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


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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.

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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.

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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.

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  • 9 months later...

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!

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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?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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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.

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