prorate annual FSA amount for less than 1 ful year of coverage;ie.e new hires durign plan year

[alexa]

We have a 5K health FSA and annual %K dependent care limit

If someone is hired say 7/1/2004 would you prorate the 5K limits or they could they do 5K in each FSA spread over remaining pay periods?

[Kirk Maldonado]

What does the plan say?

[alexa]

We don't have our plan document or SPD yet from our vendor yet; it's a new plan effective 1/1/2004

I assume though it's boilerplate language with our limits thrown in there

[Guest b2kates]

Absolutely the plan document controls.

there is no requirement in the internal revenue code to either limit or prorate the FSA amount. Companies limit the amount to limit their exposure for claims.

[alexa]

We do have an annual limit on each at 5K

My question had to do with new hires who start after the beginning of a year

Are you required to prorate the 5K annual limit?

What are others doing in practice if not required?

thanks

[Guest b2kates]

Generally, the plans that we administer do prorate the amount for post open enrollment new hires.

No there is no statutory requirement to prorate.

[papogi]

...and almost all of the plans we administer do NOT prorate based on date of hire. Guess it depends on many things.

[alexa]

such as?

[papogi]

It depends on the industry and the prevailing benefits within that industry. Companies must stay competitive with their peers to get the good employees. It also depends on the employer’s willingness to accept risk, and their perception of how much a provision like this actually controls the risk. For instance, when you say to an employer that a new employee hired on October 1 can elect a $5,000 Health Care FSA through the end of the year, submit a claim for $5,000, then terminate employment, this makes some employers want to impose a prorated FSA election provision. Some employers don’t even flinch, however. Some don’t want to deal with the administrative burden of having varying FSA caps based on hire date. Sometimes, employees don’t like that the new guy can put the same amount into his FSA even though he was hired mid-year. Employers have to find out if that’s the case in their company.

We have some employers set up a $2000 annual limit, then have new hires eligible to come on the plan either at open enrollment or at the mid-point of the plan year (if they were hired prior to the mid-point). Those people would have a $1000 limit. This approach prorates the limit, but allows only one time mid-year for newbies to come on, thereby simplifying the administration of such a provision.

[Guest aearle]

Papogi,

I am confused by your answer. You say that you have some employers that only allow participation in FSAs at open enrollment at at the mid-year point. How does that work with eligibility rules? If the eligibility is the first of the month following 90 days of service, would't only 2 entry dates conflict with this? Say it is a 1/1 plan year and a person is hired on January 15th. The eligibility rules say that the person would be eligible May 1st, but in your scenario the person waits until July 1st? Is this allowed?

Thanks!

[GBurns]

papogi

Is enrollment in the health insurance limited in the same manner? If not, then how can you allow the employee share of the insurance premium (if there is any) but not the FSA?

[g8r]

Just like a 401(k) plan, you can have different eligibility conditions/entry dates for different benefits. There's nothing wrong with having a 90 day wait for health insurance and a 1 year wait for the health FSA (or an entry date that is the first day of the plan year following date of hire). You can design the plan in any manner that is nondiscriminatory and just because you have different conditions for different benefits isn't per se discriminatory.

As far as pro-rating the health FSA limit, it can be done (subject to nondiscrimination rules -- which wouldn't be a problem if it's only being pro-rated for mid-year entrants).

However, I don't see many plans using pro-ration. I've seen numerous plans with a longer waiting period and annual entry for the health FSA.