Can retirees enroll in a Section 125 plan for healthcare deductibles?

[Guest Don Miller]

To provide for the accumulation of funds to meet retiree healthcare deductibles, groups representing our retirees have requested that the annual deductible be withheld from their monthly pension check over 12 equal instalments. Can a Section 125 plan be established to meet this? Can a Section 125 plan be established when there is no employer/employee relationship but rather retiree and plan sponsor?

[Guest Hillary P]

No, you can't establish a Sec. 125 plan specifically for retirees. IRC 125(d)(1) requires that all cafeteria plan participants be "employees." The proposed regs clarify that although

"former employees generally are treated as employees, a cafeteria plan may not be established predominantly for the benefit of former employees . . . " (see Prop. Reg. 1.125-1, Q&A 4).