jmor99

By the way, even though welfare plans with 100+ participants must file 5500s, non-profit organizations are exempt from this requirement.

The administrators I've dealt with allow the coverage to be retroactive to the event (birth) but the election change ($ amt to be pre-taxed per pay period) is prospective, as required by 125. Claims would be paid back to the date of birth.

Actually, I think there may be something in the regs that requires deductions be uniform thruout the year. Here are some other thoughts: When the deductions hit 5000 in May, what is the qualifying event that allows him to stop deductions? Hitting the plan max?

This is hilariously ironic! I've always wondered when and if this would happen with an HRA. An employer subsidizing another employers health plan!

See my post under the HSA forum, this site.

You might want to check the following: www.hsainsider.com then see the publication "HSA Road Rules" page 13, item #4 under "Health Savings Account Road Rules for Health Insurers": "4. Imbedded (per person) deductibles for family plans are not allowed unless they meet the minimum deductible for families of $2100 (2006).........." Not a legal source, but it makes sense. Edit by JMOR99: here's a legal source: www.treasury.gov/offices/public-affairs/hsa-basics see slide 18, second bullet: "if the embedded individual deductible is less than the minimum deductible amount for family coverage, then the insurance is not a qualifying HDHP." The minimum deductible for family coverage is $2100 for 2006. See Gary Lesser's chart "HSA Limits" at this site.

I've had this same thing happen with employers. This is an administrative error. The employer has the right to collect the missing contributions, and issue a corrected w-2. But HOW do you get pre-tax dollars for last year out of this years check? Most employers just eat the loss. Frankly, any claims paid to an individual in that situation ought to have that $ amt added to their taxable income.

Is the family by chance an owner of another company that has an FSA in place? If so, I'm thinking you couldn't keep the nanny out of it (the other company FSA).

Kimb: The info you've given seems to be a little contradictory. At one point "......to submit expenses incurred after the hurricane....." and then you state ".....the participant either had not incurred medical expenses before the hurricane or has lost all documentation in the flood....". Here are some pieces that might help: 1) It doesn't matter if and when a hurricane occurred, what matters is did he have expenses, if so then he will need to go back to providers for copies of receipts, etc. He has (usually) up until 90 days after the plan year ends to file claims for expenses incurred in the previous year. (see the plan document or SPD to be sure) 2) In some disaster areas, the president has declared tax relief; i.e., delayed filing of tax returns, extra tax credits, for victims. I doubt that 125 FSA participants will be given special help just because they were FSA participants. 3) Leave of absence is probably addressed in your plan document/spd. If the company has considered the employee to be on leave of absence due to the hurricane, then he never terminated and thus is still a participant in the plan until the end of the plan year. Did the company pay him while on leave? Then there will be a question of stopping elections (change of status) etc. Maybe this will get you started, and perhaps with more info from others,(and you) we can help you further down the path.

mjb: I hope you're right--I'll be ecstatic. But this sounds too good to be true. In the first place, I heard the words right out of Harry Becker's mouth (at an ECFC conference) that field agents WERE being trained to check for change of status and discrimination test violations (this was in the late '90s). Secondly, if you look at the very long list of items an agent can ask for in an audit, it becomes obvious that catching these kinds of violations is not only doable, but is being addressed. (Of course, that doesn't necessarily mean the agent will actually go thru with it). It is extremely easy to catch change of status violations if you know what to ask for. I know, I've done it. (And I've never found a plan yet that didn't have violations and most were major). Further, it seems to me that there is a very accurate description of what and who an HCE is, according to 125(e), and provides further requirements for finding them all by referring to sec. 414 [sec. 125(g)(4)]. If you are right, then I see no reason to caution key employees and HCEs in regard to their participation and contributions. The sky is the limit. After all, there are no penalties. Wouldn't this be an accurate, logical conclusion? Again, I hope you're right, but it sounds too good to be true.

mjb: Actually, there ARE tests involved. 125 plans must be tested at least annually for discrimimation. Further, a signed election form is not all there is to elections. If there is a qualifying event during the plan year and the employee wants to change their pre-tax election, then they have to sign a change-of-status form which documents the change and the reason for same. Failure to do these things amount to plan violations thereby running the risk of nullifying the plan.

Thanks, b2kates. I understood that about the only time these plans get audited is if the auditor sees something amiss during a routine business audit, and then pulls the 125 plan in as well. So they cannot go back an additional 4 years, even if they find major problems for the last 3 years? Just want to be sure! The answer may have a significant impact on sales strategies here.

You are correct, the answer is "no" from an indirect standpoint. What needs to be carefully considered is whether or not he meets the definition of an HCE for testing purposes. To determine who the HCEs are, you must first know who the employer is. In this case, there may be a controlled group issue. Under sec. 125(g)(4), "all employees who are treated as employed by a single employer under subsection (b), ©, or (m) of section 414 shall be treated as employed by a single employer for purposes of this section." The parent corp should already know the answer to this, especially if they have a 401-k, since controlled group issues are addressed in a 401-k.

I've recently been told by someone who's supposed to know that when the IRS audits a 125 plan, they are looking back 7 years. It was my understanding that audits look back 3 years, and if a major problem is found, then they reserve the right to go back another 4 years for a total of 7. Anybody know the correct answer? Thanks!

I'm guessing not likely if his wife is going to be the only employee, and maybe not otherwise. Look at section 125(e)(1)(D) which defines a highly compensated participant: "a spouse or dependent (within the meaning of section 152) of an individual described in subparagraph (A), (B), or ©." If you look at A,B,and C, they are: an officer, a shareholder owning more than 5%........, highly compensated. Therefore, she would be a highly compensated participant. In which case if you then go back to 125(b)(B), it basically states that the plan cannot discriminate in favor of HCEs as to contributions and benefits. Which is exactly what would be happening if she is the only other other employee. IF there are other employees, who are participants, then MAYBE they can pass all the discrimination tests.

Just as an add in, apparently some of Colonial's new plans no longer meet the requirements for pre-tax eligibility and are being sold as an after-tax benefit. I've not seen the latest AFLAC benefits so don't know if they're still eligible or not. Basically, anything that defers compensation (exceptions being HSAs and 401-ks) cannot be pre-taxed. Jim, your local AFLAC rep should know, or if you don't trust his answers, call the Colonial rep!

Leevena: Your assumption correct. So I'm guessing from what I've seen so far, an HRA rollover balance is not going to have any special tax treatment outside of what is already normal for a 105/106 plan. Here's what I think the intention of this question is: the employer has got to precommit, or budget for, an anticipated "expense" of 100,000. I suspect he wants to somehow "hide" or avoid taxation, or not count as assets, any dollars that rollover. The more I think about it, the more I'm convinced that I should have posted this in a corporate tax forum. This is more of an accounting question. But I certainly appreciate your taking the time to answer. Thanks, Burns and Leveena!

I'm not sure I understand my terminology either! Part of the problem is that I'm not an accountant, and don't know what terminology to use. As I understand an HRA, it's basically a 105/106 self insured or self funded health plan. If an employer commits, or rather promises 100,000 max in a plan year, and at the end of the plan year, only 50,000 was used by the employees, then the excess 50,000 rolls over, or stays in the plan for the next plan year. Assume the employer commits, again, to another 100,000 for the new plan year, but only has to come up with 50,000 in new money. I guess my question is, are there any special rules for HRAs that allow excesses to be handled any differently than they would be for the usual 105/106 plan?

I'm not sure where I think i saw this disccussed already, but does anyone know if the balance left in an HRA plan (which rolls over to the new year) is "bookable"? i.e., does the employer have to pay taxes on this money? or is there "dispensation" under the new laws?

This is a toughy and a wild guess on my part: Since you're saying they want to give cash if they take the lesser benefit, then can I assume there is a "greater" benefit available? If so, then it seems to me the only way to get around the catch-22 of a plan that looks and acts like a 125 plan is to place a $ value on the greater benefit i.e. deduct for it, and 00.00 dollar value on the lesser benefit.

It depends on what you mean by a "sub" fund. Do you mean such as an HSA? The answer would be yes. Does the sub fund provide for deferred compensation? The answer would be "no" unless you're talking about a 401-k or "certain plans maintained by educational institutions" having to do with post-retirement group life ins.

I'm going to make a big assumption here and assume that you DO NOT have day care reimbursement as a benefit. If not, you might be OK. Here's the 25% formula, where N=non-key and K=key: K -------= 25% or less. N+K Or "K over N+K = 25% or less". Total up the estimated pre-tax deductions (annualized) made by the Key employee and place in the formula. Total up all the estimated pre-tax deductions (annualized) made by the other employees and place in the formula (where N is), then do the math. If it fails, that doesn't mean he can't participate. You then do a "backdown" to find what level he CAN participate at. In other words, K minus some dollar amount, over N+K minus some dollar amount, = 25% or less. In place of K, you would put K-x, and solve for x. To clarify, let's say the total annual contribution by K is $1,000, and the test is failed. After doing the backdown, you may find that K is able to pre-tax $753 and pass the test at 25% (he can post-tax the other $247). Here's a possible catch: You run the test at the first of the year, and pass right at 25%. Then one of the non-key employees changes his election during mid-year to a lower or 00.00 amount due to a status change. Now you're out of compliance again. On a small group like this, you need to run the test everytime a non-key employee changes to a lower election, IF you're running close to the 25% limit. When that happens, you also change the Key employees pre-tax election (using the backdown formula) to get back in compliance. Test failure IS a qualifying event for the Key employee.

Your man has up until April 15, 2007 to fund an HSA for expenses incurred in 2006 (assuming covered by a high deductible health plan, of course).

One last question: If I read these responses one way, then I suspect I need to at least change my SPD and maybe amend the plan doc. On the other hand, perhaps I can leave them as is, since the inference is already built in. What's your best advice? Thanks to all for clarifying all of this.

To add to what chloe has said, many HSAs will be run thru a 125 plan, which usually reference sec. 213 expenses (outlined by pub. 502). Section 213 does not allow for otc stuff. Thus the 125 plan doc. and SPD will have to be amended to also reference or allow for sec. 105 expenses, which includes otc stuff (as noted by RR 2003-102). If you've got late model docs (within last 2 years), it's likely in there. If older, better check. Edit: I've just had an expert consultant tell me that it's not necessary to amend docs. However, how will you communicate to the employees? If you tell them to see Pub. 502, otc won't be in there. So somehow, additional info has to be given to the employees so they will know which items are and aren't eligible, usually thru the SPD.