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PTO Purchase Question


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Company has a PTO purchase program under its cafeteria plan in accordance with Proposed Regs Section 1.125-1(o)(4).  The program provides that unused elective PTO will be cashed out before the last day of the year.  If the cash-out payment satisfies the definition of "Compensation" under the Company's 401(k) plan, is there anything that would prohibit employees from deferring the cash-out into the 401(k) plan?  Would this somehow be considered a violation of the prohibition against deferred compensation under a cafeteria plan under 1.125-1(o)(4)?  I can't seem to find any guidance on this.  Thanks!

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Treas. Reg. §1.125-1(a)(3) lists 401(k) deferrals as a cafeteria plan qualified benefit, and the issue is discussed in (o)(3) of the same reg.   It's similarly addressed in Treas. Reg. §1.401(k)-1(e)(2)(i), highlighting that employees must have the right to take the amounts as taxable cash.  The bottom line result is that you can use a cafeteria plan to facilitate 401(k) deferrals through cashable flex credits.

Here's a short summary: https://www.newfront.com/blog/how-aca-affects-flex-credits-2

In this case, the employee has already actually cashed out the PTO benefit as taxable cash.  In other words, we're not talking about the standard flex credit situation which could go either way (cashable or non-cashable) depending on plan design.  This is a benefit specifically resulting in a taxable cash out.  

Once that PTO benefit is cashed out, I view it as effectively removed from the cafeteria plan because the choice between cash or qualified benefits has already been made.  At that point, I would just look to to the 401(k) plan's definition of eligible comp as you noted to ensure PTO cashouts are included as eligible.  Assuming the plan treats the cashout as eligible comp, I see no §125 issues in the analysis.

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