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Late Submission of DCFSA claim to TPA


MD-Benefits Guy

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Our plan document states a 3/31 cutoff for claims submission on DCFSA.  We have an employee that has submitted $5000 in 2022 claims after the deadline.  If we authorize the TPA to process the claims, how much liability are we creating for the organization?  I hate creating policy exceptions, but also don't like seeing an employee lost out of $5000.

 

 

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Did this claimant have a physical or mental disability that interfered with meeting the claims-filing due date?

Did this claimant misunderstand the due date by relying, reasonably, on misinformation provided by someone who had authority to speak on behalf of the plan’s administrator?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I've posted some commentary on this issue here:

https://www.newfront.com/blog/missing-the-dependent-care-fsa-run-out-period-2

Section 125 Use-It-Or-Lose-It Rule

The health and dependent care FSAs are components of the company’s Section 125 cafeteria plan.  Internal Revenue Code §125 (and its implementing regulations) imposes very strict limitations on the administration of cafeteria plans.  One of the most fundamental of these limitations is that all FSA elections are subject to the use-it-or-lose-it rule.  This means that after the end of the plan year (or earlier termination of employment) and any grace and/or run-out period, any remaining unreimbursed funds not subject to a carryover provision must be forfeited to the plan.

Plan Disqualification Risk

Unfortunately, there is no option for employers to make exceptions to these rules or refund to employees any unreimbursed FSA amounts remaining at the end of the plan year plus any related grace period and/or run-out period (or after the run-out period following termination of employment).  Engaging in this practice would risk disqualifying the entire Section 125 cafeteria plan if discovered by the IRS, resulting in all elections becoming taxable to all employees.

...

There may be particularly unfortunate situations involving large dependent care FSA forfeitures or claims submitted only slightly after the end of the run-out period.  However, a small number of employees forfeiting contributions is by far the better approach than risking the tax-advantaged status of the cafeteria plan for all employees.  The potential consequences under Section 125 are too severe to make offering an exception a viable alternative.

...

Regulations:

Prop. Treas. Reg. §1.125-5(c):

(c) Use-or-lose rule.

(1) In general. An FSA may not defer compensation. No contribution or benefit from an FSA may be carried over to any subsequent plan year or period of coverage. See paragraph (k)(3) in this section for specific exceptions. Unused benefits or contributions remaining at the end of the plan year (or at the end of a grace period, if applicable) are forfeited.

Prop. Treas. Reg. §1.125-1(c)(7):

(7) Operational failure.

(i) In general. If the cafeteria plan fails to operate according to its written plan or otherwise fails to operate in compliance with section 125 and the regulations, the plan is not a cafeteria plan and employees’ elections between taxable and nontaxable benefits result in gross income to the employees.

(ii) Failure to operate according to written cafeteria plan or section 125. Examples of failures resulting in section 125 not applying to a plan include the following—

(A) Paying or reimbursing expenses for qualified benefits incurred before the later of the adoption date or effective date of the cafeteria plan, before the beginning of a period of coverage or before the later of the date of adoption or effective date of a plan amendment adding a new benefit;

(B) Offering benefits other than permitted taxable benefits and qualified benefits;

(C) Operating to defer compensation (except as permitted in paragraph (o) of this section);

(D) Failing to comply with the uniform coverage rule in paragraph (d) in §1.125-5;

(E) Failing to comply with the use-or-lose rule in paragraph (c) in §1.125-5;

(F) Allowing employees to revoke elections or make new elections, except as provided in §1.125-4 and paragraph (a) in §1.125-2;

(G) Failing to comply with the substantiation requirements of § 1.125-6;

(H) Paying or reimbursing expenses in an FSA other than expenses expressly permitted in paragraph (h) in §1.125-5;

(I) Allocating experience gains other than as expressly permitted in paragraph (o) in §1.125-5;

(J) Failing to comply with the grace period rules in paragraph (e) of this section; or

(K) Failing to comply with the qualified HSA distribution rules in paragraph (n) in §1.125-5.

Prop. Treas. Reg. §1.125-1(f):

(f) Run-out period. A cafeteria plan is permitted to contain a run-out period as designated by the employer. A run-out period is a period after the end of the plan year (or grace period) during which a participant can submit a claim for reimbursement for a qualified benefit incurred during the plan year (or grace period). Thus, a plan is also permitted to provide a deadline on or after the end of the plan year (or grace period) for submitting a claim for reimbursement for the plan year. Any run-out period must be provided on a uniform and consistent basis with respect to all participants.

 

Slide summary:

2023 Newfront Section 125 Cafeteria Plans Guide

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Thank you, Brian Gilmore, for your great explanations.

Current § 125 was added to the Internal Revenue Code by the Revenue Act of 1978.

To interpret § 125, most of the agency law we look to is proposals, not rules.

And much of that was proposed in the 1980s.

Decades later, a lawyer properly cites proposed rules as the substantial authority.

For that sad state of play, some might blame the Internal Revenue Service and the Treasury department. I don’t; those tax officials, executives, and lawyers do the best they can with the circumstances they’re given.

1981640914_1984-05-0719320-19329.pdf 1646025742_1989-03-079459-9504.pdf

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Brian, thank you for the detailed response. This is the exact info I need to defend the denial of payment. I am pretty certain this employee will escalate things to the executive team once she doesn't get her desired response from HR.

In this particular instance, the employee is claiming that they missed the filing deadline because they were on maternity leave and simply did not have the bandwidth/ability to gather all of the info to submit her claims on time (a bit hard to believe, but that's her story.) Not that it applies here, but curious to know if there is any possible consideration to be given if a participant was in fact temporarily physically or mentally impaired during the run-out period or may have relied on misinformation from a plan representative (as suggested by Peter?)  Based on what you shared, it doesn't appear that there is language in the law to allow for such an accommodation.

As a follow-up question, does anyone have an example of a plan being disqualified for not following the plan rules? I'm just trying to prepare myself for the possible management/executive response of "I know that we are supposed to follow the rules, but how likely is it that the IRS finds out and disqualifies the plan based on this one instance?"  I am hopeful that I don't get that response from management, but it would be nice to have response/example ready.

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About my questions:

Did this claimant have a physical or mental disability that interfered with meeting the claims-filing due date?

Did this claimant misunderstand the due date by relying, reasonably, on misinformation provided by someone who had authority to speak on behalf of the plan’s administrator?

I have not had an occasion to research whether either circumstance might be a reason for a welfare-benefit plan’s fiduciary to consider equitably adjusting a claims-filing due date.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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