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Employer Contributions and Mid-Year Change to FSA Election


Guest RichelleHJ
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Guest RichelleHJ

I have a few plans in which the employer contributes a set dollar amount (which is higher than a single health plan) and then employees can elect family health insurance OR single health insurance and with the dollars left over select life insurance, FSA or DCSA or the cash option. With the job market such as it is - there have been alot of changes regarding spouses becoming eligible/ no longer eligible for another employers plan. Which then results in the employee wanting to change their own health plan. In the case that they drop from family to single coverage and would then have additional employer dollars available - could they elect to throw those dollars into the FSA or DCSA? I have always said this change could not be made as it is not a "Qualifying Event" but recent things I have read lead me to believe that if it is the employer's contribution that I may be incorrect. If they can't make the change - are they just out the employer dollars? That seems harsh! and really not in keeping with the DOL/ IRS and their typical quest to protect the employee's interests. Any input would be greatly appreciated!

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If I understand your post correctly...even though the dollars may be traced to employer contributions, the funds are under the employee's control now and it's the employee making the election change. And mid year election changes by participants on account of changes in cost or coverage are not permitted. I think this situation is different from your other posts (which were enlightening) regarding employers independently deciding to make a contribution mid-year to employees' FSAs--because the employer is making the election, not the employee.

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RichelleHJ

What you have described is a standard "Benefits Credit" section 125 cafeteria plan. Such a design is very popular among large public entities. I suggest that you contact a few large ones in your area and look at their communications material and documentation. This will give you a much better handle and insight into the isuue than you will get on this Board. However, you might want to come back to the Board once you have the knowledge, just to expound on items of concern and use us as a "sounding board".

Money in a section 125 plan is never the employee's money. All money is treated as employer contributions including the employee's elective contribution. Employer contributions can never be the employee's until certain conditions are met such as the submitting of an eligible claim for reimbursement or for payment to a third party such as payment of the insurance premium for the selected coverage. Tha is also 1 reason behind leftover money being forfeited instead of being given to the employee.

If plan changes cause a Qualifying Event which allows the employee to change coverage, that change usually does not also allow any change in employee FSA election. In general, if not always, no changes are allowed to an employee's FSA election during the plan year.

However, from what you posted, the employee will not be making any change in their FSA election.

What the employee will be doing is re-allocating the "Benefit Credit" from the employer. This is a totally different thing.

If the employee can re-allocate the money to an health insurer, then logically they can re-allocate to any available insurer. This would include the Group Life provider or the Dental provider. In re-allocating, all the employee is doing is redistributing the Benefit Credit to another provider. The 401(k) etc is just another provider.

However, do not take my word for it, just look at what the users of such plan designs do and ask them for the supporting logic if the documentation that they provide is not clear. You might also want to look up the BNA Portfolio on Cafeteria Plans available at most large Law Libraries if you cannot get on-line access.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Maybe we need some clarification from Richelle--It sounded to me like she wanted to know whether employee can take surplus employer-provided dollars (which were initially being used to pay for more expensive health/life/disability premiums) and elect to move the surplus dollars to the FSA. This sounds like an FSA election to me...

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Guest RichelleHJ

Yes, the situation is as AshleyL has described it - with the additional employer dollars that they would have by eliminating their health insurance election the employees want to now increase their FSA elections. My initial thought and subsequent research has always come to the same point - this is a mid-year change of the FSA and not allowed. Any thoughts?

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Here are a few key questions:

Will the employees be changing or filling out a new Salary Reduction agreement?

If yes, Why? What will they be reducing (deducting) from their salary?

If no, How is this a change in FSA election?

Have you yet looked at what the large employers in your area who have a Benefits Credit cafeteria plan do and how they handle this?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest RichelleHJ

New Salary Reduction Agreements? We would have them fill out something indicating that they want those employer dollars to go to the Medical Reimbursement Accounts (whether an initial election or a COS) BUT it is not a "Salary Reduction" it would be the "employer's contribution" - Does that then mean it does not have to meet a QCOS in order to change the FSA?

We are in a small rural area and there ARE no "large public employers" to check with! I maybe can do a bit more research with other resources.

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If these flex credits have a cash option, then there is effectively salary reduction. Even though the credits are initially from the employer, the ability to receive the credits as cash turns them into potential salary. The question is whether or not these dollars are subject to all the rules and regs surrounding Section 125, and I think they are. Remove the fact that these HC accounts are based on employer credits, and assume that we are talking about a typical “employee” funded HC account. If an employee goes from family to single coverage, the consistency rules would not allow the participant to increase the amount in a HC account. They could only reduce or stop the account. The employee has less deducted from his/her pay for regular health coverage, and no one assumes that this increased salary can now automatically beef up a HC account. I think that a person who is going from family to single coverage cannot raise the HC amount, whether the funds come from the employee or from the employer (that is, if the credits from the employer have a cash option, and not all of them do). If the employee goes from family to single coverage, thereby freeing up some employer credits, those can be given to the employee as increased salary, just like if there were no employer credits in the first place.

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