Section 125 Plan Question

[Guest gbs]

We have an employer who is raising the rx copay on his plan but does not want to change the copay for retirees. The employer wants to set up AND FUND a flexible spending account for the retirees to recoup the copays so they will not (in effect) have the additional copay burden. Can this be done as a traditional flexible spending account? What will have to happen for tax reporting purposes? How shall we correctly apply any pre-tax reductions?

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[Lisa Hand]

Section 125 requires cafeteria plan participants to be "employees". Prop. Treas. Reg. 125-1, Q/A-4 provides" the term "employees" includes present and former employees of the employer.. even though former employees generally are treated as employees, a cafeteria plan may not be established primarily for benefit of former employees."

[Joe Priselac]

Lisa brings up a good point that would probably preclude the employer from utilising a traditional Flexible Spending Account Plan. The other alternative would be a self-funded medical reimbursement plan under Section 105(h). This type of plan is strictly employer funded and does not require the potential of employee reductions which would be impossible where there are no salaries such as is the case with retirees. There are non-discrimination rules that have to be followed. We have never considered the possibility of a plan exclusively for retirees. Does this create a discrimination problem by excluding the active employees?