Qualifying Event for 125

[Guest dweiss]

We currently have a voluntary short-term disability buy up for hourly and non exempt employees. Participants share in the cost and the premium is deducted pre-tax from their checks. If they do not elect the plan, they only receive the California STD.

For exempt employees we have a self-insured salary continuation plan at no cost to the employees. Exempt employees are not eligible for the STD plan.

We occasionally have employees promoted into the exempt ranks. At that point, they are no longer eligible for the STD plan. We were just told by our TPA that according to the IRS, this is not a qualifying event and we must still continue to withhold the premiums from their check for the rest of the plan year.

We think this is more a case of lost revenue to the TPA then a rule. The employee cannot participate in the plan, so why should they pay premiums. The STD is not a benefit for them any more. They receive a higher benefit in the form of 100% salary continuation.

Is the TPA correct? If not, can you provide a reference point so I can take it into the meeting next week and prove my point?

Thanks for your help.

[Guest jlcowden]

While a literal reading likely supports your TPA common sense says HUHHHH ???

I believe you could make a different determination and be OK. But you should consult with specialized ERISA Counsel before proceeding.

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jlcowden

[SLuskin]

I think that the new regs on family status change make it clear that this person can change the election to zero for the balance of the plan year.

[Lisa Hand]

Sluskin is correct.

A different quesiton is why are you pre-taxing disability premiums? Did you understand that if the premium is pre-tax, the benefit is TAXABLE. Your TPA should have explained that to you and the employees need to understand they are trading a small tax savings now for their benefit being reduced by taxes.

[Mary C]

Final 125 regs issued 3/23 state that if there is a change in employment status of the employee that affects that individual's eligiblity under a cafeteria plan or a qualified benefits plan, then that change constitutes a change in status. They cite the example of an employee switching status from salaried to hourly resulting in the employee ceasing to be eligible for coverage under the plan, then that change constitutes a change in status that would allow a corresponding chang in election. Your employee should be allowed to drop the STD plan since they are no longer eligible for it.

[KIP KRAUS]

deweiss:

Just something to think about. Shouldn't your TPA be able to provide you with a siting from the Regs?

I would expect the TPA to back up his/her position by siting the Section of the Regs. That are applicable.

[Guest msearle]

Mary C

Are the final regulations posted in section 125 of the code, or are they in some ruling. Please inform me of where I can find the exact document. '

Thanks

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[Lisa Hand]

The final and proposed regulations on change of status events were issued March 23, 2000. The easiest way to get to a copy would be on Benefits Buzz of this web page for that or the following week. They are in the Federal Register, not the actual section of the IRC.

[JWK]

dweiss: Here's your cite to the regs:

1.125-4©(2)(iii), which states in pertinent part, "In addition, if the eligibility conditions of the cafeteria plan or other employee benefit plan of the employer ... depend on the employment status of that individual and there is a change in that individual's employment status with the consequence that the individual becomes (or ceases to be) eligible under the plan, then that change constitutes a change in employment under this paragraph ©." There follows an example of an employee losing eligibility due to a change from salaried to hourly-paid status.

I think you're justified in terminating contributions mid-year.