Plan Benefits only Board of Directors

[lkpittman]

Client would like to set up a cafeteria plan that benefits only the members of the Board of Directors. Directors are NOT HCEs (under 414(q) or under 125 rules), and 410(B) tests out okay. Any comments on whether this would be okay? Reasonable classification or not (and why?). Thanks.

[Guest Paul]

Cafeteria plans can only benefit employees and board members are not considered employees.

[lkpittman]

Thanks for your input, Paul, but these Directors are, in fact, employees. The Group Health Insurance Standard Provisions Model Act 27 provides that a director may be an employee, if he or she is actively engaged in the conduct of the employer's business.

The issue we are concerned with is 410(B). Any comments?

[GBurns]

What is the Group Health Insurance Standards Provisions Model Act 27 ? What is its relevance to the Internal Revenue Code ?

Section 125 benefits are for employees. (Period)

The fact that an employee ALSO serves as a Director is irrelevant. The benefit is provided to the employee NOT to the Director. There is no relationship between the two only coincidence. You should separate the two different hats that any of those individuals wear.

[lkpittman]

I think you guys are missing my point. They are employees and may participate in this plan--period. They are also directors. Do you see any problem with an eligibility classification for the plan that provides that only director employees are eligible to participate (410(B) tests out okay). GBurns, according to your reply, you don't see a problem--this classification would be "reasonable" under 410(B)?

[Bob R]

For whatever it's worth, I think excluding employees who are not directors could be considered a reasonable classification. Unfortunately there isn't anything in the 410(B) regulations clarifying what is reasonable (other than excluding someone by name is not reasonable).

As long as they are not HCEs (i.e., not earning over $85K and not 5% owner) then you'll pass the nondiscriminatory classification test. And, as long as none of them are key employees, then you don't have to worry about the 25% concentration test.

[lkpittman]

Thanks, Bob R., that's some reassurance I was looking for!