LRDG

It's true that adult dependent care is eligible, and dependent's by virtue of custodial parents are covered covered by DC assistance. However the post says 'child', so were'r not talking about a disabled adult, or anything but paternal dependent based on the info provided. If not I've misunderstood and would appreciate clarification. if there already were child care expenditures that just hadn't yet been reimbursed? None have been claimed based on the info provided. Example: Summer day camp for school age children needing supervision for working parents during summer break from school, but that doesn't necesseraly apply to this situation. There would be deductions and funding of the DC FSA, but no reimbursement request until summer camp, June, July, August, for a calender plan year that would be the sixth through the eighth month of the plan year. It appears the participant thought the dependent was "their child". They no longer believe this is "their child". There have been no reimbursement requests for expenses, only a request to amend the election based on the child who was thought to be a biological child, who is no longer thought to be so, based on the info provided. Even if there were expenses reimbursed, it would likely be settled in court. Statistics indicate non-biological parents are raising children unaware they aren't the biological parent is estimated at 25% of the population. To put this simplistically, this has been going on for a long time. Think biblical terms.

It would depend on if it's court ordered perternity(sp) or something similar, and other details before making a decision.

I'm not familiar with DataPath. P&W Software is exclusively Cafeteria Plan Administration, with administration add on's for FSA billing, premium billing, rates, etc. I met the the principals 15+yrs ago and again 5 yrs ago. The integrity, knowledge and support is high level, and very professional. I have no interest in this or any other organization, just recomendation based on my first hand knowledge of the organization. High end cost, not cheap.

The dates incurred would run from the date of birth through the last day of the plan year, or 06/17/08 through 06/30/08. We can assume there are EOBs involved dated from the date of birth, assume a minimum 24hr, maximum 3 day hospital stay, or 72hrs, would leave us with a discharge date of the 20th. Probably a new born and new mommy visit 3-6 days days followng discharge or 06/26/08. Everything else in the new plan year. Purely hypothetical, but you get the idea, I don't have any first hand experience, but based on EOBs I've seen, shortened hosiptal stays covered in the media, my adopted daughter's hospital stay, I think the timeline and dates are reasonable.

It's a comprenhisive list. Great job.

I'm not sure what EEs don't agree to or what it has to do with TPA fees or waiver of fees. That said, as a practical matter, an annual election of $400 would save $100.00, (assuming 25% withholding tax), at a cost of $102.00 annually to the participant. Stating the obvious, but it's doesn't appear worth the effort for the participant.

I'm not sure I fully understand your question or how the use of a FSA debit card would in any way perfect the claim. In situations involving DC payments to service providers in advance of service dates, but within a plan year, I suggest including itimized weeks of service to DC provider receipts. DC reimbursement can 'automatically' be paid as the weeks of service are reached without further substantation. For instance DC providers who require $600 monthly payment in advance, by itimizing weeks of service on the receipt and into an admin system will allow administration systems to release reimbursement payments weekly, or less frequently if there is a less frequent service agreement processing schedule. Without the itimized weeks of service on the receipt and entered to the administration system, the entire payment will be pended until the end of the service period, or end of the month in this case. The $600 pended claim when combined with a $600 DC FSA payroll reduction to fund the reimbursement account, for a $1,200 monthly total, a financial juggling act each month for some families.

IRS regs state that 125 plans must state a medical FSA max., with the amount determined by the plan. Dependent care FSA maximum is determined by IRS regs., $5k, or $2,500 if married filing seperate returns.

The regs have been in some form of temporary or proposed form since approx. 1980s, always with statement that final regs would soon follow. But we can hope.

If the custody arrangement is ammended sometime after the final divorce decree, than I would treat court ordered amended custody no differently than the original divorce/custody agreement, and allow the status change within a reasonable period of time as required in the plan document, assuming the plan allows status changes, although the regs only refer to divorce as a qualifying event eligible for election/status change under Sec. 125.

If custody agreement and divorce decree was amended and lost 2 yrs ago, that would not be within a reasonable time period from the date of the event allowed for election changes. The plan document should stipulate if election changes are allowed, and if so, election changes must be made within administratively reasonable period of time, 30-60 days from the date of the qualifying event. I don't believe the regs specify the exact number of days, but the plan document should. Try this link I got via a google search. http://benefitslink.com/taxregs/1.125-4-final-2001.html

Provided the plan allows election changes, divorce is a qualifying status change according to IRS cited change in election rules under Code section 1.125-4. Losing custody in the divorce proceeding or amended divorce proceedings would qualify.

Obviously, the "mandatory contribution" feature is designed to avoid having the cafeteria plan rules apply to this plan, since if they did, the plan couldn't cover retirees. A Cafeteria Plan may not provide retirement benefits, or deferre the receipt of compensation with exception of 401k. Nor may a Cafeteria Plan be for the exclusive benefit of retirees, but retirees can participate in a Sec. 125 plan.

If IRS audited the plan after adjustmentent of payroll records to allow the election change, IRS would recognize that the employee would otherwise be allowed a standard 30 days to make an election change. But for the 2 or 9 days (depending on date of the final payroll 6/20 or 6/27), from the date of birth in relation to the last payday and 12 days to the end of plan year, this transaction would be no different than any other status change.

I don't understand how the EE is enriched to the extent that would involve a large screen tv. Can you explain it because I'm curious how you anticipate making adjusts. I'll assume the last paycheck has been issued and that the FSA election increase is $500. Withholding tax savings on $500 is for example purposes, 25% or $125. EE must fund the FSA since funding can't be accomplished with a payroll reduction. After payroll records are adjusted, the EE will write a check for $500 to fund the FSA. Instead of the ER cutting anouther check for $125 to refund taxes withheld on the FSA increase of $500, the EE can adjust his personal check and instead write it for $375 to account for the tax refund. The EE is not 'enriched' untill the FSA claim is paid, in fact since he funded the FSA with a personal check, he has less cash initially.

J Simmons, there has not been much Sec. 125 audit activity. The reason may have to do with some of the issues posted here, such as the temporary status, and proposed regs. The good news is there's minimal case history on which to rely because there have not been many Sec. 125 audits. If and when this changes, I think we'll hear about it because there'll probably be a lot of coverage, in trade and financial publications. To prohibit the status and election change in this circumstance because the participant's family status change happened so close to the end of the plan year penalized the participant for reasons out of their control. The plan has a qualified status change request from the participant, but a plan that won't allow the election change. I agree that this could be a violation of constructive receipt if the circumstances were slightly different, if there was a failure on the part of the participant or intent to unfairly enhance conpensation. The primary problem is the date of birth being so close to the end of the plan year. The participant has the expectation that birth of the child is a qualifying event and that an election change will be permitted. That an unwritten penality is applied because the participant's child is born too close to the final pay day and end of the plan year is unfair to this and other participants in this same situation. Payroll frequency and schedule is at the convenience and control of the employer, not within the control of the participant. The date of the qualifying event is also not within the participant's control. One of the underlying principals established by the IRS for evaluating family status changes was the principal that events not be within the participants control.

Being such a small organization, very little money involved, in addition to being a non profit entity may have some baring on how lenient or heavy handed the IRS decides to treat the situation. I wouldn't know first hand as I don't have any experience with groups that small, and I do limited work with non profits. I've been involved in a grand total of two 125 plan audits, in addition to the one I mentioned being written about in the WSJ. I was involved in their core benefits, not their 125 plan. One of the audits involved a client who's payroll was being audited. It was approximately 1995, I got a call from the client asking what he should do because the auditors were quite concerned about payroll deductions for pre-tax premiums and FSA deductions. The client explained to the auditors that the deductions were to 'pay premiums and fund FSAs under a Cafeteria Plan, you know a Sec. 125 plan'. The 6 or so auditors exchanged glances all around, agreeing none of them have heard of any such 'plan'. My contact, (a partner in a top law firm, his father is a founder of the company I work for) knows Sec. 125 is actually in the tax code, he's seen it himself when we were discussing plan design. At this point he's hearing theam music from the Twilight zone. I faxed a copy of Sec. 125 from CCH, mostly stalling for time, because I'm really thinking how wierd it is getting, they ARE the IRS, you're the $600 an hr attorney and you'r asking me? About an hour later I got another call from my contact saying the auditors read the fax, passed it around the conference table and announced their work was done. They proceded to pack up and leave. Another example of our tax dollars at work. Ironic and in hind sight a funny IRS story, of which there are just are never enough. According to the client, the shortest audit in history. Then there was the time I called the tax exempt and benefits division of the IRS in DC with a question about Cafeteria plans and was told that fast food workers are taxed no differently than anyone else. I agree with the arguement about the temporary and proposed status of Sec. 125 and treasury regs. If any case did end in litigation, I'm sure it's the argument our legal team and client's would make. But I'm not particularly interested in clients spending their time and resources defending a court case over not having a plan document, litigation that could end unfavorabely even if client did legitamitely defend not having one. With respect to experiene with 125 plan IRS audits, as long as I've been doing Sec. 125 work, I've only had the failure to file a 5500, and those penalties were waived by the IRS. I wasn't directly involved in the case involving constructive receipt violations. My only other contact with IRS auditors and 125 plans is the case I posted above and there was no violation. IRS established an audit division dedicated to 125s in about 1998/9. The announcement was in many industry publications, but I haven't heard anything more since that time. The audits I'm familiar with happened before the 125 audit division was established.

FoolMeOnce, while I don't wish this kind of problem on anyone, I do hope you throughly enjoy watching J squirm over the next couple of weeks or months. It must have been a most unpleasent situation to find yourself in, showing up for a new job hoping to make a good first impression, to uncover long standing illegal activity conducted a well liked employee and having to be the barer of bad news. Small religious organizations can make for charged political work environments, without the illegal activity, ironic as it is. BTW, FMO, I didn't intend confuse you with the $95k example for failure to file as example of liability, but you seem pretty sharp. I figured you'd catch that. Doing accounting work for religious, not for profit organization.

The IRS will not simply ask taxes be paid on the premium, they will assess penalties, sanctions and back taxes for as far back as this has been going on, which seem to be much longer than one qtr.

J should beg you to allow him to sign and quickly and keep very quiet. He's potentially caused a not insignificient problem for his employer. Penalties that I've seen first hand for one client was in the $90k, but a slightly different problem. However, the IRS assesses at $100's+ per day per EE for certain types of violations. The $90k was for failure to file 5500 for 5+ years. It's easy for me to say I would refuse to sign the 941, would't sign no matter what, but I'm not sure what I'd do in your situation. It may be wise to not alert J to your concerns about his accounting methods until you have an opportunity to discuss with your sup. I see back taxes and penalties all around, or at least for J, possibly time in the big house for fraud. It's not like he can claim ignorence, knowledge about such matters is the basis of his job. If there is an audit, and the powers that be have not coninued to ignore J's offence, the IRS has been known to be understanding when ignorence is claimed and the claim is justified. The $90k was waived by the IRS, btw, but it was approx 8yrs ago, 13yrs since inception of the plan, the signifience of which goes to the fact that 125's were new, at a time when there were unqualified administrators, which was the case with this particular client.

FSA claims must include service dates no later than the last date of the plan year. My suggestion to ammend the final paycheck to cover the election change does not cause the entire plan to opperate in a manner that allows funding on a retro-active basis. At the time wording was formerly added to the regs requiring plan operate in a mannter that required FSA payroll reductions on a prospective basis, there was a large case with a few thousand EEs who's elections were set up for payroll deduction several months after the effective date of the plan and of course after open enrollment was completed. The payroll system had to be re-programed to allow pr-tax deductions, a problem that was not unheard of at that time. However the plan had other major compliance issues, such as violation of constructive receipt. Large sanctions and penalties were assessed and the case made the WSJ among other news publicatons. None of the compliance problems or penalties had any baring on the prospective basis language that was added to the regs. Based on my experience, amending the final paycheck to cover the increased election amount before the plan year ends, does not cause the plan to opperate in a manner that allows retrospective/retroactive payroll reductions.

IRS regs do state the plan must opperate Sec. 125 payroll reductions on a prospective basis only.

Amend the final pay check to account for the medical FSA election increase and the reduced tax withholdings.

Try a Google search of 'Dependent Care FSA vs Child Care Tax Credit'. It should provide sites with comparison worksheet based on income.

Administrators with a large block of FSA business, may find that there are advantages to having new business, enrollments, renewals, re-enrollments and all end of year reporting and testing spread through out the calendar year, versus having all FSA renewal and re-enrollment business on a calendar basis, plus a large block of new business comming on board with January effective dates. Estimating annual co-pays limits and annual deductibles for non calendar year FSAs does require some planning on the part of FSA participants.