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Prison Term


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Participant makes an election to a health FSA for $3000 to cover primarily the spouses out-of-pocket expenses. Spouse subsequently goes to jail and our generous government is picking up the tab on her expenses. Can the participant reduce the election?

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Am not an expert, but I don't think so. I think you could only change if the spouse had change in status with his/her employers plan. He/she looses coverage and then you could add them to you.

JanetM CPA, MBA

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Participant makes an election to a health FSA for $3000 to cover primarily the spouses out-of-pocket expenses. Spouse subsequently goes to jail and our generous government is picking up the tab on her expenses. Can the participant reduce the election?

$3,000 wasted and a spouse in prison would cause me to divorce said spouse which certainly is a change in status. Down the road when spouse becomes "reformed" then a remarriage might be in order.

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Is there any basis to call it a significant change in cost since all of the spouse's health care costs (including out of pocket / copay cost associated) are now being paid by the government? Or is that a stretch?

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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Is there any basis to call it a significant change in cost since all of the spouse's health care costs (including out of pocket / copay cost associated) are now being paid by the government? Or is that a stretch?

I thought that the change in cost provision only applied to dependent care FSA's - not to medical reimbursement plans.

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I thought that the change in cost provision only applied to dependent care FSA's - not to medical reimbursement plans.

Under Section 125 in general, if say health premiums had a big change mid-year, then could allow a mid-year change of election for medical coverage. But I don't know to what extent that applies to health FSA, especially in this case where it's not the premiums that change but the potential for out-of-pocket.

EDIT: Answer my own question, final regs on change of cost/coverage, http://www.irs.gov/pub/irs-irbs/irb01-07.pdf , Mary was on right track. Health FSA's are excluded from change in cost/coverage by reg 1.125-4(f)(1). So EE could drop spouse from other coverage (such as medical/dental/etc) but can't change FSA.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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"Health FSA's are excluded from change in cost/coverage by reg 1.125-4(f)(1). So EE could drop spouse from other coverage (such as medical/dental/etc) but can't change FSA."

Cost and coverage rules apply specifically under circumstances when the health plan changes result in premium increase/decrease cost, out of pocket and co-pay cost changes. Under such circumstances, the Sec. 125 plan allows for the premium cost changes, but not FSA election changes despite changes in co-pays and out-of-pocket.

Did the spouse terminate employment as a result of going to prison?

Are prisoners' medical expenses covered under Medicaid or other similar health coverage specifically for prisoners? In any case I would argued that the prison health plan covers 100% of medical cost and would be consistent with a FSA election change.

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Thanks everyone for all the feedback on this topic! I agree with the not permitting an FSA election change, as there has been no event to justify an election change, not even one that we could "stretch". Employee did not terminate employment, yet.........

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Thanks everyone for all the feedback on this topic! I agree with the not permitting an FSA election change, as there has been no event to justify an election change, not even one that we could "stretch". Employee did not terminate employment, yet.........

The only option the empoyee has is to try to incur eligible expenses for himself such as Lasix surgery if he wears glasses, new eyeglasses, orthodontia for the kids (if any), etc. If I were him I would be looking at a list of covered expenses to see if there was anything I or my other dependents (if any) needed to have done that I had been overlooking

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I have been administering FSA plans since 1990. For 14 of those years, my husband was a federal prisoner. We filed a joint tax return the entire time. There were many times in those 14 years when I had to purchase medical things for him, for example, prescription glasses or sunglasses. I had researched the status change rules a number of times during this experience, and did not find anything that would help me. In fact, when he went to prison, I had elected dependent daycare, and found I could not use it since my spouse was not employed or disabled.

However, the one comment about if he lost his job as a result of the crime might be helpful. It is unlikely at this date that the 30 days since the job loss have not passed.

Best of luck to the participant. It is not easy.

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Prior to 1989, family status/election change rules were far less comprehensive than what exists now, primarily the result of complaints to IRS officials like Harry Becker, lobying groups such as ECFC, adoption of COBRA, etc.

'Family status change' rules prior to 1989 were not an all inclusive list, and for instance did not include reference to change in employment status of the employee or spouse, and did not address child care FSA election changes at all, both were added later.

Election change rules did provide underlying guidence that "life event/family status changes beyond the control of the employee" could be considered qualified status changes. That underlying principal for determining if an election change should be allowed has not been revoked or amended that I know of. I don't considered the current status change rules an all inclusive list and don't believe the regs were intended to be all inclusive or to the exclusion of all other possible life events.

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"EDIT: Answer my own question, final regs on change of cost/coverage, http://www.irs.gov/pub/irs-irbs/irb01-07.pdf , Mary was on right track. Health FSA's are excluded from change in cost/coverage by reg 1.125-4(f)(1). So EE could drop spouse from other coverage (such as medical/dental/etc) but can't change FSA. "

The restriction on changing Medical FSA election for 'change in cost/coverage' applies only if the insurance plan experiences a change in cost (=premiums) or coverage (= copays, out of pocket expenses, providers).

In other words, if the insurance plan experiences a change in cost or coverage, the increased insurance premiums paid under a Sec. 125 can autmatically change, but not the medical FSA election. Since this situation concerns an incerserated(sp) spouse of a participant, not insurance plan cost/coverage changes, it has no baring on the medical FSA. The reference to reg 1.125-4(f)(1) does not apply here and has no bearing on DC FSAs.

Changes in DC service provider's charges would qualify for DC FSA election change, but not under the cost/coverage change rules established for health/medical related expenses.

If the employee's incerserated(sp) spouse's health insurance premiums are paid under a Sec. 125 plan, the same election change eligibility standard would apply for both the premium election change and the medical FSA election change. In other words, if spouse's incersation is considered eligible reason to drop health insurance under the 125 plan, it's an eligible medical FSA election change as well.

On the other hand, if the employee's spouse's incerseration(sp) does not qualify for change in Medical FSA election, it can't be considered an eligible change for dropping health insurance coverage and corresponding premium payments.

"In fact, when he went to prison, I had elected dependent daycare, and found I could not use it since my spouse was not employed or disabled." In order to qualify to participate in the Dependentent care FSA, employee, and spouse if EE is married, must be employeed (or spouse must be disabled, or full-time student, etc.). Since your spouse was not employed, you could have been considered ineligible to participate and allowed to revoke your prior election.

On the other hand, your spouse could not meet the legal burden of parenthood, he was not legally available to act as a full time parent or engage in employment activities. Despite the circumstances, you were not relieved of your parental responsibilities. Legally you are required to provide financial support, because it's illegal to leave children under a certain age unsupervised/unattended, you needed child care. It's possible for Child care to be provided at no cost by a friend or relative. Based on interpertation of the regs, circumstances, intent of the law, it could be handled either way.

In my opinion, child care could go either way.

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