changing pre-tax 403 or 401 deductions

blw

We have begun offering Colonial products to our employees and it has brought up another issue. In setting up the pre-tax deductions, I mentioned that if pre-taxed the deduction couldn't be changed or dropped until open enrollment. Our controller said she has been pre-taxing the 403(b)deductions (a 401(k) for non-profit organizations) and didn't know why we couldn't change them at any time. We contacted the plan representative and he said someone could change at any time or even stop participating, even though it is on a pre-tax basis. This isn't sitting right with me but I don't have a defense. Has the whole pre-tax penalty issue changed? I can't find anything in the IRS publication on 403(b) plans. Thanks, Barbara

Lori B

I think you are confusing pretax salary deferrals for retirement plans with pretax contributions for a 125 plan. They are governed by different sections of the tax code so different rules apply.

A 125 plan (flex spending for dependent care, medical reimbursements, adoption, or pretax medical premiums) can only allow the pretax election to occur prior to the year. You can't change it absent very special circumstances like change in family status, etc.

Retirement plans are a different animal. The code allows employers to set these up in a variety of ways. For ex, our plan allows ees to make changes 2x year at jan 1 and July 1. An employee can discontinue participation at any time in our plan. Some plans allow changes more frequently, others less. It is all controlled by the terms of your plan document. The plan document controls so look there first.

Lori

blw

We have also begun pre-taxing the medical deduction if the employee elected it and I know they were told by the Colonial rep signing them up for the 125 plan that it couldn't be changed unless due to a change in situation.

I guess what confused me is that another company I worked for allowed no changes to the 401(k) and any changes to the 401(a). I thought that was IRS regulations, but must have been just the way the plan was written.

Tks, Barbara

LindaS

Section 125 elections cannot be changed unless their is a "change in family status" which are things like a spouse loses their job, a new child is born, etc.. This is something that is outlined in the regs. for this type of plan.

Changing elections for a 401(k) or 403(b) plan are dependent on how the plan is written. For example our plan allows changes on a quarterly basis (Jan 1, Apr 1, etc.). This type of change is for a person going from something like 4% to 6%. Because this is a voluntary deduction a person can STOP the election whenever they want (I see this alot around Christmas time) but they cannot start again until the next time the plan allows for changes.

I hope this helps.