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LegalGround >> Steve72: Know anything about 125 plans?


4/4/08 4:39 PM
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seg
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Edited: Apr 4 2008 12:00A
Member Since: 3/28/05
Posts: 4605
 

 I've got a client who is being told they fail the 25% Key Employee Concentration Test for 125 plan non-discrimination purposes.  I have no doubt that they do as the client is a professional services outfit that has a ton of "key employees" and relatively little in the way of office staff.

Their 125 plan provides health benefits, and I am sure they qualify for the 125(g)(2) safe harbor.  However, if I understand the operation of this safe harbor correctly, it only serves as a safe harbor against the key employees having constructive receipt, and does not serve as a safe harbor against having to pass the key employee concentration test of Prop. Treas. Reg. 1.125-7(d)(1) for non-discrimination purposes.

If so, the proposed regs suck ass, as the safe harbor is contained in 1.125-7(e), right fucking below 1.127-7(d), so you would fucking think that the safe harbor would be applicable to the subsection immediately fucking above it. (end of rant)

As I read the reg, my client is fukked because it does not pass 1.125-7(d) (not actually fukked, but the fat cats will have to pick up some more income).

Am I reading this shit correctly, and am I missing anything?  Does a 125 plan have to pass the 25% concentration test in every situation, and there is no safe harbor to get around it?

4/7/08 2:35 PM
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Steve72
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Edited: Apr 7 2008 12:00A
Member Since: 1/1/01
Posts: 50019
Preliminarily, you may already be aware of this, but just to throw it out there: remember that a "key employee" is NOT the same as an HCE. In order to be a key employee for the concentration test, the individuals essentially need to be officers or owners (full definition in 416(i)(1)). Is there any way to carve some of the individuals out of this classification?

I have seen some analyses (including Thompson) which indicate that a 125 which is solely a premium conversion plan, passes both the contributions/benefits test AND the concentration test if it passes the safe harbor. However, I agree with your reading. The regulation language specifically references the test in 125(c), not the concentration test in (a). Additionally, (and, although this is parsing of the worst kind, I think this is an intentional difference) note that the concentration test is not described as "discrimination" in the statute. The 125(g) safe harbor is only for discrimination testing.

Is this for the premium conversion plan only, or are there FSAs as well? Delivering the news on an FSA is going to be more painful, IMO.
4/9/08 10:00 AM
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Edited: Apr 9 2008 12:00A
Member Since: 3/28/05
Posts: 4658

 Thanks.  This is an FSA, I knew they were stuck, but just wanted to make sure.

I will take a look at the HCE vs. key employee issue, maybe there is some leeway there.


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