LRDG

For most EEs taxes paid or saved via existence of a Section 125 is approx. 22.65%, representing Federal tax rate of 15%, FICA total tax rate of 7.65% (6.2% FICA on earnings up to $106,800; 1.45% Medicare on all earnings), assuming there is no State or Municipal Income Tax. Eliminating Sec. 125 does not raise premiums, taxes increase but the premium remains the same. While the premium does cost more based on the taxes paid on the premium amount. There is no increase in premium rate or decrease in ER subsidy that resulted in the increase in the cost.

SLuskin, after giving this more thought, it seems there must be an explanation for the attorney to say IRS prefers pre-tax DP premiums, then imputed income back to EEs. Do you have any indication what the explanation could be?

katieinny, I'm not sure if you got the answer you are looking for from the 5500 instructions, but the plans may be employee owned policies, a/k/a Voluntary or Supplemental Insurance. Because these are typically 100% contributed to and owned by EEs, sold at the worksite and payroll deducted via a list bill, 5500s are not required.

QDROphile's observation is correct. While the end result may satisify IRS, it is not the mechanism described in Sec. 125. My concerns would involve the potential for EE/ER tax calculations being inadvertently based on pre-tax DP premium deduction. With the advanced HRI & Payroll systems available today, one would think it unnecessary to use such a convoluted approach, particularly in light of the mechanism being the 'opposite' of what is described in Sec. 125. I personally would avoid using that aproach unless it was impossible to do so. IRS in more recent rulings and published opinions, has bowed to the concerns of employers, so it may not be a big IRS concern. I have first hand experienced involving a simple change in IT staff that resulted in huge compliance problems.

IRC Sec. 213(d)(1) provides the definition for medical care, which includes "expenses for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body." Seperate plan for medical vs. dental care is an underwriting mechanism of the insurance industry, which does not alter the definition of medical care as described in Sec. 213(d)(1). Unless dental care is specifically excluded for purposes of HCR, the IRS description above includes deltal care as care "affecting any structure or function of the body". I'm not aware of a Dental Care exclusion for purposes of HCR.

Below is a link to IRS Notice 2010-38 of IRS's intention to retroactively amend Sec. 125 for under age 27 dependents. http://www.irs.gov/pub/irs-drop/n-10-38.pdf The IRS announcement is here: http://www.irs.gov/newsroom/article/0,,id=222193,00.html The notice states that ERs providing coverage for dependents who have not attained age 27 as of the end of the taxable year, including Medical FSAs, can do so as of 03/30/2010, the effective date of the amendment; allow EE/participants to revoke a prior MFSA election and make a new election to include the additional amounts for no older than 27yoa dependents expenses. IRS and Treasury intend to amend the regulations under § 1.125-4, effective retroactively to March 30, 2010, to include change in status events affecting nondependent children under age 27, including becoming newly eligible for coverage or eligible for coverage beyond the date on which the child otherwise would have lost coverage. The plan document can be amended retroactively, but no later than 12/31/2010. There appears to be some discrepency as illustrated here quoted from the notice: § 2714 of the PHS Act applies to children under age 26 and is effective for the first plan year beginning on or after September 23, 2010, while, as noted above, the amendments to the Code addressed in this Notice apply to children who have not attained age 27 as of the end of the taxable year and are effective March 30, 2010 Until age 26 in the Public Health Searvice Act in Sec. 2714, under age 26 else where, and under age 27 for purposes of ACA addressed in this notice. Also: The Affordable Care Act also makes parallel amendments, effective March 30, 2010, to § 401(h) for retiree health accounts in pension plans, to § 501©(9) for voluntary employees’ beneficiary associations (VEBAs), and to § 162(l) for deductions by self-employed individuals for medical care insurance. (See § 1004(d) of HCERA.) In determining eligible Dependent Care FSA expenses, the age of the dependent is no more than 12 yoa, with the plan relying upon the EE/Participant for making an election within the age limit for eligible expenses. It seems the age limit for under age 27 dependents for the Medical FSA would be applied in a similar manner. Also, here is info pertaining to amendment of the plan document, and retroactive effective dates: However, a retroactive amendment to a cafeteria plan to cover children under age 27 must be made no later than December 31, 2010, and must be effective retroactively to the first date in 2010 when employees are permitted to make pre-tax salary reduction contributions to cover children under age 27 (but in no event before March 30, 2010).

IRS is the only reliable source of information regarding benefits, Sec. 125 in particular. There are many to choose from and it can be a temptation, but I don't suggest relying on the online info of any organization. IRS is the only reliable source, other than for purposes of discussion or debate. I'm also leary of a few of the benefit advisor subscription services, as they have not always been 100% reliable or consistent with IRS. SLuskin, I'd also avoid advice from anyone's attorney who would suggest that the IRS doesn't like the after tax payment basis for DP-EE contributions. Did they fail to mention the attorney is a personal injury attorney moonlighting in Sec. 125-EE benefits? In addition to calculating EE FICA and payroll tax on the DP premiums, but also for purposes of calculating ER payroll taxes. Today, someone told me that their attorney said the IRS doesn't like the after tax basis for the employee contribution, that it must be taken as pretax and then imputed income back to the employee. EBIA does not agree. Has anyone else heard anything like this?

ER organizations are prohibited from reimbursing an unrelated ER organization's premiums under Sec. 125. This would apply to unrelated organization's COBRA premiums.

106(f) REIMBURSEMENTS FOR MEDICINE RESTRICTED TO PRESCRIBED DRUGS AND INSULIN.— For purposes of this section and section 105, reimbursement for expenses incurred for a medicine or a drug shall be treated as a reimbursement for medical expenses only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin. OTC medications or drugs a physician writes a RX for are not prescribed drug or medicine. For instance OTC cold medicine, doc writes RX for Vicks DM cough syrup that is not a RX formulation and is not eligible for reimbursement, according to pre OTC eligibility under Sec. 105(b) amendment in 2003, and as of the effective date of the above HCReform amendment issued in March? 2010, effective tax year beginning 01/01/11?, regardless of plan year. Prior to OTCs becoming eligible under Sec. 105(b) in 2003?, there were facts and circumstances that might allow otherwise ineligible OTC medicines or drugs reimbursable from Medical FSAs. For instance a diagnosis of ITAs (patient w/history of 'mini' stroke type disorder resulting in brain 'scars' or lesions on MRI films), that a doc could write RX for baby asprin x times a day as long term treatement, would be considered eligible OTC for MFSA reimbursement. This and similar circumstances were the only type of OTCs considered eligible for reimbursement from Medical FSA based on facts and circumstances, prior to OTCs becoming eligible by Sec. 105(b) amendment in 2003? providing OTC eligibility, and March 2010? HCReform amendment under Sec. 106(f) and section 105 quoted above, reversing the OTC eligibility and the Sec. 105 (b) 2003 amendment. For eligible OTCs some pharmacies refuse to accept RX for OTC meds, others attach a RX lable on the OTC medicine. In cases where pharmacy refused the the RX for OTC, participants were required to submit the register receipt and the written RX, with a DX, considering facts/circumstances. There are older formulations of insulin available w/out RX, that remain eligible under the HCReform amendment above. Also, determined without regard to whether such drug is available without a prescription, I understand to mean reimbursement of RX Prilosec can not be refused because non-RX Prilosec formulation is available. OTC medicines, drugs and non-drug items are not eligible for reimbursement from a Medical FSA, unless the facts and circumstances? are met, w/medical necessity & DX, similar to ITA example above, or non-RX insulin. Included in the eligible class would be medical supplies and similar items under Sec. 213, where for example there is dx resulting in paralysis, the cost of equipement to transfer from bed to wheelchair, and supplies such as swabs and syringes for self injection RX meds. Recently, some injectible meds are dispensed in a 'kit' w/pre-filled syringes and swabs delivered to patients, supplies all inclusive, eliminating the necessity of purchasing supplies seperately. This is becoming more routine. Cost, (less capital gain if any) of making participant's primary residence W/C accessible due to medical necessity; installing ramps, or central AC systems and similar home improvement costs if medically necessary and consistent with the DX/RX, are eligible, less any increase in value of property. The cost of converting Vans and other vehicles to handicap accessible with hand only accelerators and brakes, W/Chair lift, etc. Contact lens solutions are eligible by virtue of contacts rendered un-usable w/out solutions, and medically necessary. Before making a decission to eliminate the OTC classification, consider that OTC reimbursable expenses are rare, and those most in need of the costliest items will qualify for Sec. 125 non-RX medicines, drugs, supplies, vehicle conversions and home improvements.

A discriminatory plan is not considered non-discriminatory because under Sec. 125 testing, the benefit passed non-discrimination. Plans must pass non-discrimination under the specific IRS benefit code, for example non-discrimination rules for Group Term Life under Sec. 79 must be passed, and Sec. 125 testing for GTL if premiums are paid pre-tax.

Was the election confirmed via Election Verification Statement? Plans should be issuing election verification following open enrollment each year, with enough time prior to the first day of the new plan year that would allow EEs who experience buyer's remorse or have made an error, or admin keyed the amount incorrectly etc., an election change can be made before the plan begins. The Verification is also for protection of the plan, allowing admin an opportunity to state 'we issued your Election Verification on 12/01/2009, provided 10 days to return the statement w/changes for the plan year begin date of 01/01/2010. According to our records you did not submit a request to change your election, indicating you agree w/the election you made during open enrollment in 11/15/2009. As the election verification instructions indicate, it is your final opportunity to change your election prior to the beginning of the plan year, a change in status not withstanding". IRS regs do not contain a specific provision for change in elections due to admin errors, or mistakes or do-over for any reason for that matter. As admins, the verification statement does provide for 'buyer's remorse', or correcting election errors by admin or participant before the beginning of the plan year, and a final reminder to the participant, that IRS regs prohibit a mid-year election changes unless there is a change in status. With respect to this specific participant, I agree that if it is the first P/R deduction, meaning the first time he would have noticed the deduction amount off by $2,500 or $2,800, I might consider allowing a change if no Election Verification Statement was provided to Participants. However, I'm not sure I would consider this at all. Doing so could back fire if word were to get out to a disgruntled participant/employee wanting to stir the pot a bit, or anyone else experiencing FSA buyer's remorse. My final final comment: Where is the clear and convincing evidence in his argument thus far? $3,000, urh, I ment $500, oh, make that $300 because number 3 and five are so close and that extra zero could happen to anyone. Because I made an oopsy and therefore qualify for a do over in my annual election in an Internal Revenue Plan, that could jeopordize the elections of every employee participant, w/IRS re-cooping all those EE and ER tax savings, assesement of possible IRS penalties? IRS plans that prohibit any such election change after the beginning of the plan year?

I think the question is how to provide the DI/STD/LTD benefit tax free. Your options are pretty limited, short of having EEs pay DI/STD/LTD replacement income premiums w/taxable income, resulting in non-taxable benefits. Di/LTD/STD replacement income is typically 60% (+ or -) of earned income. Based on $1,000 earned income, 60% replacement income of $600, less taxes of approx. 24%, or $144 withholding income taxes, for a total replacement income of $456.00 after taxes, the result could be significiant financial hardship. For plans w/EE paid DI/STD/LTD, providing EE's the option of either pre tax or after tax premium payment, allowing EEs the option to decide if they wish to continue paying tax on a premium they have never collected a benefit from, a point which some EEs can be adamant about, or those EEs who see the wisdom of tax free replacement income. If there are other payroll deductions such as health insurance premiums, funding FSAs, high medical expenses a result of the disability, to consider deducted from the 60% replacement income. Also, consideration for ERs payroll tax consequences.

Medical FSAs continue to recognize medically necessary supplies and devices described in Sec. 213. Sec. 213 includes expenses for medically necessary supplies for self injections for diabetics, such as syringues, cotton swabs and nonprescription insulin; medicines or supplies for conveselent home care that are medically necessary for administration or treatement of dx'd medical conditions. Bed pans, lifting devices to transfer from bed to wheelchair, and expenses for similar supplies, always with the underlying requirement of medical necessity and supporting documentation from a physician, licensed therapist, etc. Chaz Mar 31 2010 1-Currently, I am able to be reimbursed under my FSA for contact lens solution. Will I be able to continue doing so because lens solution is not a "medicine or drug"?; and Sep 7 2010, 07:15 AM 2-It is only OTC drugs and medicines that are not reimbursable (unless there is a prescription). IRS remains silent on the eligibility of Contact lens solutions. I considered this expense eligible under Sec. 213, similar to cotton swabs for RX injectibles and non-RX insulin, and similar medically necessary supplies essential to administration of a medical treatement for a diagnoised medical condition. I consider a RX for the contact lens to include solution because it is essential to the medically correct use of RX'd contacts, is included in consultation w/medical professional rx'ing the lens. Contact lens solutions are necessary for administration/treatement of dx'd disorder of the eye/correction of vision.

It's based on individual and corporate annual tax filing requirements and related exemptions.

Benefit Audit Co, good presentation, material in both the DE Under HCR presentation and what I've read so far in the Audit Guide. Timing is getting tight for publishing regulatory rules for Plan implementation by 09/23/2010?, without an extention of some type or relief within the regs.

mli, if the EE surcharge for coverage of spouse w/other available coverage is used to pay premiums or claims, complies with regs applicable to either fund account, is controled by the plan, it can be interperted as additional premium used for purposes of paying plan expenses.

PEMAQUID95, based on your post, it appears you are on the right track for Sec. 125 compliance. Prompt the the insurer that you need to clear the matter administratively. What is insurer's practice for incomplete apps, 30/60/90 days for unresponsive applicant? Prompt insurer to decline issuing the policy/deny coverage based on the incomplete app. Document w/writen advisory from insurer and EE for your records and issue refund less tax withholdings; correct your payroll system, in addition to amending any required filing complied w/throughout the period of time. Some insurers will issue the policy w/exclusion rider for coverage specific to the incomplete portion of the app, which may or may not result in a premium adjustment. If the rider is acceptable to the applicant, or the applicant doesn't decline the policy w/exclusion rider, premium deduction refund/adjustments, payroll records, amended filings should be handled accordingly. edited to add: Amend the EE enrollment form for either premium adjustment or policy denied, per the insurer w/documentation.

Failure of the regs to mandate on dependent to age 26 coverage does not create a mandate. Overturning long standing precedent with respect to the plan's dependent premium payment via the EE, and for dependent access to coverage via the EE, without a specific regulatory mandate instructing the plan, has the potential to create regulatory problems, in addition to extending coverage unintentionally. Expanding exponentially on the law of unintended consequences. That a covered child would have legal standing to demand COBRA was not within the scope of your question or my answer.

The inference in the highlighted portion is the relationship between child and participant that is relied upon to define the dependent status for the plan. Restrictions on plan definition of dependent. With respect to a child who has not attained age 26, a plan or issuer may not define dependent [/i]for purposes of eligibility for dependent coverage of children other than in terms of a relationship between a child and the participant. The employee/employer relationship is the basis for any offer of employment based coverage, which does not exist between a dependent and the plan. A dependent under the old rules would not have legal standing to demand coverage without the employee/participant including a dependent for coverage. Is the plan required to treat some dependents differently than others in terms of extending the offer of coverage via the participant/employee?

The tax code does not describe a surcharge as an eligible expense under Sec. 125. If a $250 group medical premium is discounted, there's no surcharge. It's still not clear if the surcharge is imposed by the insurer, the ER, TPA or admin., if it pays medical claims or is a penalty that goes into a fund that pays???? Is the surcharge used to off-set employee only premiums? Help me here. I'm grasping at straws to understand what would make the surcharge eligible, and make those collecting the surcharge believe it's eligible.

It may be a premium, but then it can't be called a surcharge and qualify.

amcorson, IRS has not issued a final ruling on the type of reimbursement accounts that allow employees covered under a individual health policy to be reimbursed the premium by their employer via a reimbursement account. IRS has failed to issue a final ruling on the matter for a decade, maybe longer. The other issue involves Medicare that is typically secondary payer, if or when there is other health coverage. Most Medicare beneficiaries are retired or disabled, therefore not working/employed. If they are employed, continue to receive Medicare and group benefits, or are retired/disabled, receiving Medicare B and covered under a working spouse's employer plan, well it's a fairly specialized niche market, with limited implications. A Medicare B Premium payroll tax exclusion would be counter to Medicare funding objectives under the FICA Medicare payroll tax. Medicare secondary payer status is mandated to contain Medicare cost, but for exceptions a Small ER plan meeting requirements referred to in the CMS link below, providing small group plans a degree of relief. Whether Medicare premiums are eligible to be reimbursed via a plan IRS has refused to rule on in a decade, considering Medicare funding & cost containment mandates, possible negative impact of a payroll tax exclusion , I don't believe so. What I know about Medicare and ER issues I've just read under COB here: http://www.cms.gov/EmployerServices/05_sma...n.asp#TopOfPage The site provides info for ERs w/20 or fewer EEs, including Medicare age eligible EEs/beneficiaries. CMS? may determine that Medicare claims qualify as primary payer, versus the small group plan as primary, provided the ER registers and qualifies for primary payer exemption? The site does not refer or advise the small ER group plan of other Medicare relief available, such as a Medicare premium payroll tax exclusion, based on my minimal reading/experience. It is beyond the scope of the topic being discussed. Edits in bold.

MARYMM, higher premiums charged for insurds with high risk life styles is not a new practice in insurance underwriting. Refusing a health assesement prevents the insurance company from making a determination about smoking vs non-smoking, and the adverse effects to the insurance company and insured non-smokers who cover the higher health care cost smokers typically represent. It's a premium and it's eligible. The health asessement may not be exclusive to smoking vs non, it may also involve pre-ex. A surcharge on the otherhand can be an administrative fee, a billing fee, it can be any number of things, even a penalty fee. IRS isn't particuarly interested in making a determination whether a surcharge is really a premium, an admin. fee or a penalty. If the penalty is part of underwriting to cover higher risk that has potential to involve covering cost of higher health care claims, it's eligible. If the penalty is called a premium, that is. edited to add: MARYMM, I read your post again and not sure if the higher premium you refer to is charged by the employer, TPA or insurer? Depending on who is assessing the premium, it could make a fairly significient difference.

The surcharge looks like a penalty paid by employees with employed spouses with other available coverage. It is not charged for all spouses of employees. Most important is it is not called a premium, it's called a surcharge. Surcharges are not eligible under Sec. 125.

Unless it is eligible pre-tax else-where, a sur-charge is not an eligible expense under Sec. 125.