LRDG

I'm not sure I understand your question. In particular your reference to "The Audit of OTC Receipts and Prescriptions, How does the process for receipts and prescriptions for FSA work". There is no IRS audit requirement under Sec 125, for OTCs or other expenses. The only audit policy I'm aware of would depend on the plan sponsor's or administrator's internal audit policy. A tax audit conducted by IRS would not likely be of such limited scope to include only OTCs, but would probably include an audit of payroll practices that would include pre tax FSA deductions, or a financial audit that would include an audit of all plans administrated by an administrator. I'm not aware of required audits specifically for OTC meds or "non-drug items". According to IRS regs, all FSA claims are required to be substantiated with supporting documents such as receipts and/or RX, by a 3rd party qualified to make claim determinations. I would be concerned for any TPA making FSA reimbursements that do not meet the IRS requirement that claims be substantiated, even claims for OTC drugs or claims for non-drug items. The consequences if ineligible unsubstantiated claims were to be paid to participants, are usually borne by the plan sponsor who will likely be subject to IRS fines and penalties, payment of all employee and employer taxes otherwise due under the plan if the validity of the plan is nullified by IRS as a result of not substantiating claims. The plan sponsor will probably take legal action against the TPA to cover legal fees and IRS fines and penalties, participants income and withholding taxes, and ER payroll taxes that are usually excluded from taxes under a valid plan. ChristheFSAGuy, disregard references to non-drug items. It was obviously much later than I thought. There is confusion about "non drug items". Non drug items is terminology not found in the tax code nor is it terminology used by IRS. It is terminology that is the invention of and used by plan administrators to facilitate communicating to participants items that may be eligible based on analysis of and by extripolating from Sec. 213 medically necessary equipment and/or supplies that may include OTC durgs/meds per IRS and non drug items as described by administrators. Non-drug items, terminology not found in the tax code but used by plan administrators, and OTC drugs/meds, terminology refered to by IRS, will continue to be eligible only through December 31, 2010, due to IRS amendments the result of health care reform.

Participants on unpaid leave can continue funding their FSA with post tax contributions during the LOA. Participants on paid leave should be required to continue funding during the paid LOA. If FSA funding has continued during LOA, FSA claims should continue uninterrupted during the period of the LOA. For unpaid LOA, or unfunded FSA during LOA, an option is to upon return make a one time Payroll deduction for the amount missed while on LOA, resume payroll deductions through end of the plan year resulting in contributions equaling the annual elected amount. FSA claims are usually suspended during the period the FSA is unfunded. Another option during unpaid LOA and unfunded FSA is to subtract the amount funded prior to LOA from the annual elected amount, calculate new payroll deduction amount based on adjusted amount and remaining payroll frequencies through end of the plan year, with claims suspended during the unfunded LOA.

The plan would have to be amended to adjust the ER FSA credit amount. If as you have indicated, you did not enter into a salary reduction agreement, but made your FSA election based on the available ER credits, the FSA amount of $320 is not covered by a salary reduction agreement. Although there may be other considerations I am not aware of, a better solution for reducing the ER FSA credits mid-year would be to amend the plan and reduce participants annual FSA funding via ER credit by a corresponding amount. For example, complications for participants who mid-year claim entire amount of annual FSA elected funds consisting of ER credit amount and the employee salary reduction amount to the FSA; or participants like yourself who did not enter a salary reduction agreement but have claimed the annual ER credit FSA election, claimed and reimbursed mid year, complicating any reduction to the ER FSA credit. Again, the $320 is not covered by salary reduction agreement, and it seems unlikely collecting the reduced ER FSA credits from participants would be in compliance with IRS regs.

Medicare Part B premiums are not eligible under Sec. 125. Medicare is a government sponsored medical plan not described in the tax code, or in either Sections 105 or 106 of the IRC. Sec. 125 prohibits the reimbursement of any premiums from a Medical FSA. Medicare premiums are under certain circumstances eligible for a medical expense tax deduction when filing individual income tax returns. Medicare co-payments and non-covered medically necessary expenses can be elected and reimbursed from a Medical FSA.

That's stating the obvious, don't you think? Because we all know this individual would never consider legal action against the ER for non-compliance, given the chance.

I'm not familiar with your plan document or terms of your plan or options offered to this participant with respect to continuing or interupting participation during FMLA. Circumstances that typically trigger if MFSA participation continues or is interrupted is if FMLA is paid or unpaid. If FMLA is paid, MFSA deductions should continue uninterrupted. If FMLA is unpaid, and the participant is unable to continue funding without income, MFSA participation is interrupted for the period of the unpaid FMLA leave. Upon return to work, catch up the missed deductions, for instance if 10 weekly $10 payroll deductions were missed, allow the participant to withhold $100 as a one time lump sum payroll deduction, resuming the remaining regular deduction. Another option is to calculate the remaining balance to be funded for the remainder of the year and withhold a new per pay period amount. For example if the annual elected amount was $2000, with $1000 funded prior to leave, upon returning frm FMLA the remaining $1000 deducted over 10 remaining pay periods for $100 deduction per pay period. Both options will provide the tax savings MFSA participation is based upon and should have no baring on MFSA expenses with service dates during FMLA period, that are eligible to be claimed upon return to work when participation resumes. If neither of the 'catch-up' options is feasible, allow a personal check to fund the remainder of the MFSA funding for the missed deductions. This will allow participant to avoid forfeiture if there was an available balance during the FMLA leave. The participant will not realize the payroll tax savings for those contributions if a personal check is used to fund the MFSA. There are some issues that haven't presented themselves in my experience with respect to unpaid FMLA and interupted MFSA participation. One involves unpaid FMLA with interupted participation, claims should be honored for service dates prior to interupted participation and unpaid leave, to maintain compliance. Similar to rules governing MFSA claims up to elected amount for participants terminating employment. The plan is not obligated to continue paying claims when a participant is no longer making contributions, however without more details I can't respond to your specific question.

oriecat, thanks for the link. "At the time an employee is hired, the employee receives a notice explaining the automatic enrollment process and the employee's right to decline coverage and have no salary reduction. The notice includes the salary reduction amounts for employee-only coverage and family coverage, procedures for exercising the right to decline coverage, information on the time by which an election must be made, and the period for which an election will be effective. The notice is also given to each current employee before the beginning of each subsequent plan year, except that the notice for a current employee includes a description of the employee's existing coverage, if any. " My concern with automatic, default elections under Sec. 125 for subsequent plan years is addressed in the highlighted section above.

This type of POP election is referred to as a default or evergreen election, or assumptive election. There are a few administrators taking a position that EEs, by electing to participate in the group health plan, will automatically have pre-tax premium deduction assumed to be a Sec. 125 POP election. I don't recall IRS providing for this kind of non-'election' for Sec. 125. I have seen many plans encounter problems under this scenerio and with initial POP election automatically renewing each year. For instance, consider the earlier post titled "can a waived participation be revoked after 1 year?" concerning a group health plan with assumptive/automatic POP enrollment. The participant signed a waiver for 2008. In 2010 insisted she was a participant despite the signed waiver. Assumptive elections and automatic renewing elections seem to open the door and invite problems w/EEs leaning on plans to make decisions that are ambegious, despite clear provisions in the regs. The non-'election', participation in the group health plan an assumptive election for Sec. 125, is counter to the premise of an election/choice between cash and a non-taxable benefit, IRS's defination of a qualified plan under Sec. 125.

5500 filing deadline is 'no later than the last day of the 7th calendar month after the end of the plan' or GIA year the end of the plan year'. http://www.irs.gov/instructions/i5500/ch01.html#d0e586

Review the administration contracts with both of the Payroll companies/plan administrators to verify responsibilities of the parties involved. You want to verify who is responsible for: annual enrollment/default elections; providing and updating P/D; discrimination testing annually and when there are mid-year participation changes; annual or mid-year benefit changes, etc. Request enrollment forms from the original P/R company for the 1st POP plan year. If the P/D states there will be annual open enrollments, request those enrollment forms also, if not verify default elections comply with Plan Doc. Contact P/R company #2 for copies of IRS Sec. 125 non-discrimination testing reports. If they did not conduct discrimination testing, it is possible to conduct the test today with payroll the records for the missing years, assuming there is access to pre-tax P/R deductions for the plan years involved. It may not be necessary to issue a new plan document when the Payroll company/plan administrator was changed, unless benefits changed or in the event of other material changes. It is possible that the plan sponsor/ER & the Payroll company/plan administrator intended elections to be 'default' elections after the first plan year. "Default' elections refers to plans that do not require POP annual open enrollments after the initial elections for the 1st plan year. Default elections refer to participant elections that automatically renew on the anniversiary date of the plan. The plan document must state that the type of elections involved are default elections for all plan years following the 1st plan year/open enrollment. Assuming 'default' elections are in effect and included the plan doc., verify there are enrollment forms for mid-year newely eligible participants and for mid-year and annual participant election changes, assuming they are allowed in the PD. You are correct that IRS prohibits retroactive elections or retroactive plan changes. Begin creating a document trail with both payroll companies in the event of an IRS audit. The documentation and correspondence in writting, will raise the possibility that in the event of an IRS audit the responsible parties will be held accountable and taxes/penalties can be recovered. In the event of an audit, IRS will probably recover taxes and/ penalties from the plan sponsor/ER. It's possible those expenses can be recovered from the payroll companies/plan administrators, if they failed to provide services contracted for with the plan sponsor/ER. Be in a position to demonstrate good faith compliance w/IRS, for instance by getting enrollment forms signed for each of the plan years the forms are missing. Document an explanation for the 'retroactive' enrollment forms that explains to IRS in event of audit, the contractural failure? of the plan administrator. Keep this in mind when communicating with the Payroll companies/plan administrators. Hopefully you will squeek by without hearing from IRS. Beyond that, I don't know first hand how agressively irs is auditing sec. 125s for the past couple of years.

Most Group LTD policies have an eligibility period, usually 1 year of employment, before EE is eligible to participate in GLTD plan. Once eligibility is met, EE or ER begins contributing to GLTD premiums and a 1 to 2yr waiting period begins, depending on policy terms. The waiting period limits claims to a period of 1 to 2 yrs after eligibility is met. There is often a look back period that allows insurer to consider insureds medical history if a claim is made within first 5yrs of the policy, which could result in pre-existing condition exclusion. I believe once the 5yr 'look back' is satisified a pre-existing condition could be covered by GLTD.

Annual open enrollments and most elections are made on a prospective basis, so what you are proposing sounds like what is expected in terms of compliance when a change in election is made.

masteff, there are not separate IRS categories for OTC medicines or drugs and OTC non-drug items. I lump OTC's together because a separate OTC Non-Drug category does not exist in the IRC. You seem to believe when new Sec. 106(f) refers to medicines and drugs that will require RX to be eligible for reimbursement, that a category of 'OTC non-drug items' remains eligible. OTC non-drug items does NOT exist within the IRC as an eligible classification or category. I am aware of the term 'OTC non-drug items' used by plan administrators to provide examples of the eligible types of expenses to plan participants, but it does not exist in the tax code. OTC non-drug items are assumed to be eligible based on analysis and by extrapolating from Sec. 213 references to eligible medical 'equipment, supplies, and diagnostic devices', and a couple of PLRs.

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. My interpertation of 106(f) expense for medicine or a drug only if it is a prescribed medicine or drug, without regard to whether such drug is available without a perscription. For example, I have a Rx formulary for Prilosec, I can not be required to purchase Prilosec OTC, or have a FSA claim for Rx formulary for Prilosec denied because Prilosec OTC is available. edited to add: "Correction: the OTC repeal applies to medications and drugs w/out a prescription only. It does not apply to non-drug items like bandages, etc." If the OTC repeal applies to medications and drugs w/out rx only, that is what the OTC class of meds is, so I'm not sure what the distinction is that you are making. I'm not sure best use of my doc's time is to write rx's for other people's asprin and badaids. For my own, not so much. That's of course while my doc is diagnosing my disorder that requires a rx for asprin and bandaids. Guidence from IRS, Labor, or HHS should be published soon to resolve some of this uncertainty.

My understanding is because of the repeal of OTCs in Sec. 105(b), OTC expenses will be ineligible for reimbursement from ER sponsored health plans, including MFSA, HRA, MRAs. That will leave Sec. 213, for deductible eligible medically necessary expenses for tax payers. Sec. 213 specifically prohibits OTC expenses. Sec. 213 allows medical supplies for medically necessary expenses. Medically necessary standard requires a diagnosis by a physician and a corresponding RX. Contact lens solutions are eligible because contact lens are medical treatment to correct vision, and contact lens are unusable without solution. Blood pressure monitors if there is a BP dx and written RX/recommendation from a physician. OTC reading glasses would not be eligible, vs RX'd glasses to correct far-sightedness by a physican would be eligible. Fever thermometers if necessary for treatment of infertility, substantiated by a physican.

To which "taxable year" does section 9003 apply; the employee's or the plan's? They may not be the same. Before Sec. 125, there were income tax deductions under Sec. 213 for medical expenses and a dependent care tax credit under Sec. 21, both of which include language that is consistent with the tax year of the tax payer. When Sec, 125 was adopted, it referred to the respective IRC Sec's 213 and 21 for a description of expenses that are eligible under a Sec. 125 plan. Sec. 125 states plan years can be no more than 12 months except for the 1st plan year which can be a short plan year; the 12 months but need not be a calendar plan year. The problem with 'tax year' and 'plan year' has been overlooked when IRS amendments were issued in the past. Public response to IRS pointed out the prospective elections involved and potential for forfeitures with respect to Sec. 125s operating on non-calendar plan year basis. IRS usually responded by revising language to include 'plan year' in amendments. It is possible IRS's position will not change, that they will stick with 'tax years beginning after December 31, 2010', in which case MFSAs should operate accordingly. If that is the case, participants should be urged to spend OTC funds no later than 12/31/10.

Q. If the agent refuses to apply uniform coverage, is there an agency that we should report this to? A. Problems involving insurance or a licensed insurance agent should be reported to the Insurance Commissioner in your state. Most states have special rules for agents who handle plan assets. That information is available from your state insurance commission. I believe you should start with DOL for reporting the kinds of violations involving Sec. 125 plan assets. If additional agencies also require reporting, DOL will usually assume responsibility for distribution, or they will refer you to proper agency if needed. If the scenerio play out with the worst possible outcome, with the agent acting as TPA; using copyrighted(?) material, property belonging to another firm; accepting plan assets; multiple IRS Sec. 125 complience violations; risking the ER's reputation and putting the organization at risk with the IRS, the agent could lose his license and without question should be prohibited from practicing. Hopefully the plan assets are available to be returned to the plan=your employer. IRS penalties, all EE back taxes and legal fees associated with the violations can be exorbitant, possibly putting a small business at great financial risk, not to mention the livelihood of EEs also possibly at stake. If it's possible to protect the organization/ER and EEs contributions in the process, first and formost that should be done, IMO. Terminating the plan is an option, but it's unlikely that alone will resolve all IRS problems. Turning the plan over to an administrator willing to correct past compliance issues and correcting the existing plan might be the best option. Considering the irreocable elections involved and deciding what to do with remaining assets; what about participants who made contributions but presented no claims thus far? There isn't a simple answer.

Sec. 125, the section of the IRS code that includes provisions for MFSAs, has been around for some time now, about 20+yrs, but still considered reletively new. It wasn't uncommon to see situations similar to your's, an agent setting up a couple of bank accounts, charging monthly admin fees, selling products and wa-la. IRS has since hired auditors who specialize in Sec. 125 plans. IRS is assessing penalties, fines and back taxes against organizations who's plans are out of compliance. These penalties, fines and back taxes are not insignificient. Uniform coverage is one of the cardnial rules of Sec. 125. There are many other possible violations; Sec. 125 plans must include a plan document that describes all the benefits under the plan, and how the plan is funded. The Plan Doc must be available to all participants within 15? business days of written request from the ER and failing to provide it within the period of time is subject to penalty, reportable to DOL=Department Of Labor(?) There are special rules for plans funded with EE contributions that involve particularly severe penalties if violated or if fraud is involved. Individual states have special rules for agents who handle plan assets. That information is available from your state insurance commission. I'm not aware of IRS hot lines to report violations, they are not particularlly interested in encouraging disgruntled employees. The steps usually involve hiring an attorney and filing suit. In defense of those involved, it's possible the plan administarator the ER/agent planned to use had minimum participation requirments that your organization did not meet once enrollment was completed, leaving your ER and the agent with what they viewed at the time as their only option. Curious about response of TASC. If it's possible to get the plan into compliance and avoid IRS involvement, that's probably how I'd choose to proceed. Keep us posted on your progress, the outcome and good luck.

Medical FSAs under Sec. 125 are subject to the Uniforme Coverage Rule that require medical claims to be reimbursed up to the EEs annual elected amount. Keep in mind if the MFSA is in a spouse's name through spouse's ER, that might explain some of the problems responding to someone other than the EE, owner of the MFSA. That wouldn't explain why the company has no record of the employer or flex account, or the questionable handling of uniforme coverage. FlexSystems/TASC has a decent web presence and web site with a customer service line that you should try to use if you haven't already done so, vs continuing to communicate through an unresponsive individual agent.

Mary C, worth pointing out that COBRA in no way changes coverage received while an actively at work EE. The fiduciary duty of the ER includes providing Plan Docs to participants with in 15? business days from receipt of written request, under penalty for failing to do so. DOL penalty is $150? per day? Here is a link to DOL site for COBRA and health plans: http://www.dol.gov/dol/topic/health-plans/cobra.htm In addition to the link provided by oriecat: http://edocket.access.gpo.gov/cfr_2005/apr...r54.4980B-7.htm

If the recently hired EE is covered by a County Gov't Medical Plan through COBRA, the premium payments are not eligible for pre-tax payment through your organization's Medical FSA. The COBRA payment is also not eligible for pre-tax deduction from payroll paid to the EE by your organization. If the EE is receiving income from the County Gov't, (County Gov't severence pay package, for instance), it is possible for EE's COBRA premium to be deducted pre-tax from post employment income received from the County Gov't if allowed by the County Gov't plan. According to IRS regs., Medical FSAs are prohibited from being used to reimburse premium payments of any type.

In order for the ER to make the EE 'whole', as thought the DCFSA election was administered according to the EEs elected amount, depends on how payroll deductions were administered and also how respective DCFSA claims/reimbursements were administered. A couple of possibilities come to mind, for example if the per pay period amount was correct but only withheld for 6 months instead of 12 months of the plan year; or if the amount was keyed incorrectly, for instance $2,000 annually was entered instead of $2,500 annually. Were DCFSA claims paid/reimbursed according to the incorrect payroll deducted amount; or were DC claims paid/reimbursed based on the correct EE elected amount? In order to correct the payroll error, issue amended W-2 to reflect the correct EE annual election amount. Make appropriate adjustments to withholdings for Federal, FICA, State and Municipal if applicable, and any other required state and/or local, municipal withholdings. Collect from the EE participant the difference between the amount actually withheld to fund the DCFSA and the correct amount based on EEs DCFSA election, less Federal, FICA, State, Local, Municipal tax withholdings owed to EE based on the election adjustment. If claims have been paid/reimbursed based on the incorrect amount withheld from payroll, process eligible EEs claims up to the correct annual elected amount. If claims have been paid/reimbursed based on the EEs correct annual elected amount, and the error was limited to one involving only payroll DCFSA deductions, it seems no Claim adjustments are necessary, provided all paid claims were otherwise eligible and paid based on the correct EE election.

I found a number of web sites with info about OTC's, adoption of OTCs as eligible for exclusion from income for FSAs, HRAs, HSAs, MSAs, etc., but few with IRS links or direct link to IRS cites. Based on some of the reading I've done, in 2003 Sec. 105 was amended to allow OTCs for purposes of FSAs, HRAs, HSAs, MSAs, etc. Sec. 213 was not amended to allow OTCs, leaving this class of meds taxable for purposes of Medical Income Tax deductions from individual income. Programs for weight loss that are not recommended by a physician as treatement of disease and well as OTC weight loss meds were not included in the amendment in 2003 of Sec. 105. I appologize for not providing IRS links. The resourses required to provide the summary of info above might be enough that IRS links will be posted for the necessary verification. It's possible the info may only be available via CCH or similar hard copy/web subscription publications authorized by IRS.

It depends on how the amendment to repeal reimbursement of OTC drugs is worded and if Sec. 213 is also amended. Before Sec. 125s were permitted to reimburse OTCs for expenses such as cold meds, asprin, etc., Sec. 213 provided a description of eligible medical procedures and circumstances under which they were eligible for purposes of income tax deduction and for exclusion from income via MFSAs. Sec. 213 includes expenses for medically necessary supplies for self injections for diabetics, such as syringues and cotton swabs, 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. These types of expenses have been eligible under Sec. 213 prior to adoption of Sec. 125 by the IRS, and long before Sec. 125 was amended (in 2003) to allow OTCs. Contact lens solutions are eligible via Sec. 213, not the later amendment allowing OTCs. If the amendment that allowed OTCs is repealed, then your solutions will probably continue to be eligible. If however, in addition to repealing the (2003) amendment that allowed OTCs, if Sec. 213 is also amended to exclude medical supplies necessary for administration/treatement of medical condition/dx, then it's unlikely contact lens solutions will continue to be eligible for reimbursement from your MFSA, and unlikely that it will be eligible for income tax deduction. With respect to "2-Section 9003 applies to "amounts paid with respect to taxable years beginning after December 31, 2010" , FSAs usually refer to "plan years beginning after" , a specific date. It seems the only interpertation is OTC is ineligible for service dates for "amounts paid with respect to taxable years beginning after December 31, 2010". OTC is not eligible for expense incurred for taxable years beginning after December 31, 2010, regardless of FSA grace periods. It's the only interpertation because the language is not more specific with respect to Sec. 125 plans and grace period provisions. For example plan years ending on 06/31/11 would allow OTC with service dates through 12/31/10 based on info you provided. I haven't yet seen a reference to Section 9003 of ACA , haven't heard about repeal of OTC either. Do you have a link? Sixth paragraph edited: eligible edited to read ineligible; and eligible edited to read not eligible

If you don't mind, I'm curious how the plan handles sabbatical leave with partial pay vs. full pay or no pay? Hope the PD doesn't have to be amended, but if so, better now than later.