Can employer limit nonelective contributions to 125 plan to: dependent

[Guest Robert Landau]

Can an employer limit nonelective contributions to a 125 plan to (a) premiums for dependent care coverage or (B) 401(k) plan contributions? If so, what is the tax status of the k-plan contributions? How would this work?

[Lisa Hand]

Robert: can you give us a bit more information. Are you refering to dependent health insurance coverage or employer contributions for dependent care assistance? Does the plan have a cash-out option?

[Guest Robert Landau]

Sorry for the cryptic message. The employer wanted to put money into the flex plan but only allow employees two choices for using the money: either it could be used to pay premiums for dependent health care or if not used for dependent premiums the money would go into the employee's 401(k). It seems like a reasonable enough choice, but we couldn't figure out how to do it. Any thoughts would be appreciated.

[Guest KGibson]

Have they thought about a defined contribution plan? The ER can pay 100% for EE coverage and give spending credits for employees to choose other benefits where they can spend their money. That way, if they don't have dependent health coverage, their option could be to use it in 401(k) or other voluntary benefits.

[Guest Paul]

If the only choice is non-taxable benefits, the program is not a cafeteria plan. One of the choices has to be cash and if there is only non-elective employer contributions going to non-taxable benefits, the Section 125 rules do not apply. You still would have to satisfy any discrimination rules applicable to the various underlying benefits.