LRDG

Premium included in a 125 plan must be tested for non-discrimination, must comply with sec. 125 with respect to annual elections, comply with election change rules, and must be included in the plan document and any amendments. Compliance regs for FSA and premiums are the same, there isn't a seperate set of regs for premiums under a 125 plan, and the idea that compliance for premium conversion is less important than a medical or dependent care FSA is very risky for clients. Administration and compliance for FSAs is more labor intensive, therefore fees for premium conversion reflects that fact. We require clients who wish to self administer their premium conversion accounts to sign a bullet point waiver form. As a curtiousy(sp) we include premiums in annual enrollment for both the POP and FSA portion of the plan for clients who choose self admin of premium accounts. We also offer POP administration as a stand alone service.

Group Term Life premiums paid through a Sec. 125 plan for no more than $50k total coverage, is non-taxable. Benefits paid under Sec. 125, for no more than $50k coverage is non-taxable. If however ER provides $50k and EE purchases additional $5k, the total would exceede the allowable $50k total, premium for additional $5k is taxable at Table II(?) rates, I believe the first $50k benefit is non-taxable. A review of Sec. 125 and Sec. 79 would provide additional guidence.

Hope you received the 2 messages I sent to you with recommendations.

The funds would be treated as a forfeiture similar to unused forfeited spending account funds.

Based on ther irrevocable election entered into by the EE, the EE and ER are bound to the agreement for the plan year, qualified status changes not withstanding.

The date cited is 1989, probably published as a result of repeal of Sec. 89, a time when regs were chaotic. IRS and other agencies issued suprufulous notices and advisories that today are of little or no consequence. Cessation of required premiums might refer to a plan termination or some other situation at the plan level or the insurer level. The emplyee is correct in that no one can force them to keep coverage they no longer want. Terminating coverage does not change the pre-tax deduction. I have encountered participants wanting to drop coverage mid year without meeting IRS terms of status change. Even if coverage is dropped and the policy is no longer in effect, the pre-tax deduction remains in effect. To do otherwise puts the plan in jeopardy of IRS imposed employer sanctions, penalties and potentialy the loss of all employee taxes as well. I have not encountered a situation where the state law has been invoked by an EE, so I have no insight to offer. But I'm confident there is no one participating in my portfolio of Sec. 125 plan clients who can claim ignorence about the irrevocable nature of Section 125 elections. I recommend to participants that they keep coverage until next open enrollment, versus the alternative and only option for the employer in this case, to continue the pre-tax deduction with no coverage in force. The employer has the choice of possible sanctions, pelalties and jeopordizing the entire plan, or the ER can deny the EE request to revoke the election and not risk violiating terms of IRS compliance.

Not that I'm at all surprised.

Thanks for the link. i agree that the regs and example exclude reference to existing dependents. Failing to do so is poor writting regardless of personal opinions on the issue. I don't believe the drafters intended existing dependents to go uninsured, while their parents who previously declined coverage would be extended another opportunity to enroll, based on the birth of a child, who will also be covered, while existing dependents would be denied coverage. It defies logic.

Only if state law exists that protect an individual employee's pay and paroll deductions, and supercedes Federal regs., requiring a qualified status change in order to cease deductions.

It seems that the 4yo, based on the example in 54.9801-6, can not be denied coverage either. If so, on what basis? Arguments I come up with for logical basis to deny coverage doen't stand up to scruitny. It would be absurd that 4yo's could be denied coverage because this example failed to eleborate family members far enough?

If the employee was covered based on an election for employee only coverage, or if the EE coverage was due to a plan that automatically covers all employees, the special enrollment would only extend to the new dependent based on the birth of a child qualifying event, but not the spouse and 4yo for whom the employee previously declined coverage. The same would be true if there was a loss of coverage as a qualifying event, that is to say, only those experiencing the loss of coverage would become entitled to special enrollment privilages for coverage previously declined. Because the employee wasn't a covered EE at the time of birth, neither employee or the child meet special enrollment eligibility based on birth of the child as a qualifying event. If EE was a covered employee the child can be added based on birth as a qualifying event. The spouse and the 4yo do not qualify for special enrollent based on birth as qualifying event. Because the EE did not experience a loss of previous coverage, no one is eligible until the next open enrollment. At the next open enrollment if the employee elects coverage, all will be eligible as dependents of a covered employee.

Legal documents involving employee benefits typically include standerdized language regarding employee wills, estates and executors, and circumstances when the plan can treat an individual as an executor when no formal designation or estate exists. I don't know who your service agreement designates as responsible or if the service agreement covers this, but either the TPA or the plan sponsor is responsible for directing the participant to the particular section of the plan document and providing a copy, in order for participants to get their will in order and necessary documents to reassure participans that their FSA funds will be used according the the wishes of particiants to pay qualified expenses and avoid risk of forfeited in event of death. Establishing a will, designating an executor, providing the executor with legal proof for the plan to follow is the particiapnt's responsibility. The plan document need only state that the plan will follow the participant's wishes, and how the plan will handle FSAs in the absence of a designated executor.

Receipts for DCB must include providers Tax id number. If the provider is an individual, the tax id is the SS#, if it's a DC facility, the TIN. The tax id must be provided on the tax return of anyone claiming DC expense tax deduction, or substantiated on DC FSA receipts. I have researched au pair regs for DC, but it's been some time ago. I'd suggest verifying with the agency their TIN, and verify if it's tax deductble. The agencies are usually well informed on IRS regs because the agency must ensure the au pair is in compliance with work permit requrements and collection of applicable taxes for foreign workers, etc., and because their fees are typically used for income tax return for DC expense deduction, or to substantiate DCB reimbursed from the FSA. If the particular agency is not helpful or well informed, I be suspect if the expenses can be used for DC FSA or tax deduction, due to compliance concerns. I don't have a particular site to recommend for independent verification, but I'll post one if I can find one. The dates of service must be performed within the dates the employee was a DCB participant. According to IRS if the employee enrolled in DC FSA on March 1 that would be the effective date for services. Service dates should not pre date the enrollment date, services must be performed within the period of time the individual was a DC FSA participant, usually determined by the date the enrollment form was signed. Verify with DC FSA administrator.

Section 125 elections are not tax deferred, but instead are exempt from federal income tax and FICA contributions. Most all states that do impose tax on earned income have followed the Feds and exempt amounts elected under Sec. 125 from state income tax. This should be verified because there were 2 states that delayed making a decision to follow the federal regs., (PA and ?IA?), if memory is correct, eventually all states that tax income followed the Federal regs. Anyone?

Can FSA balances at year end be rolled over to an employer's 401(k) plan as employee contributions? No. Unused FSA balances must be forfeited.

I'm not sure (I'm not familar with the card), what language based on regulations from August 03 you are referring to, but if the funds are credited back to the FSA debit/credit card, the funds will be forfeited if it's lasiks. There is a 2-3 month waiting period for healing between a first and second lasiks procedure. The employee met all requirements and spent the $3k as required by plan & regs and the plan agreed because the plan paid the bill. Should the employee be penalized with forfeiture for undergoing unsuccessful eye treatment? The litertature for lasiks surgery indicates complications are few, but there is a segment of population for whom surgery will never be successful and others who will benefit from a second procedure after 2-3 months for healing from the first. If the plan does receive the refund I think there should be some accomodation made to address this situation. For instance, the refund could be set asside by the plan in order for the participant to use the funds after the end of the plan year, and if not a candidate for a second surgery, allow the funds to be used for other eligible expenses. The participant might be in a better position if the funds remained with the doc until another doc is selected or the second procedure is performed with the same doc, 2-3 months after the end of the plan year for medically necessary healing. But does that meaningfully change anything really? what if the doc moves away, goes out of practice, insolvent? or refuses refund at a later time, the chances of any of these increases the more time elapses. Will the plan or the IRS view any of those situations more favorabely than if the participant received the refund and spent it on medical expenses.

No matter how you slice this $3k, once it is returned to the participant by the physician, it becomes earned income on which the participant did not pay income tax. The participant should (must) spend the $3k on some eligible medical expense/s. The participant has the option to have the procedure performed again by a different physician. However, purely as a time constrainght, it may not be possible to have the services performed by 03/15/08, the last day of the plan year. I'm guessing it's a surgical procedure, Lasiks maybe. Purely as a medical constrainght, it's possible the time allowed to spend the funds is not medically sufficient to perform the procedure a second time. The participant's income tax return could go un-audited. It's also possible the $3k will go undetected. So, let's see, the options are as follows: 1 forfeit $3k 2 IRS audit 3 risk blindness

I would suggest not changing the FSA in any way that would restrict the participants under the newely aquired entity until the anniversary date. At that time provisions under both plans can be made uniforme via plan amendments. If the plan year anniversary dates are out of sinct, use a short plan year at the next plan anniversary date to get both plan under one plan year. In this case the plans may opperate under 2 plan documents, but they can both opperate under the same provisions via plan amendmens. If the plan years are not unique, and the plan years are the same, at the next anniversary ate all participants can be brought under the same plan documents. Announcements concerning plan changes and employee Q&A meetings, should be held prior to the annual open enrollment and before the plan anniversary date. Any financial agreements between buyer and seller concerning the impact of FSA on the corporate assets involved in the transaction should be agreed upon between the buyer and seller. I'd strongly suggest keeping participants informed about the changes, explain the need to have all employees under one plan, and the steps being taken to accomplish that. Explain that while both organizations maintained FSAs, the anniversary dates and other provisions that will change to transition the two plans into one plan. Mention the need to also meet IRS requirements, and the desire of the new parent company to assure that while employees must be under one plan, the company is taking every step possible to avoid participant employees from taking a financial hit in the process. Keeping employees informed will go a long way in making the transition smoother and may keep disgruntled employees from having an ax to grind or any legal legs to stand on if they try to influence others or file complaints, etc.

There are no regulations that address situtations such as this one. But for some non-IRS/DOL liability imposed upon the care provider via the debit card, care providers are not obligated to the plan. The participant would continue the obligation to use refunded monies according to FSA regs and the plan requirements. If not for the Flex debit card, the participant would have filed a claim and been paid via FSA reimbursement check or direct deposit(?). Next the participant would pay the care provider via cash, personal check, or personal credit card. Any refund to the plan by the care provider would violate the patient's/participant's rights in the transaction with the care provider. Any refund would have been reversed (cash, check, credit card) directly to the patient/participant. While it would be preferable if the participant returned $3k to the plan, in reality it's not likely and more importantly, not enforcable, and because the care provider has no obligation to the plan, the plan is under no obligation to act as FSA collector of debts. The participant continues to be obligated to spend refunds according to Sec. 125. If participant undergoes an IRS audit and the refunded money is found by IRS auditors to not have been spent accordingly, participant will be subject to penalties and taxes on $3k. I don't think that because this transaction went badly for the participant that refunded money should be forfeited, but the regs don't give a clue how to correct this problem. i do think it's possible to correct without enriching the participant or the plan.

The employee/employer relationship is terminated and replaced with that of business partner. The loss of eligibility and loss of coverage is due to a change in employment status. An alternative for limited partherships is to stipulate in the Plan Document that participants promoted to partner no longer meet the legal requirements for eligibility and participation and account balances in the Sec. 125/FSA will be forfeited. It goes behond IRS and DOL regs, but would eliminate the ambiguity left behind when partnerships promote from employee ranks.

I get it (DOLT!). Thanks for the links by the way.

Typically, AFLAC and similar outfits include their voluntary product premiums in the POP plan and the employee premium elections, to that extent it's probably a bit of a mess. It's possible, if handled correctly and many legal $$$ later, to correct and restate the plan hopefully minus the misrepresentations. Of course it depends on what was misrepresented, if that is in fact the employer's claim, it must be proven and documented before any corrections/amendments are made.

Note reference to birth or adoption of a child paragraph (f) of this Q&A-1 describes the treatment of children born to or placed for adoption with a covered employee during a period of COBRA continuation coverage, and paragraph (g) of this Q&A-1 contains examples. See Q&A-1 through Q&A-3 of Sec. 54.4980B-10 for special rules in the case of leave taken under the Family and Medical Leave Act of 1993 (29 U.S.C. 2601-2619). Note reference to divorce, marriage and death: Example 4. (i) F is a covered employee who is married to G, and both are covered under a group health plan maintained by F's employer. F and G are divorced. Under the terms of the plan, the divorce causes G to lose coverage. The divorce is a qualifying event, and G elects COBRA continuation coverage, remarries during the period of COBRA continuation coverage, and G's new spouse becomes covered under the plan. (See Q&A-5 in Sec. 54.4980B-5, paragraph © in Q&A-4 of Sec. 54.4980B-5, and section 9801(f)(2).) G dies. Under the terms of the plan, the death causes G's new spouse to lose coverage under the plan.[/i] General © An event satisfies this paragraph © if, under the terms of the group health plan, the event causes the covered employee, or the spouse or a dependent child of the covered employee, to lose coverage under the plan. For this purpose, to lose coverage means to cease to be covered under the same terms and conditions as in effect immediately before the qualifying event. Any increase in the premium or contribution that must be paid by a covered employee (or the spouse or dependent child of a covered employee) for coverage under a group health plan that results from the occurrence of one of the events listed in paragraph (b) of this Q&A-1 is a loss of coverage.

oriecat Posted Feb 8 2008, 09:49 AM The COBRA regs specify the qualifying events, which for a covered employee are only termination of employment and reduction in hours. Would becoming a partner equate to one of those? If not, then there is no qualifying event and I don't think COBRA would apply. The Cobra link includes the family status changes, so I'm confused how the limitation to termination or reduction of hours applies.

26CFR54.4980B-4 What is a qualifying event? [Title 26, Volume 17][Revised as of April 1, 2006]From the U.S. Government Printing Office via GPO Access[CITE: 26CFR54.4980B-4][Page 294-296] TITLE 26--INTERNAL REVENUE CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED) PART 54_PENSION EXCISE TAXES--Table of Contents Sec. 54.4980B-4 Qualifying events. The determination of what constitutes a qualifying event is addressed in the following questions and answers: Q-1: What is a qualifying event? A-1: (a) A qualifying event is an event that satisfies paragraphs (b), ©, and (d) of this Q&A-1. Paragraph (e) of this Q&A-1 further explains a reduction of hours of employment, paragraph (f) of this Q&A-1 describes the treatment of children born to or placed for adoption with a covered employee during a period of COBRA continuation coverage, and paragraph (g) of this Q&A-1 contains examples. See Q&A-1 through Q&A-3 of Sec. 54.4980B-10 for special rules in the case of leave taken under the Family and Medical Leave Act of 1993 (29 U.S.C. 2601-2619). (b) An event satisfies this paragraph (b) if the event is any of the following-- (1) The death of a covered employee; (2) The termination (other than by reason of the employee's gross misconduct), or reduction of hours, of a covered employee's employment; (3) The divorce or legal separation of a covered employee from the employee's spouse; (4) A covered employee's becoming entitled to Medicare benefits under Title XVIII of the Social Security Act (42 U.S.C. 1395-1395ggg); (5) A dependent child's ceasing to be a dependent child of a covered employee under the generally applicable requirements of the plan; or (6) A proceeding in bankruptcy under Title 11 of the United States Code with respect to an employer from whose employment a covered employee retired at any time. I must be missing something.