Employer contributions to a 125 plan

[Guest Liz Klym]

What are the rules that apply to a cafeteria plan where the employer contributes a set amount of money which the employees can use toward employer sponsored benefits? Does it operate differently than a regular 125 plan? Are there special administrative issues? How does it affect the employer, tax wise? I don't know anything about this issue, so all help will be appreciated! Thanks!

------------------

Liz

[Guest ptpnthr]

You have to make sure that you offer employees the opportunity to take at least one taxable benefit, whether it be cash or the opportunity to participate in a benefit on an after-tax basis (some people say it has to be cash, but an argument can be made that when you give them after-tax benefits you are really giving them cash to put toward that benefit - any comments on that issue?). If the plan turns out to be discriminatory, this type of arrangement will affect the tax consequences to the HCEs. To use an example from the proposed regulations, say an HCE may select benefits costing $1,300 from amomg the following: up to $300 in cash, health care coverage (cost of $600), disability (cost of $200), legal services (cost of $400), and dependent care (cost of $400). An HCE elects $100 in cash, the health care ($600), disability ($200), and dependent care ($400). If the plan is discriminatory, the HCE is taxed on the $100 that she selected and on the $200 that she could have selected. This $300 is allocated first to the taxable benefits she actually selected and afterwards allocated pro rata to the nontaxable benefits, with $100 going to health care, $33.33 going to disability, and $66.67 going to dependent care. This in turn may impact the taxability of amounts received under each, and the cost of coverage under the health plan may be deductible under Section 213.

Anyone have anything else?

[Guest Liz Klym]

Thanks for the reply. Could anyone tell me if the administration of this type of plan would be any different than a regular 125? I haven't been able to see that it would, other than tracking who's making the contribution, the employer or the employee. All replies appreciated!!!

[GBurns]

First you should look into your definition of a section 125 plan, you seem to have some confusion as to what is "a regular " plan. A plan in which the employer contributes an amount of money which the employees use to pay for benefits is a regular plan to many people. You are probably thinking of a premium conversion plan, which is also regular to many people.