discrimination test

[QDROphile]

First, the focus of the test is "key employees," not HCEs. That distiction helps one reach the conclusion that if you have only key employees, you cannot have a cafeteria plan. This has been our conclusion for a one person P.C., we have not encountered a large group with only key employees. The plan is available to non-key employees even if they are HCEs, so pay close attention to the definition.

[Guest Robin Vatalaro]

I had a client raise an issue about discrimination testing for cafeteria plans. If a plan has only HCE's does the plan automatically fail the "only 25% or less of contributions can be for HCE's" test. I know in 401k plans if all the participants happen to be HCE's, the ADP test is not deemed to fail even though numerically it automatically would fail because NHCE percentage would always be zero.

Thanks for your help.

[Guest Robin Vatalaro]

Hi QDROphile (how'd you ever get that name)-

Oops on the key vs hce - I knew that. Thanks for the reminder. The particular client I'm speaking of is like your one person PC (hence key/hce pretty much the same thing there).

So what I'm hearing is you haven't found anything re: exception for your one person P.C. who is excluded from benefiting from a cafeteria plan due to obvious discrim failure. I also have not been able to find anything. This problem seems entirely unfair. Do you think this is an oversight on the part of our friends on Capitol Hill or intentional?

Thanks again for your help.

[Guest Robin Vatalaro]

Lisa, do you have a cite for your comment?

I'm not trying to dispute you, however I thought the 2% rule applied only to S-corp's. In fact I recently went to a seminar sponsored by a well respected technical speaker, Art Auerbach (his cousin is Mike Auerbach who is a high-up at employee benefits division of DOL).

According to Art, and everything I have known in the past, a PC is a regular corporation. The IRS requires certain types of corporations to be personal service corps (atty, cpa, engineer, consultant, etc).

One reason you'd want to be a PC in fact is to gain the benefits of cafeteria plan benefits that are not available to sole prop's, partners, and 2% S corp shareholders. I have never heard of the idea that a PC shareholder is not elig for fringe benefits.

Does anyone have any thoughts about this? Thanks!

[QDROphile]

I do not speculate what is in the collective mind of Congress. But even though it smacks of socialism, it is a plausible policy to give tax benefits to encourage certain behavior to benefit the masses, but withhold those benefits when they go primarily to the captains of industry. Or as my law school corporations prof asked, "What is majority ownership of a corporation? It is a license to steal."

[Lisa Hand]

Robin- to clarify the earlier message on the greater than 2% shareholder issue. A PC maybe structured as a corporation or as an S corp, if it is a S corp then the greater than 2% rules apply. The situation for corporations has already been addressed.