want it in cash.

[K2retire]

Thanks for all of the responses. Although it disagrees with most of the information here, my boss tells me that this is known as a "full flex" account and is both very common and totally permissible.

[QDROphile]

Does you boss explain anything?

[K2retire]

Because the question came from the investment advisory division of the company, rather than the retirement plan division, I am unlikely to get more information.