PLAN AMENDMENT QUESTION

[Guest Kimberly Crowder]

A CLIENT WISHES TO AMEND THEIR PLAN TO MAKE THEIR PLAN YEAR COINCIDE WITH THE CALENDAR YEAR, PRESENTLY THERI PLAN YEAR ENDS JANUARY 31.....

IF THIS PLAN IS AMENDED TO BE A 12/31 PLAN YEAR END, CAN THE PARTICIPANTS CHANGE THEIR ELECTIONS TO ACCOMODATE THIS SINCE THEY ORIGINALLY SIGNED UP TO HAVE DEDUCTIONS TAKEN OUT THROUGH JAN 31?

[SLuskin]

The best way to accomplish this is amend the plan prospectively. That way, you would have an 11 month plan starting 2/1 and ending 12/31. The employees would know this in advance and make an 11 month election. I do not think you should do this in the middle of a plan year and simply "cut short" a plan year for which employees originally had made a 12 month election.

[Guest Kimberly Crowder]

thank you for your response. i actually suggested this myself. However, the client wishes to make the plan year end change effective 1/1/2001...does this mean they will have to cut off contributions at 12/31/00?...and if so, will the participants be allowd to adjust their elections to accomodate this?

[Guest Lee Ann Jenkins]

I don't think you'd better let the participants make any changes, but if the plan sponsor wants to change it so quickly, is he willing to accept the negative balances that would occur if the plan is funded for only 11 months? That might make him change his attitude toward prospective changes.

[Lisa Hand]

The participants would not be allowed to adjust their allocations since a change in cost or coverage does not open the door for changes in the health FSA (Tres.Reg.1.125-4(f)).

This would mean that terminating the plan mid-year would have possible negative results on both employer and employees. The employer would have to absorb any negatives at plan year termination and the employee would not be able to claim expenses during that final month which in some cases would result in forfeitures.