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"Employer-Funded" FSA vs. Sec. 105 MERP


Guest ConceptCorner
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Guest ConceptCorner

This may be a dumb question but what really would be the difference between an "employer-funded fsa" where the employer put $500 into everyone's account or a Section 105 Merp document that says the employer will reimburse up to $500 for eligible expeses.

It appears that it mainly would have to do with the timing of the reimbursement. In other words, if the fsa plan had a debit card, payment is made up front versus an "old" style fsa reimbursement (filing a claim manuallywith no debit card) or a merp. Am I missing anything here?

Pagogi usually has some good insight to these things!

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Inside the FSA, the employer contribution is subject to the Uniform Premium Provision. There is no carryover. The MERP outside the cafeteria plan can reimburse on a prorata basis, can reimburse for health insurance premiums and can carryover without negative tax consequence.

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Employers have been working without guidance from the IRS in trying to set up 105 Medical Reimbursement Plans for some time, and have traditionally tried to allow unused amounts to carry over to subsequent years (unlike the FSA with its use-it-or-lose-it provision). The problem has always been that it is hard to keep a 105 MRP from being classified as an FSA, thereby losing their desired carryover provision. Prop Treas Reg 1.125-2 (Q7) states that an FSA can exist outside of a cafeteria plan. An FSA is a benefit plan which reimburses expenses under Section 213 and the amount available does not exceed 500 percent of the total value of the benefits (the value of the account). This means that an employee would have to have the ability to take out at least 5 times the value of the 105 MRP for it not to be classified as an FSA. This difficulty is why the new guidance on HRA's is so wonderful for those employers who want these amounts to rollover from year to year.

In essense, when you set up a 105 Medical Reimbursement Plan with a use-it-or-lose-it provision, and the employee can get no more than 5 times the value of the account (normally they only get 1 times the value of the account), you just created an employer-funded FSA. There's no way around it. So, you're right, there really is no difference.

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Guest ConceptCorner

I would say that most of the employers I am looking at have less than 100 employees. Their main goal is to lower and control costs. They are not so worried about rolling over funds/credits for the employees. I'm guessing for cash flow purposes, the 105 is more employer-friendly.

Which do you think is a better approach for the employer who wants to raise his deductible but doesn't want the employees to freak out? He is not worried about rolling over anything.

The employer-funded fsa has the benefit of the debit card and allows the employee to have immediate reimbursement, this is especially a strong benefit at the pharm.

With the 105 merp the employer simply retains any unused funds with the fsa he gets back any unused funds. Sort of accomplishes the same thing. I guess it just depends on cashflow and I should present both ideas and let them decide. I know there is a lot of employers doing merp-type arrangements on their own, but probably have no documentation.

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If they want to do a MRP, I would recommend allowing the carryover provision, thereby really setting up an HRA. If they want employee forfeitures, they can go FSA. You also simplify some other things if you go FSA, but we've talked about that before.

If you try to do an MRP without carryovers, I think you should just go FSA.

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If an employer's basic medical plan uses insurance, and if the employer sets up an HRA, doesn't the employer risk getting sucked into the HIPAA blackhole (for lack of a better term by someone who does not prtend to be a HIPAA expert)?

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The IRS has not clarified the relationship between HRA's and HIPAA. It is possible that individual health policies (typically not subject to HIPAA) funded with HRA dollars will become subject to HIPAA. The jury's out on that one. For ConceptCorner's purposes (he/she is bent towards the no carryover provision), this makes employer-funded FSA's that much more attractive. We already know how FSA's and HIPAA interact. I like IRC401's HIPAA terminology.

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  • 2 weeks later...
Guest ConceptCorner

I've thought of one other area that might separate the two plan designs. This would be the area of employer tax deduction. With the MERP the employer only deducts the expenses for reimbursement when they are made. Where on the other hand the employer would get a credit for a business expense with FSA's once they have funded the accounts, even if the employees did not use all of the account money. It would seem to me that employers who are wanting more tax credit would like the employer-funded FSA better. Does that make sense?

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