LRDG

If the employee drops health insurance, yet continues to make pre tax deductions because the Sec. 125 plan document does not allow election changes or because the election change is one that is not permitted under Sec. 125 regs, the funds are forfeited. Forfeited funds, if they are FSA forfeitures or premium forfeitures, are treated no differently. The employee can not get these forfeited deductions back at the beginning of next year or at any other time because IRS regs prohibit the return of forfeited amounts to the participant. Forfeitures can be used to offset plan expenses, or distributed equally among all plan participants. There may be another option such as offering Sec. 125 credits with forfeited funds. Refer to the regs for a full description.

The legal cost of analysis and amending the existing docs would probably be higher than a restatement of the existing plans and docs. Unless the client has a compelling reason to remain under the existing format, the cost of doing so might encourage them to change. I'm not sure why the plan would be formatted as 3 seperate plans and docs. Perhaps they are under the impression 3 'plans' provide discrimination testing advantages.

The benefit to the terminating employee offered Cobra is if there are available funds in the FSA that would otherwise be forfeited. For example an employee who elected MFSA for services to be performed late in the year could face forfeiture if terminating employment mid year, prior to incurring expenses and service dates. Keep in mind if date of termination is 01/15/09 the participants plan year ends on that date also. Service dates must be within the plan year, no later than the date of termination. Funds are at risk of forfeiture without a Cobra election. Uniform coverage does apply to Cobra MFSA elections. To encourage terminating MFSA participants to choose Cobra, and limit the effects of uniform coverage, our plan allows terminating participants to fund the MFSA from the final paycheck. Doing so allows employees the benefit of tax savings and funds the MFSA eliminating or at least minimizing the impact of uniform coverage. This requires advance knowledge and preperation, has worked well for participants and the organization. edited to add Federal Register URL: http://www.gpoaccess.gov/fr/index.html

GBurns, you're right, my apologies for not being more specific. It would apply to those who are 'more than 2%' owners of the S corporation. The following from BenefitsLink, (it appears dated): "Further, it appears that persons who own more than 2 percent of the shares of an S corporation are not considered "employees." (An S corporation is a corporation that has elected to be treated as an "S" corporation for income tax purposes, pursuant to subchapter S of the normal income tax provisions in the Code.) See Code section 1372, which states that for purposes of the "fringe benefits" portions of the Code an S corporation is treated as a partnership and a more than 2 percent shareholder of the S corporaiton is treated as a partner of such partnership." Here is the URL: http://benefitslink.com/modperl/qa.cgi?db=qa_125&id=6 It looks dated, the full text posted March 31, 1997, although there's not necesserily a more recent revision. I'll search in event there is, appreciate anyone with revisions or info would also post the text and/or a link.

As of 01/01/09 revised IRS Sec. 125 regs, there are no official regulations addressing this particular change in status from eligible employee to ineligible S corp owner-employee. These individuals no longer meet Employee Status requirements of Sec. 125. They are owner employees, and as such no longer meet eligibility requirements as of the date of their change in status to S corp owner-employees. Their salary reductions should be discontinued on a date that coincides with the effective date of the status change. There are or should be rules in the plan document that address the treatment of FSA balances for mid-year termination of employment and other status changes that do comply with IRS regs. I would follow the existing termination of employment rules as they are in your plan doc as a reasonable precedence or template for handling mid year loss of eligibility the result of status change to S corp owner employee status. IRS may be more conservative, could require forfeiture of FSA balances retroactive to the beginning of the plan year for this class of owner employees. However, that would not follow the example that exists for other mid-year termination and change in status regs. It seems only reasonable to allow reimbursements through the end of the plan year for reimbursement of funds accumulated in the FSA at the time when they were eligible participants. Amend the plan document to coincide with the decision made for these employees. This is at least the second time in the past couple of months this question has come up. It might be time to address this issue with IRS via a private letter ruling. edited to add: There are issues in the S owner employee change in status that do not exist in other mid year election changes or changes in status. Cobra is a question of particular interest not addressed for this class of employees. While I can use reasonable judgment, it is no substitute for an official IRS ruling. For instance, for a plan that allows termination of employment participants to fund their FSA from the last paycheck pre tax via Cobra, should it be an option for change in status owner employees, or can that option be denied? What about other Cobra options? What to do with those who terminate with claims that exceede available MFSA balances, or more importantly would IRS treat them differently than non-S corp owners terminating employment with claims that exceede available balances? WWIRSD?

The employee made an irrevocable IRS election. The employee's irrevocable election and the employer's obligation to comply with IRS regs are not mitigated because of administrative error. The correction must comply with IRS regs or come as near to that as possible. Objective should be to comply with regs, restore the employer's loss, and recover unearned income from employee. Employee is not responsible for causing the problem, but didn't correct with P/R, while continue to file claims, and I suspect knew FSA was not being funded from salary. Termination of employment is not an issue in this case that should affect recovery. Repayment probably will not take place without some financial imposition on employee. Adjusting W-2 does not recover the un-earned income from employee, nor does it comply with IRS regs, particularly when there are better options that meet compliance requirements more closely. What are you referring to 'especially if I lost some of the $$ at year-end'? The adjustments I illustrated credit the employee with payroll taxes that were not otherwise available, in the amount of $300.

The cleanest option is to terminate the current plan. Termination of the plan could potentialy allow employee the remainder of the year to submit claims for the FSA balances at date of plan termination. Termination of the plan would make tt possible to adopt new plan that allows employees to make new premium and FSA elections. Amending the current plan is also a possibility. It's possible to amend the plan's description of part time employment to coincide with the reduced hours to be worked, thereby allowing election changes due to status changes from full time to part time status.

You can recover money from employee who elected to receive benefits under Sec. 125, but due to administrative error did not fund his FSA account, while receiving FSA reimbursements. This can be accomplished via payroll reduction from '09 payroll. Take precautions that the TPA does not reimburse the 08 recovered amount to fund another FSA for 09. Another option is to allow employee to pay with a personal check or other form of direct payment. If direct payment is the option employee selects, make adjustments for the tax savings employee did not receive via the missed '08 payroll deductions. Adjust W-2 to reflect repayment of FSA reimbursed but not previously funded. If the total missed fsa election is $1,000, and if the total tax rate is 30%, (for FED STATE FICA plus if there is applicable municipal tax or local tax), the adjustment for all taxes should be $300, employee's balance due is $700. edited to add: Adjust W-2 to reflect repayment of FSA reimbursements but not previously funded.

Why and what kind of election changes do you expect in March? If the concern is the possibility of insurance carrier rate increases that will result in premium increases to employees in March, Sec. 125 plan regs allows for premium increases or changes in premiums that are the result of carrier rate increases, without requiring employees to change their premium elections mid year. Sec. 125 does not require a pro-active election by those employees experiencing premium rate increases/changes, it is recognized by the plan and should be accompanied by increase in P/R reductions. Review your plan doc to assure that rate increases mid year are allowed and amend the plan doc before March if necessary to comply. The premium change would not allow employees to change their Medical FSA (or DCFSA) elections without a qualified family status change. IRS regs do no permit a plan year of more than 12 months. The remainder of your options are not necesserily prohibited, but may not be necessary if the rate increase is your concern.

Of states that imposed a payroll tax on income, only NJ voted not to follow IRS recognized Salary Reduction Agreements under Sec. 125. Employer MFSA contributions do not involve SRA. Employer contributions were not the subject of that particular legislation, but based on analysis at the time, NJ continued to follow IRS tax policy allowing exemptions for employer benefit contributions. The basis to suggest excluding employer MFSA contribution on payroll is that I would not include superfluous data on payroll, which would be the case if it's not subject to payroll tax. It's presence serves no purpose. which at this time is the case for employer MFSA contributions.

I'm assuming it's because of the FICA exemption under Sec. 125, and that there is no FICA exemption when filing individual income tax returns.

It's not necessary for the employer contribution to be on the P/R system because there are no tax or net or gross pay implications. However, there could be administrative preference. If the employer contribution/credit is tied to eligibility triggered by hours worked, for instance, and hours worked are accounted for on p/r system versus the Sec. 125 system, but other wise it's not necessary for it to be on P/R system. I personaly would keep employer contributions in general asset account and would not set up a seperate bank account to avoid triggering trust account issues.

Yes, based on 2000-01 regs and expat plans I was involved in at that time, and no amendment that I'm aware of, medical care outside the US is eligible. Also, because medical care received outside the US continues to be eligible based on the major insurance providers promoting care outside the US as a cost cutting benefit design strategy for US residents. Based on the expat population, and plan design strategy promoting medical care outside the US for US residents, if anything there has been an expansion of the use of 'off-shore' benefits, making the chances of regulators revoking or amending it reletively low. I don't have a link for you, but I'd suggest verifying. The negative impact of revoking the eligibility of medical care received outside the US on the US expat employee population and US employers will probably contribute to it's continued eligiblity, in addition to more recent trends for medical care outside the US as a plan design strategy for US residents.

For purposes of determining effective date for late enrollments, it is the date of participants signature on the enrollment form, unless the plan doc and enrollment form specify otherwise. This date is for establishing service dates to honor FSA claims. Similar to the first date of the plan year establishes the service dates to honor FSA claims for participants enrolled during annual open enrollment, for example FSA services no sooner than 01/01/09 and no later than 12/31/09. Typically there is no similar date within the PD to establish when the FSA 'effective date' for service to be honored for participants enrolling in the plan late. Insurance effective dates are typically established in the insurance contract. Edited to add: For what it's worth, the standard for Sec. 125 plans is written documentation, it's what the IRS requires and more importantly participants should not be required to rely on memory for the date admin received it, (is that even possible for participant to know?), guess the service date or assume what the service date should be for his claim to be honored. Forfeitable monies are at risk if the service date is just one day early. Written reference is for benefit of participant, administrator, and plan sponsor.

Administrators or enrollers who let it be known that EE Joe Schmore is changing a Sec. 125 plan election, get exactly what they deserve. In my most menacing tone of voice while flexing muscles and pounding iron? knuckles, I stress to Joe Schmoe that election change is allowed under the strickest of confidence and I'd hate to eliminate changes entirely should word of this get out. One other comment made concerns when elections become permanent? Elections are 'permanent' on the effective date of the plan. With respect to the regs, elections can be waived, revoked, voided, changed, up to the day prior to the plan effective date. On the plan effective date that is no longer true and elections are 'permanent' on the plan effective date forward. For late enrollments, for instance new hires or newly eligible participants, their elections become permenant on the 'effective date' of their election, which is the date their enrollment/election form is signed, typically.

The standard is that there must be clear and convincing evidence of the error/mistake and it must be reasonable conclusion to correct the mistake, and doing so would not otherwise voilate Sec. 125. Most enrollments involve gathering a lot info from a variety of departments, a number of individuals involved in the process, an enrollment staff, management and minipulation of data accross system platforms. It is not always perfect, but is usually very close, based on first hand knowledge. If the mistake is the EE missed a deadline, the plan and regs usually don't have tollerence for that type of error, unfortunately. However if the EE didn't receive material that would have led to meeting a deadline, either because for example the EE was out sick, vacation, business travel, during enrollment, those EEs really should be attended to by enrollment staff before there's a problem, but could be a circumstance under which a corrected election might be allowed. There must be documented evidence (available for review in the event of an IRS audit), that an error was made, and it would be reasonable to correct without violating Sec. 125.

IRS states that Sec. 125 elections are 1. irrevocable and 2. for a plan year. SRAs should state the annual election amount, or at least should state that the election is entered into on an annual basis. If SRA only states a per period amount, it is for illustrative purposes, an illustration of the annual elected amount and it's effect on participants per period net and gross pay and tax savings after Sec. 125 reductions. These are annual elections and SRAs should clearly state that it is, even if the illustration is per pay period. Sec. 125 contributions have no effect on minimum wage. You would "want to even make the deduction" because not doing so would violate Sec. 125 regs. with potential for IRS penalties, possibly for the plan year and the entire plan. There may be circumstances where it is impossible to fund the FSA, in which case the fact and circumstances would have to be evaluated regarding how to resolve the problem without violating Sec. 125. There are no IRS guidelines addressing this specific situtation.

The $2,400.00 cap for one dependent or $5,000.00 cap for 2 or more dependnts are limits for income tax filing purposed, not caps for DCFSA. The only limit on a Sec. 125 DCFSA is $5,000.00, regardless of the number of dependents. (Other limits that may apply to couples filing jointly when one parent is a full time student or disabled or working part time.) The $5,000.00 maximum is the total combined employer and employee amount for both benefits paid and contributions to the DCFSA. The MFSA maximum contributions and benefits amount must be stated in the plan document, but there is no hard dollar amount limititation imposed by IRS. If the MFSA includes ER credits, the employer credit allocation must be stated in the PD. The MFSA maximum employee contribution/benefit must be stated in the plan document.

I agree. The participant's plan year ends on the date of termination absent a cobra election. Dates of service for honoring claims is services preformed no later than the date of termination, absent a Cobra election. Based on the unusual funding arrangement, confirm that the doc doesn't have other unusual terms. Curious why hasn't this participant elect Cobra? Particularly since the FSA is employer funded. Has anyone advised the participant that claims would be honored through the end of the plan year with Cobra? It doesn't make sence that the participant wouldn't agree to Cobra under the circumstances if it was explained? Unless it's a disgruntled employee.

Spouses are not always both employed for a variety of reasons. One may be stay at home, student, disabled or if both are employed, insurance may not be available through both spouse's employer. That aside, even families where both spouses are employed, health coverage is often provided under one spouse's employer provided health plan. There is no mandates that employeed couples each aquire insurance coverage from their respective employer's. In any case, payment for eligible beneficiary's cobra payments are eligible under Sec. 125.

The process described by tellidaho, eliminates IRS required independent claim determination/review process, transfering that burden to the plan participant via participants claim data entry info, and to the service provider, by including endorsement statement on the check. The assumption based on this process is that the claim payment/reimbursement is in deed made after the data is entered into the system, meeting that requirement that payment/reimbursement is made after the claim is 'adjudicated' by a system that relys on accuracy of participant data entry.

Despite declining housing market, IRS provides no exception to the requirement that expense is deductible to extent it exceedes capital gains. The hot tub wouldn't be of much benefit as an investment in the current declining market, potential to lose all it's value with continued decline. Based on the declining market, it could if anything have a significiently greater tax benefit than a it would in a stronger housing market.

I don't consider this process as one that meets IRS required burden of proof that an actual 'document' provides, lacks the required and appropriate review for eligibibelity that's provided when claim documents are reviewed by plan administrators. The process described lends itself to interpertation by the participant with respect to information in an EOB, such as contract discounts, ineligible charges, deductiables and similar information, some of which is frequently mis-interperted by participants as an eligible expense when it is not. FSA claims administrators are routinely questioned by participants regarding why discounted amount on an EOB were not paid from their medical FSA, suggesting the reimbursement amount was less than the full eligible amount. Aside from the potential for unintentional abuse, the process described in your post lends itself wide open to intentional abuse by participants. Consider a participant faced with forfeiture, or one terminating employment mid-year. The plan sponsor has a large stake in the integrity of the plan and it's administration, considering IRS penalties, the possibility that the entire plan could be deemed 'ineligible' due to unsatisfactory claim substantiation.

The hot tub must be treatment for a diagnoised disease or injury, stated so by the treating physician. It can't be for the general health or well being of the patient. The expense from the FSA is reimbursable only to the extent the cost exceeds capital gains. It would involved property assesment prior and post purchase/installation/construction costs of the hot tub. Establishing capital gains requirement would be the same regardless if the expense were used as a medical expense deduction on income tax return or if claimed from the medical FSA. The benefit of using the FSA is the expense is not required to exceed 7.5% of income that is required for deduction on tax return.

According to IRS, "employment related' kindergarten expenses were previously defined by the tax payer as being primarily for employment purposes, with the educational benefit being incidential to employment related child care provided, applied to DCFSA or child care tax credit. This was true regardless if kindergarten was provided in a school environment, (for instance k-6 or 12 school, public or private, accredited or not), or if kindergarten was provided at a pre-school facility that provided infant care through kindergarten care, or an individual providing care in their home with no educational benefit. The defination was refined by the IRS a couple of years ago. The refinement states if there is any educational benefit associated with the care or an educational institution provides kindergarten care, educational benefit is no longer considered incidential, becomes primary purpose for the care/expense. To be IRS qualified expense, the care must be "employment related", meaning both parents employed/one disabled parent/student-parent, or employed single parent. Becoming a purely educational benefit, the expense is no longer employment related and is not qualified. If employment related kindergarten care is provided at a facility providing infant care through kindergarten care, it can be considered employment related eligible child care expenses, or an individual providing care in their home with no educational benefit. I personally feel it's a hard stand for IRS to take, education is emphasis for care provided to the youngest of children. It's silly or foolish to think that any parent is sending a child, even 2 or3 year olds, to a setting that is absent the benefit of educational instruction. Considering the cost associated with child care, educational benefit should be demanded for even early child care and for working parents kindergarten expenses should qualify. Also in the past the favorable tax treatement of kindergarten expenses was favored and justified because a tax payer provided public school education is available to all US residents, supported via taxes, manditory attendence enforced by law in most communities with age requirements, beginning with 1st grade. Expenses for before/after school care and summer day care for school age children no more than 12yoa continue to be qualifed expenses, and have not changed as a result of the IRS re-characterization of kindergarten expenses.