LRDG

IRS regs do not require either payroll or benefit deduction schedules be uniform for all participants. The original question as I understand it does not relate to payroll or benefit contribution frequencies, but wether IRS regs allow an individual participant to 'coordinate' FSA benefit funding with FSA benefit reimbursement that would result in a much abreviated period, a situation IRS has previously stated is prohibited.

Organizations often establish multiple payroll schedules or frequencies, and multiple benefit contribution/funding/deduction schedules. It is not necessary that any payroll or benefit deduction schedule be uniform for all participants. If "front loading up to the limitit" results in a participant contributing for only a period during which a participant will insure expenses, it is likely the principles prohibiting the constructive receipt of benefits have been violated.

A plan may establish a unique benefit deduction period that results in periodic funding of benefits, for instance a plan with 52 pay frequencies may also establish monthly benefit contribution/funding/deduction fequencies. This would also be true for a plan that for it's unique business reasons establishes annual benefit contributions/funding/deductions frequencies. FSA plans may not establish contribution/funding for only a period during which a participant will incurr expenses, according to IRS regs. Early on when this was specifically adopted, it may have been to avoid the potential for violating the principals of constructive receipt. edited to add: IRS Publications such as IRS pub 969, I have considered for user general information purposes. I would not recommend relying on the user friendly language in such publications as a substitute for technical compliance standards an administrators would be expected to meet.

IRS addressed this specific contribution/funding question many years ago and stated that contributions/funding and corresponding payroll deductions can not be established for only those periods during which participant expenses are incurred. For instance in the case of an employee's one time payment, or service/billing over 2 months of a 12 month plan year, contribution/funding can not be set up as a one time deduction or for only those periods that correspond to the partial plan year service/billing period. Dependent care FSA contributions/funding versus the period during the year that higher expense and more service are provided, such as summer day care or winter break for school age children, has been inherrent since the inception of DCFSAs. The funding rule applies to medical FSAs as well.

This plan probably has little to do with early adoption of a plan under proposed Sec. 125 regs taking effect in January 2009. This plan and probably many similar arrangements likely adopted under Revenue Rulings 61-146 that date back to the 1960's, as stated earlier.

Private Letter Rulings?, I've seen a couple published in tax compliance publications such as BNA. I didn't realiza that a FOIA might be involved in order to view an original, or see one not otherwise published or issued on my behalf.

Premium only plans are a provision under Sec. 125 and must meet compliance, forfeiture and election change requirements as imposed on FSAs. The only exception to the participant's irrevocable annual salary reduction agreement/participant irrevocable annual election requirement under a Premium Only Plan under Sec. 125 is the option for an automatic renewal on each subsequant plan anniversary date, but only after an initial POP irrevocable salary reduction agreement/POP election is made. The objectives achieved when IRS allowed this type of POP was two fold. One is that employer's were able to tie the receipt of group medical coverage to the Sec. 125/POP election, eliminating the participant's option to receive benefits post tax, eligible POP benefits were made available only pre-tax. The other is once an initial POP election is made, provided the salary reduction agreement states the election will remain in effect for each subsequant plan year, annual open enrollment is eliminated. Because there is no annual open enrollment, participants are at a greater risk of forfeiture if the participant wants to change an existing election absent an underlying qualified status change. Open enrollment is the only opportunity for participants to change their elections in the absence of a qualifying status change. I am in favor of clients with a POP that includes automatic annual election renewal feature to prepare and distribute an annual statement verifying the irrevocable POP election/salary reduction agreement made in 1995, for example, will remain in effect for the 12 month plan year beginning on XX and ending XXX. Premiums paid under a Sec. 125 plan in conjunction with employee premium payments for individual health coverage should not be confused with a Premium Only Plan under Sec. 125.

It depends on the plan provisions regarding making premium election changes, and election change reporting requirements the employee is responsible for. If the plan allows premium election changes, and the employee has complied within the time provided to make an election change, but due to mis-handling or communication/paper delays not in the employee's control the deadline has been missed, and if the employee has satisfied any substantiation requirementsthe, the adjustments should be made with a refund to the employee. Adjustments and a refund of excess premiums should be returned to the employee via payroll with appropriate tax withheld on the premium amount that exceeds the actual premium amount due. A seperate check can be issued, but the payroll system should reflect the necessary adjustments, tax withheld on the excess premium amount. amd funds returned to the employee.

This is a plan error. This is not an employee election error. Correcting a plan error does not require compliance with status change or compliance with election change criteria. IRS does not prohibit administrative relief for errors made by the plan. For instance if in the course of administeration of the plan, a medical FSA deposit for the payroll date of 11/01/08 was duplicated, the administrator would simply reverse the unintended, duplicated deposit. In this case the plan errored by allowing an unqualifed representative of the organization to advise an employee/participant about enrollment and medical FSA elections. To correct the error made by the plan, the employee should be allowed to change the medical FSA election by the amount of the premium that was included in the election, according to the incorrect enrollment info proided by the representative of the organization. I would require a statement from the company rep stating the incorrect info provided to the participant. Require a similar statement of facts by the participant. Invoice or similar documentation from the insurer to the insured of the total premium amount (or a means to ascertain the total premium amount if monthly billing for instance), included in the participant election amount made in error. The original election document and the corrected election document, the representative and participant statements of the facts, insurer invoice documenting the total premium amount, should all be maintained to support the election change and the reason, and to allow for an accurate and clear audit trail in the event of an audit. The election change amount should correspond with the total premium amount included in the original election. Avoiding forfeitures with a bonus, salary increase or stock of equal value is specifically prohibited in the regs. An attempt to avoid forfeitures or circumvent prohibited election changes or correct errors similar to this one, with some type of offset via a bonus, salary increase or stock of equal value is prohibited.

If there is no corresponding election by the spouse for employee only coverage, the election change would not be consistant. Because both are electing employee only coverage under their respective plans, the election is consistant with the change in status.

Unless the Sec. 125 plan prohibits election changes, the changes you describe, your daughter marrying, and as a result of her marriage, both you and your husband only now being eligible for single coverage under your respective employer plans, in my opinion meets the eligibility requirements for singe coverage consistant with a Sec. 125 premium election change. Since both your and your husband's health insurance plans only have two tiers of coverage, single or family, and your daughter's marriage allows both of you to now choose single coverage not previously available to either of you until her marriage. In my opinion, even if your plan continues to argue that your daughter's marrage is the only qualified change in status, I believe the IRS regs recognize your husband's newly eligible status for single coverage also qualifies, and I believe, your new eligibelity status for single coverage, entitles you to the election change. Both, or all three 'events' (# 1 marriage, #2 you becoming newly eligible for single coverage under your employer insurance plan, #3 your husband becoming newly eligible for single coverage under his employer insurance plan, both only consisting of 2 tiers of coverage), are consistent with the election change under Sec. 125.

Co-pays are not typically deducted 'per pay' from pay checks. Co-pay is typically a percentage of the cost of the covered medical expense a medical insurance policy requires to be paid by the insured, with the remaining amount paid by the policy. For example a policy might require co-pay of 80%-20% co-pay, meaning the insured is required to pay 20% of the cost, the policy co-paying the remaining 80%. The co-pay might be eligible for reimbursement from a medical FSA, assuming the procedure is eligible. The contributory cost of medical insurance premiums is usually paid through the premium conversion feature of a Sec. 125 plan. Typically, the premium cost for spouse and dependent/s coverage is also eligible for payment through the premium conversion feature of a Sec. 125 plan.

The tear stained letter should also emphasize how poorly the transition was handled. Be specific pointing out what led to the failure to file oversignt, highlight the previous administrator's errors, plead ignorence on behalf of the plan sponsor and new administrator. Offer to do whater is necessary to correct. I strongly recommend making an attempt to include the missing 5500s. If you don't have forms for the missing years, cross out pre-dated forms and insert by hand the correct year. Complete as much info as possible. The effort alone will go a long way in your favor. With end of year reports or available date, etc., you may be able to provide more data than you realize, and the EZ form might not require the depth of info as a full 5500. Submit the form with tear stains included, in addition to TSL as they have proved successfull in the past.

ojs, I agree with Jacmo. I don't see a discrimination problem based on the employee population described in your post. However, I don't recommend that you assume the burden of non-discrimination is met because that are other possible issues of which I'm unaware. I avoid commenting on non-discrimination for that reason. I'll add that in addition to amending the Plan Document to include the new benefit, a copy of the non-discrimination test, including the new benefit in the test results, must be maintained and available in the event of a plan audit, and should be standard protocal. Industry wide, Sec. 125 participation in the 25%-30% range is probably representative of average participation levels. Participation should be much higher with more attention to inadequate employee education, minimizing risk of forfeiture to participant, burden of meeting non-discrimination requirements, and cost of administration, to mention a few of the issues attributable to FSAs. Considering the cost involved in sponsoring most benefits plans, employers recognize the value of offering FSA plans. Sponsoring a benefit plan that generates savings to an organization, even minimal savings in some if not most cases, is never the less attractive to plan sponsors, versus the cost plan sponsors are accustomed to assuming. TPAs and other service providers who recognize and seize the marketing opportunity a FSA plan stands to represent, realize that the value is not necessarily in the fees billed, but in the investment funds generated via tax savings for participants. This is particularly true when employee education is adequately addressed. Looking back over a couple of decades, there are parralles in legislative history, employee education needs, and participation levels, with respect to 401ks and FSAs. Plans with low participation are of limited value to plan sponsors, and to service providers. Plans with low participation often evolve to represent a burden. In my opinion, when implemented correctly it's hard to dispute the potential value FSAs represent to participants, plan sponsors and service providers.

The US/federal tax code does not recognize domestic partners for income tax purposes. The US tax code does recognize individual tax payers, their legal spouses as described by state law, and dependents as described in sec. 152. Dependents are bioligical child/ren of the tax payer, adopted child/ren of the tax payer, step child/ren, or dependents under majority age, to whom the tax payer contributes toward the care of child/ren's financial support; these childr/en may be grandchild/ren raised by the grandparents with legal custody, foster child/ren, etc., fully described in sec. 152. A medical insurance plan, governed by state insurance law, may allow insurance coverage for domestic partners and dependents. Pre-tax payment of premiums or other eligible expenses for the domensic partner is not permitted by United States income tax law, including Sec. 125 of the US income tax code, written and enforced by the Federal Government, not to be confused with what may be allowed by State Insurance law, or State Income Tax law. There exists some ambiguity because the US tax code refers to a legal spouse as one 'described by state law', and I think we have states that recognize domestic partnerships. We also have state insurance law now allowing coverage of domestic partners and dependents. (Also consider common law marriage in those states that do, do not or may no longer recognize common law marriage/spouse) But until the federal tax code is amended to describe and recognize domestic partners or further describes spouse more faborably with respect to DPs, there is no provision for taking a tax deduction or a payment for pre tax benefits through a Sec. 125 plan for a domestic partner, or the dependent/s of a domestic partner who do not otherwise meet Sec. 152. A Sec. 125 plan can't permit expenses pre-tax for a domestic partner or dependents of DP not meeting Sec. 152, even if a state insurance law allows DP and their dependent/s, coverage, and even if state income tax law provides for tax deduction for DP expenses, the IRS does not at this time.

Plans that promote FSAs' with annual presentations, employee newsletters, election worksheets with itemized list of medical procedures and dependent care expenses for employees to estimate the respective amount they will incur, IRS list of eligible expenses, explination of the payroll reduction, tax savings and funding of the FSA and procedures for filing a claim, typically those plan experience 50%-60% of employee population participating in FSAs, forfeitures typically represent pennies on the dollar. Before employees will participate, allow a reduction in their pay, and possible forfeiture of those funds, there must be a level of understanding. Communicating the plan and IRS requirements of the plan contributes to how confortable employees will be participating. Without annual enrollment and communication of the Sec. 125/FSA plan, participation will be low, annual election amounts will be low and forfeitures may be high as well.

Fees and services consisting of both eligible and ineligible expenses, 'bundled' as an access fee with those charges that would otherwise be eligibe for reimbursement are not eligible unless and untill the claim is perfected, ie 'unbundled', and presented for reimbursement with itimized cost and dates of service of respective eligible services. The appeal of marketing as 'boutique' medical care may be lost or wartered down, but there is nothing inappropriate with itimizing the cost if some of the fees and services are otherwise eligible services for reimbursement.

If they invoiced the The MDVIP Physical yearly, removed reference to 'access fees' from the description of services and charges, and provide the remaining services at no charge. it's possible it might meet eligibelity for FSA required reimbursement. If any portion of the total cost were invoiced for medical services for The MDVIP Physical yearly, the respective amount would possibly meet eligibelity for FSA reimbursement.

The employer has created a group plan by providing an account to either pay or reimurse medical premiums for individually owned policies, possibly subject to IRS, DOL and treasurary regs. The situation is not unlike group supplemental policies sold via payroll deduction with individual policies issued to employees, paid with 100% employee contribution, pre-tax via Sec. 125. Cafeteria plans convert the payment from an employee contribution to one made by the employer, and is therefore provided the tax benefit provided under Sec. 125. The employer goes a bit further, enter into a contractural agreement with the insurance carrier to allow monthly list billing via payroll deduction and makes decisions regarding types of coverage, cost comparisons with other carriers and similar decisions. The ambiguity is wether a group plan exists that gives rise to regulatory requirements other group plan are subject to, similar to the ambituity associated with individual policies for individual medical coverage in your post.

Jacmo The restriction that you and LRDG refer to are under the old Proposed Treas Regs but not under the new Proposed Treas Regs cited by J Simmons. Regs have not been amended under 'new' proposed treasurary regs to remove restriction on FSAs from reimbursing insurance premiums. There has been for several years a clarification by IRS that allows for individually owned medical insurance coverage to be paid or reimbursed by an employer under a plan that has never been very well articulated by IRS. Non-discriminationm rules have not been addressed, administration and requirement to define the plan in a document are issues IRS has yet to define in regs. The only requirement I'm aware of that has been defined is that there be substantiation of the cost. As I recall if the policy is in the name of the employee's spouse, but covers the entire family of the employee is not defined in the regs as they were proposed and continue to exist. I am not involved in marketing or administering such plans and therefore have not followed with the keen interest of someone waiting for some development. But as one who in general follows IRS developments and published refindments in regs over the years, these have not as far as I'm aware, been defined any further.

The employer subsidy toward cost of insurance is not included in non-discriminaion testing, only the employee portion and amount in the salary reduction agreement is considered when testing Sec. 125.

IRS officials I talked with about this indicated it is not an issue with respect to Sec. 125 compliance, possible violation of constructive receipt. One would have to conclude that because this is such a long standing issue, existing since the inception of 125's for a significient number of plans, with IRS taking no steps to address the issue formerly in regs or informerly when questioned, and IRS's continued silence on the topic for 20+ years, must consider it irrelevant. Ckrum's reply is similar to explenation I recall from IRS officials.

I would verify that there is no limitation on the non-limited-use Medical FSA from reimbursing non co-op Vision expenses because vision expenses are reimbursed via the limited use Vision Debit Card FSA. I think there may be such a limitation because of the existence of the Vision FSA plan. I haven't done the research on this matter, only a vage recollection that there may be such a limitation in the regs. Brilliant marketing, btw.

When premiums were removed as an eligible expense for reimbursement from Medical FSAs, among other intentions, it was intended to prevent the employer who was not the sponsor of the medical plan from experiencing FICA savings of an employer who was the sponsor of the medical plan. Each employer who sponsors a cafeteria plan and medical plan experiences FICA savings they are entitled to. If not, employer A, with a Sec. 125 Medical FSA, but with no medical plan, could potentially experience FICA savings via the Medical FSA reimbursing the premiums of Employer B, who is the sponsor of a Sec. 125 Medical FSA and a medical plan.

With respect to the plan year, because each benefit option under a Cafeteria plan is described in a seperate document, (I believe each is an 'addendum' to the primary document), each benefit option can establish a seperate plan year within the Vision Care Debit Card FSA Plan, for instance. I have 2 clients with a seperate plan year for their Dependent Care FSA plan, a few with health premium conversion with seperate plan years also. Provided there is a legitamiate business reason for establishing a seperate plan year, I don't recall anything preventing establishing a seperate plan year for Dependent Care or Health Premium options for eligible benefit under the core Cafeteria Plan, I would assume the same is true for the limited use vision co-op. Curious, is the co-op providing a plan document for Vision Care FSA Debit Card plan, or is the plan sponsor/employer responsible for the Vision Care FSA Debit Card Plan document under the Cafeteria Plan Document? Are there any problems with the IIAS requirements for free standing retail vision and pharmacy outlets using the merchant Vision FSA Debit cards via the co-op? Is there a membership fee or any kind of annual fee associated with the co-op? If so, these are not likely eligible under Sec. 125. One other issue involving limited use FSAs comes to mind, (keep in mind I'm not providing limited use accounts). But establishing a limted use FSA as this would be, how will employees elect and claim expenses who may not want the co-op provider plan, but who do have vision expenses? This is not a limited use FSA as it was originally established in the regs, as much as it's a provider or co-op plan, and what implicatins that may have with respect to compliance with regs for limited use accounts.