Extended COBRA benefits to retirees through cafeteria plan

[Christine Roberts]

Employer wants to offer extended COBRA benefits to retirees through its cafeteria plan. Employer's group health benefits are self-funded; active employees pay their portion of coverage through salary deferrals. Employer wants to allow retirees to pay for extended COBRA by allocating accrued, unused sick pay to the plan. Can it do so through the cafeteria plan? Sick pay is not on the "menu" of benefits under the plan for active employees.

[KIP KRAUS]

It seems to me that the IRS says a plan can included former employees, but a 125 plan cannot be established predominately for former employees. Thus, because sick pay is not part of the plan for active employees it seems to me that allowing retirees to utilized sick pay within the plan may fall afowl of the regs.

[Kirk Maldonado]

Kip:

What would you think if the plan was revised to allow active employees to surrender their accrued but unused sick pay?

[KIP KRAUS]

Kirk:

When one reads the paragraphs included in IRS Publication 502 regarding “Unused sick leave to pay premiums” it appears that you may use unused sick pay to pay retiree health premiums, but if you voluntarily apply such sick leave to pay for retiree health premiums it is taxable income.

On the other hand, it goes on to say “If you participate in a health plan where your employer automatically applies the value of unused sick leave to the cost of your continuing participation in the health plan (and you do not have the option to receive cash), you do not include the value of the unused sick leave in gross income”.

What I am unsure of is, is this the only time you can use unused sick pay to pay premiums, or can you do it as an active employee?