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Timing of deposits for §125 deductions


Joe Priselac
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Guest Becky Ray

What about a situation where the employer has contracted another firm to handle for administration of dependent care and medical reimbursements. This is a case where the employer is taking anywhere from 1-2 months to send the money to the contract administrator and participants are having to wait a long time to receive their reimbursements.

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I thought that DOL Reg 2510.3-102© required salary reductions to be sent to the Plan or the insurer as soon as they can be segregated from the employer's assets but no later than 90 days from the date that the salary reduction would otherwise be payable in cash. I also thought that the 90 day requirement is a condition for not keeping these contributions "in trust" under Tech. Rel. 92-01.

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Guest Becky Ray

Does the DOL require deposits of §125 deductions to be made in the same time frame as 401(k) contributions?(As soon as they can reasonable be segregated from the general assets of the employer and no later than the 15th of the following month)

If not, what does the DOL require?

Thank you

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Becky, the Labor regulation cited by KJohnson is the controlling authority on this issue. In its original form (issued in 1988) the final reg imposed the same rule for the deposit of amounts withheld from by an employer from an employee's paycheck for contribution to both pension benefit and welfare benefit plans, i.e. 90 days from the date the amounts are withheld. Effective 2-3-97, the reg was amended to impose the same general rule, but with different outside limits. Read carefully, the reg says that amounts withheld from wages become "plan assets" with respect to a pension benefit plan or a welfare benefit plan as of the earliest date on which these amounts can be reasonably segregated from the employer's assets, but in no event later than a specified outside limit. The outside limit for pension benefit plans, (like 401(k) plans) is the 15th business day of the month following the month in which the amount was withheld from wages. The outside limit for welfare benefit plans, remains 90 days from the date on which the amount was withheld. For self-insured welfare benefit plans like flexible spending accounts, the rule is further refined by the DOL release KJohnson mentions, i.e. FSA's currently benefit from a DOL policy of nonenforcement regarding ERISA's trust requirement.

You should keep in mind, however, that the outside limits are definitely NOT "safe harbors." An employer should not design its payroll processing system using them an benchmarks. I have defended numerous clients subject to DOL audits regarding this issue, in each case the DOL looks all the relevant facts and circumstances regarding the capacity of the employer to process payroll deductions and negotiates the applicable limit. For an employer using standard a off-the-shelf payroll data processing systems, the DOL almost never accepts a period of more than 10 business days from the date the amount is withheld from wages. The outside limits are probably only applicable, if ever, for the most thinly capitalized plan sponsors with "green eyeshade" payroll systems.

[This message has been edited by PJK (edited 06-21-2000).]

Phil Koehler

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I guess all this talk about segregation has me confused.Technical Release 92-01 states that the DOL will not enforce the normal requirements of a separate trust for participant contributions under a cafeteria plan, if it is operated on an "unfunded" basis i.e. reimbursements made from employer's account from the general assets of the company. The typical arrangement would be for the employer to provide the TPA check writing authority on an account of the employer. When participants submit claims to the TPA the TPA issues reimbursement checks written on the employers account. There is no transfering of funds. The participant contributions are kept by the employer to fund the benefits. In essence these plans are operated like a self-funded medical plan. There requirements under Section 125 that reimbursement of eligible expenses must be made on a timely basis. Without looking it up, I think that 30 days is the safe-harbor time frame. However, most "progressive" FSA plans reimburse employees no less frequently than the pay cycle of the employer.

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Joe, I think the best way to read this guidance is as follows:

1. DOL Reg. Sec. 2510.3-102(a) and © say that amounts withheld by an employer from an employee's paycheck for contribution to an employee welfare benefit plan (like a Health Care - FSA), become "plan assets" as soon as they "can be reasonably segregated from the employer's general assets," but no later than 90 days after the date they are withheld.

2. DOL Tech. Rel. 92-01 limits the significance of these amounts ripening into "plan assets" by providing such contributory welfare benefit plans with exemptive relief from (a) certain ERISA reporting and disclosure requirements and (B) the ERISA trust requirement. The relief from reporting and disclosure comes from an expansion of the (i) "small welfare benefit plan" reporting exemption under DOL Reg. Sec. 2520.104-20 and (ii) the exemption from the ERISA audit requirement for certain "self-insured welfare benefit plans" under DOL Reg. Sec. 2520.104-44, where such plans would otherwise not be eligible because, as the Release points out, "a welfare benefit plan that applies participant contributions directly to the payment of benefits (or indirectly by way of reimbursement to the employer) would not qualify for the exemptive relief [provided in the regulations] because the benefits under such a plan could not be considered paid 'solely from the general assets of the employer.'". So what the Release does is it first extends the exemptive relief to contributory welfare benefit plans like Health Care - FSAs or contributory insured medical plans under a premium only cafeteria plan, if they would otherwise satisfy the regulatory requirements for either of the two exemptions. Second, the Release says that the failure to hold participant contributions, once they have ripened into "plan assets" in a trust that satisfies ERISA Sec. 403(a) will not be the basis for any Departmental enforcement action. But that doesn't mean that their status as "plan assets" doesn't matter. Consider ERISA's anti-inurement provision under Sec. 403© and all of ERISA's fiduciary responsibility standards that apply to a welfare benefit plan fiduciary's handling of "plan assets" under ERISA Sec. 404, and the liablities to which they are exposed. For these purposes, the employer and a fiduciary still has to know when it is handling "plan assets."

[This message has been edited by PJK (edited 06-22-2000).]

Phil Koehler

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The regulation cited above deals with "participant contributions", a term that is nowhere defined to include elective deferrals. After the regulation was issued, some attorney (Don't you wish that they wouldn't ask questions?) inquired whether participant contributions included elective deferrals. The Dol, ignoring both the law and the Administrative Procedure Act, responded that they did, and then issued a notice stating that it wouldn't enforce the trust requirement, which it shouldn't be able to enforce anyway. Assuming that the Administrative Proceedure Act is still good law (and I realize that the DoL tends to ignore it), the reg. doesn't apply to elective deferrals under section 125, and the DoL needs to go through the rulemaking process to change it.

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  • 2 weeks later...

IRC 401--The reg states that it applies "amounts (other than union dues) that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer..." that sure sounds like it covers elective deferrals.

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Elective deferrals are neither paid to the employer nor withheld from wages. They are amounts that the employee negotiates to have his wages reduced in exchange for the employer increasing his benefits.

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IRC 401,

That is the best plain English description of the concept as I understand it. I am afraid we lost sight of Becky Ray's original question. In the "real world" my description of the "standard" operation of a FSA plan still stands and nothing I have read subsequently changes my answer. The proposed Section 125 regulations have a timeliness of reimburement provision that should govern Becky's situation. By the way, I have a question conserning Becky's situation. If her employer is sending funds to a TPA who is holding those funds and issuing checks from their own account, could that make the plan lose its "unfunded" status and require the adoption of a trust?

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IRC 401--It would seem that the definition of salary reduction agreement under the IRC 401(k)regs ("an election to reduce cash compensation or forgo an increase in cash compensation") and the proposed IRC 125 regs (an agreement..."under which participants elect to reduce their compensation or to forgo increases in compensation") is almost identical. Would it be your position that the plan asset reg also does not apply to elective deferrals under a 401(k)Plan? If so, it would seem that the examples in the reg relating to 401(k) Plans would make no sense.

I think this is a case where you cannot import IRC terminology over to DOL terminology. With the agressive position that DOL is taking on the Plan asset regs, I would doubt that DOL would back down based on your argument.

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Also, there was this language in the preamble of the DOL reg:

The Department's view is that elective contributions to an

employee benefit plan, whether made pursuant to a salary reduction agreement or otherwise, constitute amounts paid to or withheld by an employer (i.e., participant contributions) within the scope of Sec. 2510.3-102, without regard to the treatment of such contributions under the Internal Revenue Code. See 53 FR 29660 (Aug.

8, 1988).

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1. Joe- I don't disagree with your real world

assessment.

2. The employee has a claim for benefits

against the employer, and the fact that the

employer is taking its time to get money to the

TPA does not get the employer off the hook.

3. I don't see how using a TPA to pay claims

would create a trust (assuming that there is no

trust document or trust language in the SPD).

4. The DoL may not like the IRC, but, at least

in theory, government agencies are supposed to

obey the law. Personally, I think that the DoL

has capitualted on the issue with 92-01, but I

can't prove it, and they won't admit it.

5. I am not prepared to discuss on this message

board how the regs apply to 401(k) plans.

Nevertheless, I would like to note that with a

401(k) plan the employee is bargaining for an

allocation whereas with a 125 plan the employee

is usually bargaining for insurance coverage.

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At the heart of the discussion with IRC 401 is a misuse of the term "elective deferral." This term as defined in the regulations has absolutely NO application to amounts excluded from gross income under Code Section 125(a) (the Cafeteria Plan exclusion). See Reg. Sec. 1.402(g)-1(B). "Elective Deferrals" refers exclusively to: (1) "elective contributions" under Sec. 401(k), (2) "employer contributions" to a SEP under Sec. 408(k); (3) "employer contributions" to a tax-sheltered annuity under 403(B); and (4) any deductible "employee contribution" to a trust exempt under Sec. 501©(18).

Common sense would indicate that, since a Cafeteria Plan merely permits an employee to exchange a taxable benefit (typically cash compensation) for specified nontaxable benefits ("Qualified Benefits"), and exclude the taxable benefit from gross income, there is no DEFERRAL going on. Deferred compensation is expressly excluded from the range of Qualified Benefits that a Cafeteria Plan can offer, so any reference to "elective deferrals" in this context is just plain wrong. Prop. Reg. Sec. 1.125-1, Q&A-7. Logically, the absence of any reference to "elective deferrals" in the the DOL "plan asset" regs discussed in this thread does not support the inference that IRC401 appears to be making, i.e. these regs don't apply to amounts that an employee has withheld from his paycheck for purchase of a Qualified Benefit under a Cafeteria Plan.

Phil Koehler

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You are free to use whatever terminology

you want. The way that the law is written

an employee negotiates to have his compensation

reduced, not to have money withheld from his

paycheck (poor SPDs notwithstanding). If the DoL

doesn't like how the law is written, it should

complain to Congress, not try to make up new law.

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  • 13 years later...

Thought I would look for some current updates to timing as related to FSA contributions? Is there some guidance somewhere that I might be referred to for the following questions:

Consider that Employer uses a TPA firm to administer both HEalth & Dependent Care fsa plans.

1. What is the timing of deposits from Employer to fsa accounts (which apparently is not a trust)

2. What is the timing for the TPA firm to then reflect these deposits they have received into the individual accounts (this seems to be the problem at hand my client is inquiring about)

3. What is the timing for the TPA firm to pay out a request for reimbursement

4. If there is any delay to any of the above, are there any 'lost earnings' payable to employees?

These questions are perhaps more applicable to the Dependent Care side because reimbursements cannot be requested until the accounts reflect the contributions.

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The only question that is relevant is #3. In fact, if there are deposits to a segregated and dedicated fund or funds without formal trust arrangements, the plan is in violation of the DOL's administrative relief from the ERISA trust requirements. Not a precise answer to #3, but claims must be paid monthly or when a certain reaasonable amount has accumulated.

Also, the timing of payment of benefits has nothing to do with the timing of "collection" from salary redcutions, excpet for dependent care account. Payment is due based on a receipt of a claim, and nothing else. The TPA's contract will say the the TPA will not pay unless it has received adequate funds, but that does not mean the employer is not reponsible for covering the claims timely.

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Thought I would look for some current updates to timing as related to FSA contributions? Is there some guidance somewhere that I might be referred to for the following questions:

Consider that Employer uses a TPA firm to administer both HEalth & Dependent Care fsa plans.

1. What is the timing of deposits from Employer to fsa accounts (which apparently is not a trust)

2. What is the timing for the TPA firm to then reflect these deposits they have received into the individual accounts (this seems to be the problem at hand my client is inquiring about)

3. What is the timing for the TPA firm to pay out a request for reimbursement

4. If there is any delay to any of the above, are there any 'lost earnings' payable to employees?

These questions are perhaps more applicable to the Dependent Care side because reimbursements cannot be requested until the accounts reflect the contributions.

TPApril, in my mind, if you are having to ask this, it's likely time to find a new provider. Use one that will provide benefit cards for the medical fsa accounts and reimburse the dependent care no more than a week after payroll.

Now that's assuming the employer is causing the difficulty by not making the funds available.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070
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