LRDG

I would consider the possible disadvantage to employees when making the decision, and possible failing non-discrimination requirements and testing. My guess is the 401k assets are attractive and recognizing service dates a win win What would be the justification for having seperate service dates? I would research ERISA and the implications of using service dates to recognize the k plan, then ignore service dates for the cafeteria plan benefits. Specific Sec. 125 code has not evolved to the extent that issues you raise can be addressed within the scope of a cafateria plan. Because Sec. 125 is subject to ERISA, that's where I'd focus research. Is there an existing 125 plan for the effected (soon to be aquired?) employees? If so, what's the consequences to EEs of ignoring service dates? Consider rules under same/similar line of business vs. unrelated/different lines of business. stupid answer. good luck anyway.

Kristine hasen't commented, so there's no clarification on hir part on which to provide a more accurate reply. However, I'm not convenienced that the example of $1000 as outlined in Rob R's post is accurate. It seems to be the result of some confusion based on proposed Sec. 89 non-discrimination testing rules. Sec. 89 was repealed effective in 1989. Unless there are plan design issues not disclosed in the example, most administrators of Cafeteria Plans would not include the $600 employer paid portion of the premium for non-discrimination testing purposes. ER paid premium contributions are not included in EE taxable income without the existance of a Sec. 125 plan. ER paid premiums are not included in the EE annual election under the salary reduction arrangement.

A couple of clarifications I'd like to make about Sec. 125, Cafeteria Plans. FSA or Flexible Spending Account, can be a Medical FSA or a Dependent Care FSA. A Sec. 125 plan can be designed to include or exclude either one or both FSAs, in other words, the choice of pre-tax payment of benefit options can be limited to eligible insurance premium payments, referred to as a Premium Only Plan in an earlier post. Depending on the Sec. 125 Cafeteria plan design, the benefit options can include pre-tax premium payments, and/or a medical FSA and/or a Dependent Care FSA. Tax exempt, (vs. tax deferred), more accurately reflects the tax status of eligible expenses paid pre-tax under a Sec. 125 plan. Eligible expenses paid on a pre-tax basis (excluded from taxable income) under a Sec. 125 Cafeteria plan are not currently included in taxable income nor are such pre-tax benefits deferred until a later date, but are instead excluded from taxable income, period. I would not recommend Google searches as a reliable research source for IRS compliance, and particularly not for Sec. 125 info. There are several subscription services available for research of the IRS Code, Revenue regulations, ruleings, etc., in addition to other compliance issues. The disadvantages to the employee participating in a Sec. 125 Cafeteria plan, maybe one of the most overlooked is the Dependant Care FSA. The general rule that service dates must be performed and paid within the Sec. 125 Cafeteria plan year, employees don't always take this into account when making DC FSA annual elections. Employees often make their Dependent Care FSA elections based on weekly/bi-weekly/semi-monthly/monthly DC expenses and multiplying the amount by the respective dependent care payments within the plan year. The result is a service period can begin in one plan year and end in a subsequant plan year, resulting in not being eligible for payment in either plan year. Employees do not always account for family vactations which may or may not be charged by a dependent care provider. DC provider's schedules may vary during the holiday season, and accounting for it is sometimes overlooked by employees when making DC FSA elections. Plan years ending mid-week don't usually coincide with Dependent care provider payment/service schedules. There are ways of getting around these 'disadvantages', but EEs must consider these or other situations when making their DC FSA elections under Sec. 125 Cafeteria plan. Lower paid employees are not always aware that using a DC FSA will result in forfeiting the dependent care tax credit. The DC tax credit for lower paid employees provides greater tax advantage than excluding the DC expenses thru a DC FSA under a Sec. 125 Cafeteria Plan.

No. Making up missed deductions is permitted. I'm not aware of provisions that allow participation in a DC FSA to be terminated based on missed deductions. The circumstances do not fall within the Status Changes provisions allowing participants to revoke a prior made election.

Pensions, i don't think $94,200 is the Flex plan contribution. It's the wage/salary at which an employee becomes exempt from a portion of FICA payroll tax withholdings. FICA has two components, 6.2% FICA, 1.45% for Medicare(?) funding. $94,200 is the wage limit for maximum FICA contributions, wages above $94,200 are FICA exempt, on the 6.42% portion of FICA. There is no wage exemption on the 1.45% Medicare portion of FICA. (assuming $94,200 is accurate). Since it's an annual amount, assuming there's no salary increase, the 7.65% will provide an accurate ER tax savings projection for the plan year. If there's a wage/salary increase, the amount and date of the increase within the plan year will determine the degree to which ER tax savings are reduced. The 1.45% Medicare portion of FICA not subject to a wage/salary exemption will continue. ER tax savings reports are 'projections' based on current elections and salaries. If the employer can predict with a degree of accuracy the effects of salary increases subject to the FICA exemption, employment terminations, mid-year family status election changes, new hire mid-year participat elections, only then will an administrator or anyone else be in a position to provide an exact calculation of tax savings. Unless the participating EE population is prodominately highly paid professionals, with a small, lower paid support staff, the FICA wage exemption shouldn't have a substantial impact on the projected ER tax savings report. A prodominately professional employee population with few lower paid support staff has bigger dragons to slay. non-discrimination testing comes to mind.

whithholding/neglecting to compare the more favorable DC tax credit vs. less favorable exclusion from income using DC FSA, poses an unfair burden on the lower paid employees. i consider providing the comparison an obligation to lower paid group of employees, failure to do so professional neglence. ER (and administrator?) benefit from the neglence. is there a professional and ethical obligation to correct the failure to fully disclose information to an employee group that the plan is prohibited from discriminating against. particularly in view of the unfavorable financial consequences of losing higher tax credit, impact on their financial stability due to insufficient earnings to fund the DC FSA, the burden of funding the DC FSA when earnings are sufficient to do so.

consider foot notes to explain unknown factors, mid-year election changes based on family status changes, at what pont during the plan year the FICA income limit will be met, terminations, cobra elections, newly hired-mid year participants. new hire elections potentially off-set terminations. You can only base the report on what is known based on elections as of the day the report is prepared.

low paid EEs usually earn the greatest tax savings using the DC tax credit vs. Sec. 125 exclusion from income. DC tax credit is a tiered, income based percentage rate, with the lowest income earners, ($10k-12k) receiving the highest tax credit, 30-35%?, vs. exclusion from income using a flat rate of 24.65%? (7.65% FICA, 15% Federal tax and consertative estimate 2% state tax) . Higher paid employees using DC tax creidt will top out at 15?% vs. 24.65% by excluding from income. Other considerations for higher paid EE is elimination of $2400 max spent on DC expenses for one child using the DC credit vs. $5,000 for one child exclusion from income under a Sec. 125 plan. Another reason the tax credit works better for lower paid empoyees is they use friends or family members who either don't charge, exchange sitting services or the care providers don't report the income which in turn prevents the lower paid employee from claiming the DC credit. Sounds like an administrative burden, with potential for problems with constant payroll related deposit adjustments to DC account available balances. particularly at the end of the plan year in the event of a forfeiture to those who can least afford it. I'm assuming they are earning less because they are working fewer hours, in turn not using their DC provider. I'm assuming the DC tax credit vs. exclusion from income comparison was not explained to the lower paid EE at enrollment. The oversight could be used as the rational to allow a one time election change/opt out option in the DC FSA, for the lower paid EE affected. Document with a plan amendment or technical correction, covering the dates within the plan year.

Employers typically save on their matching FICA payroll tax, 7.65%. Except California with does not recognize Sec. 125 salary reductions for purposes of their state MediCal(?) portion of FICA, 1.65%(?). If you have clients in CA, you'll have to research state regs. Premiums for Workers Comp is also administered state by state. Most states with WC payroll tax do not want to reduce funding and don't recognize Sec. 125 salary reduction agreements. FUTA, Federal Unemployment Tax Act, recognizes Sec. 125 salary reductions. Because FUTA tax applies to the first $7k(?) of payroll, it's usually not a consideration for purposers of the employer tax savings calculation. SUTA, State Unemployment Tax Act, is determined by individual state, and as is the case with FUTA, the dollar cap on payroll is so low it's usually not a factor in the tax savings calculation. Municipal govt's may impose payroll based taxes as well. NJ and one other state that i can't recall, were hold outs for deciding to recognize salary reduction agreements, both have since decided. Why only FSAs? What about pre-tax premiums when calculating employer tax savings? Is there a contact in your P/R dept., (or your client's)? how up to speed they are on state regs? Not sure about 'total elections and contributions'? Your supervisor gives you the easy stuff

Revenue Ruling 2003-102: http://www.legalbitstream.com/scripts/isys...y/irl347d/1/doc I would feel more confident about referring to the Federal Register, but assuming the content of the link is accurate, there's nothing in Revenue Ruling 2003-102 that states "Revenue Ruling 2003-102 said that 213 is not controlling for purposes of whether something can be reimbursed by a cafeteria plan." Sec. 213 does identify medical expenses eligible for deduction from taxable income, and is referred to in Sec. 125 for purposes of identifying medical expenses excludable from taxable income. Limited exceptions to Sec. 213 do exist, example elimination of the 7.5% threshold for amounts spent on medical care, or by specific reference as in Revenue Ruling 2003-102 which only providers the exception for medically necessary expenses for OTC drugs. *I'm thinking Claratin(sp) becoming available OTC, the revenue ruling as win win for insurance and pharmacutical companies*

Refer to Section 213 of the IRC. IRS 500 series publications are not the most reliable source of information for administrators to rely on for compliance.

i'm thinking Sec. 125 constructive receipt violations. Correct me if I'm worng, but constructive receipt does not apply to the medical insurance plan benefits or premiums. if i becamse eligible for medical benefits on the 1st of the month, complete and date the enrollment form for medical benefits on the 5th of the month, my medical plan will pay benefits as of the 1st of the month even if billed or paid at the end of the month or retro-actively. pre-tax deduction of the health insurance premium is a seperate mechanisim, and if executed as outlined in the example above, would violate the prohibited constructive receipt provisions.

Yes, last day of the 7th month. I'll research if there's been any change in the perodic reporting. Edited: the filing exemption eliminated any reference to periodic reporting requirements. Also to clarify, the exemption for plans with fewer than 100 participants on the first day of the plan year.

requirements for form 5500 filing is no later than the last day of the 6th month following the end of the plan year. The number of participants is fewer than 100 on any day within the plan year. Plans with fewer than 100 participants are not required to file every year, but periodic filling is required, every 5yrs?

The effective date is the date the election form is signed. Using the employer's interpertation could present a problem if claims are honored that pre-date the election/enrollment form, it would be an IRS violation. If the employer insist on eligibility and enrollment being the same, it can be done, but could raise suspitions in the event of a IRS plan audit. It's administratively highly unlikely (impossible?) for every election form date to coincide with the effective date.

If there are no eligible 2005 charges from which to off set, the transaction should be reversed and the balance forfeited.

Usually NHC/HC-Key employee census data/forms are sufficient for discrimination testing. How did your employer test the premium portion of the plan last year? If this is a new client is there another plan you can refer to? How was premium data collected in prior plan years/other plans? Is the employer self administering the Premium portion of the 125 plan via payroll administration, if so according to the administrative contract, who is administering compliance on premiums? Is premium conversion included in the administrative contract, if so pro-bono or fee for service? Is premium conversion included in the Plan Doc? The 'ton of forms' may be related to collecting pre-tax premium data. If so, run a test on the FSA then test manually with NHC/HC/Key with FSA and premiums. This was not an uncommon problem when 125s' were new. premiums present an administrative burden particularly with multiple plan options and benefits.