jmor99

See if you can obtain the latest AFLAC or Colonial (Ceridian) document. They both should have the latest wording options.

Thanks, JG and oc. I've read both RR2003-102 and 2003-58. I must still be missing something. I see where 102 states these kinds of expenses are eligible under Sec. 105, but how is the leap made to section 125? Does an FSA fall also under sec. 105? Does sec. 125 reference 105 as well as 213? I assume this is what you mean that the plan must be amended to also reference sec. 105 eligible expenses. I think I'm starting to see the light, but I'm not sure. If this is the answer, they I owe the both of you for turning on my light bulb!

I have been hearing of some "new" eligible FSA expenses such as cough syrup, bandaids, otc Clariten, etc. Is this correct? Even if true, mustn't it be prescribed by a doctor? Is there a new IRS bulletin to this effect for 2006? Didn't see anything like this in Publication 502 for 2005 returns. Thanks!

What was the effective date in the plan, for you? Only those expenses with a date of service after the effective date are eligible. The eligibility waiting period will be stated in the summary plan description. (You did get one?--another potential employer error).

You can find a nice HSA chart done at this website under the HSA forum. Done by the moderator. P.S.-- Even if you get a pass on the 25% test, there's still the "facts and circumstances" HCE test, which is a very gray area, but it seems to me from the details given that this is an outright failure. P.P.S.--Basically, the IRS doesn't care if HCE's are "discriminated" against. You'll find this especially where Day Care reimbursement under a 125 is a benefit, in small (under 100 ee's) groups. It is almost a guarantee that HCE's can't participate because of the 55% formula, i.e., a virtually guaranteed failure, thus no participation by HCE's.

I don't recall the exact wording, but I have seen election forms with a statement somewhere at the bottom to the following effect: "Unless I elect otherwise, I authorize my employer to continue deducting for this/these elected coverage(s) at the new current cost."

I'm not an expert on this, but one of the basic premises of a 125 plan is that there must be a choice between cash and a non-taxable benefit, otherwise there isn't a 125 plan. It seems to me that to get away from what you're currently doing, you need to get away from flex credits, and simply put a price on everything whether it be a stated amount for health insurance etc and a choice of contributing (via pre-tax salary reduction) to the flex plan or "keeping the cash". Same applies to the health ins. But again, I'm not an expert on this.

Burns is right--add the total $ pre-taxed by the S-corp owner(s) during the S-corp time period and add it back to their W-2 income. By-the-book legal types will also tell you that the company has had "a plan operational failure" and that a plan of correction should be filed with the IRS. Looks better if they get audited.

E as in Erisa: You are right--separate, IRA-like accounts are set up, usually at a bank. But there's nothing different for the employer to do, anymore than there would for a new insurance benefit. A monthly listing of participants and dollar elections sent to the bank each month. Much like an ins. carrier billing. The bank (or whichever qualified third party) does the "HSA thing" as far as reporting requirements, directly to the employees home address, just as a bank would when reporting interest on a savings account, etc. The employee uses that info to report on his personal tax return. So no big deal for the employer.

I'm not sure I understand the question. Why do you need forms if they've been told their 2005 coverage election is the default (at the new price) unless they return the form choosing otherwise?

I don't think section 105 allows an employee to use pre-tax dollars or salary reduction, does it? 125 does. I don't think your question has anything to do with whether or not you call it credits or dollars.

Go to www.benefitnews.com/law/archives There you will find a list of articles. Page down (way down--watch for December 2002) until you find the article entitled "voluntary benefit plans may fall under ERISA". There are pros and cons to subjecting these plans to ERISA. Most employers AREN'T, for several reasons. One is that the sales rep who sold the benefits didn't know or didn't tell. When the employer is made aware, they see it as a problem, "one more thing to do", etc. and ignore the whole thing. Further, I haven't heard of much enforcement one way or the other. ERISA has bigger fish to kill, although a lot could be at stake for large employers.

Is/will the 125 plan be bargained in good faith? How is the health being handled? Yes, they can be excluded if it's bargained in good faith. But I'm not an expert in this area If he's their legal counsel, better take a close look at the key employee definition. Parts of it are based on income. If it turns out he's a key employee, then the 25% test will automatically be failed. Formula is as follows: K=key employee, N=non-key employee _____K_______= 25%. or less. N + K "Key employees shall receive no greater than 25% of all benefits received by all employees" You plug in the total annual $ pre-taxed by each category of employee. If he's a key employee, you can see that the test is automatically failed, because there are no other participants. The 5500 is required whether it's a POP or not. If 5500's are required because of a "trust arrangement", then it is necessary for a POP because pre-taxed insurance premiums are held by the employer until the insurance carrier bill is paid each month. As you can see, I know just enough to be dangerous. Hopefully others will jump in here and correct or clarify what's been said I've had to edit this post because the formula doesn't show correctly. The formula is "K over N+K equals 25% or less"

Leevena: You may have forgotten one other advantage of running an HSA contribution thru a 125 plan. That is, you ALSO save the FICA taxes, which you can't claim on your personal tax return. That's worth another cool 7.65%, or thereabouts. Cheers!

If there's a 125 plan, there are discrimination tests. Is he an HCE or Key employee? If so, looks to me like there's an automatic failure. In addition to discrimination testing, he must have a plan document and a summary plan description, election forms, etc. Form 5500 is an annual reporting requirement. He could possibly "self administer" it, but is he prepared to do all the above plus adjudicate claims (he'll need to understand Publication 502)? The pitfalls are self evident. Cheers! P.S.--The owners DO know this is about to happen, don't they? After all, they're the one(s) that will have to draft and sign a "board" resolution adopting the plan, and sign the documents themselves. Oh, and by the way--they DO know they'll have some potential liability don't they? i.e., your man makes a nice big election, uses it all in, say, the first few months and then quits. And your man DOES understand the use it or lose it rule, right?

katieinny: You've got it right--you have to amend your current plan document to add HSA contributions as a pre-tax benefit, just like it already names insurance premiums as an eligible benefit.

Does anyone know if an employer can legally terminate an FSA to start an HSA (mid plan year)? I am aware of the transition relief available. Thanks!