LRDG

Loss of eligibility results because of change in employment status. The status change results in participant no longer being an employee, but a partner. I would allow Cobra election for full Medical FSA election, with pre-tax deduction, reduced by prior claims, from final paycheck before status change takes effect. I'm not convinced that a qualifying event for Cobra is restricted to reduction in hours and termination of employment. A qualified family status change cound give rise to a Cobra electon. What happened to mariage, divoirce, birth/adoption of a child, death of sopuse or dependent, to name a few?

Laking specific instructions or information in the regs about making these types of corrections, I've amended/corrected W-2s for respective years involved. With respect to retroactive adjustments on withholdings on ineligible premiums I've limited corrections to two options. One is collecting directly from tax payer via a personal check. The second option is a limited 1 or 2 time payroll adjustment. I perfer the first option but have had circumstances when there was an ER or EE preference for the 2nd option. Both should be well documented and provide a clean audit trail.

Most of what takes place during open enrollment is implied versus being spelled out in the regs. The plan in most cases would not otherwise qualify or comply with regs if employees were not allowed to make elections, which regs state the deductions for which must be completed prior to commencement of the plan year begin date, or subsequent plan year anniversary dates. Most plans take the opportunity to commence an organized open enrollment, a period of time that allows plan changes to be communicated to employee participants, and for employees to make necessary election changes based on changes in plan options. Payroll departments must do their administrative magic before the first pay period of the new plan year (emergency extended enrollment periods not withstanding) in order for pre-tax plan deductions to take place during the plan year. Open enrollment could take place in July for a calander plan year and not be out of compliance. No IRS or DOL regulations prevent it. But open enrollment that far in advance of the new plan year and the anticipated expenses would not be as practical for participants as a 30/60/90 day election period prior to the new plan year being date. A July enrollment might effect participation, with elections that far in advance of particiapnt's anticipated expenses. all of the above assumes concensus with the principal that Sec. 125 benefits consist of employee elected benefits

Unless he died at home in bed and was put in a sack at the curb, there are likely qualified medical expenses executors of the EE estate can claim reimbursement for on behalf of the EE. Even 'unexpectedly at age 35,' there would likely be ambulance services, ER services, other medical procedures to sustaine life. without the particulars, I can't say definatevly that would be the case, but I would assume so. Sec. 2.7 Death "However, such Participant's beneficiaries, or the representative of his estate, may submit claims for expenses or benefits for the remainder of the Plan Year or until the Cafeteria Plan Benefit Dollars allocated to each specific benefit are exhausted. A Participant may designate a specific beneficiary for this purpose. If no such beneficiary is specified, the Administrator may designate the Participant's Spouse, one of his dependents or a representative from his estate." I interpert this to mean expenses incured prior to death, but which executors would be eligible to submit claims incurred by the EE within the EEs eligible coverage and claims period. Because there is a surviving spouse and children who's expenses may likely have been included in the FSA annual election made by the EE, those funds and benefits must also be given consideration. The question of COBRA eligible beneficiaries and their participation is a seperate issue.

The regs are a bit ambegious on the issue of requiring all plans included in a Flex plan be co-ordinated with the same plan year. For example, the regs state that group plans that are underwritten 100% with no element of self insurance can pass mid-year premium increases mid-year through the Flex plan without requiring plan sponsor issue Flex plan amendments or participant election changes to cover the increased premium deductions. However, if the plan includes other changes, for instance higher co-pays, higher cost deductibles, etc., those changes may not provide for a coorsponding mid-year Medical FSA election change. Nor do the regs mention in any other respect, how group insurance plans that include elements of self insurance are to do in order to comply. The lack of such instruction leaves the only conclusion and remaining option would be to pass premium increases on to participants mid-year, via payroll deducted on an after tax basis, not automatically included in the pre-tax payroll deduction in effect when the Flex election was made. Administratively participants would have 2 premium deductions, one pre-tax and one for the mid year premium increase deducted after tax.

A 07/01/08 through 12/31/08 short plan year, with a calancer plan year of 01/01/09-12/31/09. Terminating the 07/01/07 through 06/31/08 plan year will be impossible to do without compromising irrevocabe elections/agreement employees entered into for a 12 month non-calendar plan year, and/or encountering compliance problems.

There are issues that are unaddressed. For instance, ERs' COBRA obligation for Medical FSA for eligible qualified beneficiaries, and EEs with court ordered out of pocket medical expense payments. Would a qualified beneficiary be entitled to 2 medical FSAs, one payroll deducted and funded by EE via court order and one funded by the non-employee qualified beneficiary? If EE terminates employment after claiming the annual elected amount in January and the qualified beneficiary discontinues Medical FSA contributions after claiming 100% of annual elected amount, the ER's liability has tripled? Unless I have overlooked something in IRS, DOL or Treasurary, such a scenerio extends ER liability for medical FSA beyond any official descriptions published thus far.

The short term health policy I was involved in developing is an individual policy intended as a 'bridge' policy, (not my terminology), offering coverage to otherwise uninsureds between jobs and/or pending eligibility under a new ER group plan, or unaffordable COBRA premiums during a brief period between jobs or unemployment, etc. The individual policy is not subject to COBRA because it's an individual policy, not a group plan. The state DOI issue a HIPAA exemption because the nature and purpose of the short term health policy was to provide coverage during brief time when ER coverage was unavailable. The policy could be issued in increments of 30, 60 and max 90 days, allowing 2 additional 90 day policies following the first, none of which covered a pre-existing condition. Premiums ranged from just over $100 for individual for 30 days, it was affordable, with rates priced to exclude pre-ex conditions. A dx made during the first policy period was considered pre-ex under the 2nd policy period, claims denied in policy period #2 for a dx made during policy period #1.

This may be unchartered territory. Out of an abundance of caution, I'd assume once a transfer from the general assets takes place, a trust is created, but I'm not familiar with pre-paid debit card/creditor side to add anything to that part of the discussion.

"Must FSA elections be spread equally over the plan year?" If the question is if payroll deducting FSA elections over 24 verus 26 pay periods would create a problem, no it's an administrative decision and would not create a compliance or an eligiility problem. If the problem is that enrollment forms won't be signed and dated piror to the plan year effective date, than any claims that pre date the FSA enrollment form will not be eligible and yes that might be a problem for employees who were not advised during the late enrollment meeting that they should either not include in their FSA election any expenses they incurred prior to the date on the enrollment form because if the employees are not fairly warned, and they forfeite funds they will not be happy and if this is a 3rd party client, that IS not good but if it's just your employees, well that's not good either because EE don't like forfeiting their FSA funds when it could have been avoided but that's just my opinion employee probably love forfeiting a portion of their salary that funded their FSA so never mind. It's not clear if the problem is one of keying in/uploading election data, or one of signing, dating and completing enrollment froms prior to plan effective date. The enrollment form date would determine eligibility of claims.

You are correct about the possibility of a problem with non-discrimination testing if the ER FSA credits involve HCEs. Does the plan include provisions for ER contributions/credits to FSAs? If not, there could be a problem with the plan complying with provisions not contained in written plan document. Also worth considering is the underlying purpose for the ER FSA credits. Are the funds intended as a distribution of previous plan year FSA forfeitures, or intended to correct funding or claims problems or tied to compensation for these EE participants? The credits could be intended for a number of purposes and impossible to make a 'compliance' determination without identifying the underlying purpose for the credits.

The obligation is to refund the EE $4500, less payroll tax not paid on the amount. Issue corrected W-2 to EE, and possibly correct 5500 forms for prior years, in addition to correcting other payroll based tax, such as ER matching FICA. There may be other income based plans the ER should review and correct. This is an example of potential problems when EE elections are not conducted annually.

Former wife and children are probably qualified beneficieries and eligible for COBRA election in the medical FSA for 35% + expenses, in addition to his court ordered obligation for 65% of their expenses, funded through the EE FSA. The divorce and court order probably qualify for an election change permitting the employee FSA participant to change his prior medical FSA election, assuming the plan allows mid-year election changes. I assume the court order is irrespective of the existance of an FSA plan. The Sec. 125 plan can and should accomodate the EE participant's court ordered order of spousal and child support if plan provisions allows mid year election changes. I have not been a big advocate of non-EE, qualified beneficiary FSAs because there is no tax savings for non-employee spouse/child(ren). This legslitation was instated during a time when Sec. 125's were 'out of favor', also around the time risk shifting was introduced. Both were seen as 'dis-incentive' for ERs and a possible means to eliminate Sec. 125 plans without making the politically unfavorable decisiions to out and out eliminate it from the tax code. Enough safe guards remained in the tax code and regs, that ERs' continued to offer Sec. 125 despite rish-shifting and COBRA, and eventually the FEDS-FSA? plan was adopted for federal govt. EEs.

The biggest problem is probably that there are no employee election forms, and is the most difficult problem to correct without violating rules prohibiting constructive receipt. The course of action to correct would be to enroll employees asap. Pre tax payroll effective date should be no earlier than the EEs enrollment date. It will require reversal of payroll and other taxes that pre-date EEs date of election/enrollment.

If discoloration of teeth is a secondary condition to a primary medical condition or disorder, it may be eligible for reimbursement from FSA. But it may also be eligible under the major med plan if secondary treatments are covered. For example, tooth/teeth disorders resulting as a side effect of chemotherapy treatment for cancer, teeth bleaching to correct discoloration resulting from a medically necessary treatment might be covered under the major medical plan, and co-pay would be reimursable from medical FSA. If not eligible under the major medical plan or dental insurance plan, bleaching treatment would be reimbursable 100% from the medical FSA. I wouldn't deny every claim for teeth whitening without first making a determination if there is underlying medical necessity, which could include the original dental procedure.

Notify EEs to postpone any FSA services/expenses until they sign/date enrollment/election forms. DC FSA expenses can't be postponed, so use your imagination, don't break the rules, and keep your EEs whole. Another option is to allow EEs, particularly EEs familiar with FSAs and particularly those with planned expenses early in the plan year, to make their election, complete, sign and date their enrollment form, in advance of the 'extended' annual open enrollment meetings or the 'extended' annual open enrollment deadline. During the 'extended' enrollment meeting or the date 'extended' annual open enrollment ends, EEs may need an opportunity to make election adjustments based on info communicated in 'extended' open enrollment meeting. Because this is an administrator/ER problem, EEs should be accomodated as much as possible. Every effort shoud be made to help EEs avoid claim problems or denied claims resulting in possible forfeitures for EEs. This is based on a problem EEs have absolutely no control over and is not of their making, they should not be penalized with forced forfeiture of funds and/or denied claims. It is perfectly acceptable to deduct annual elections over fewer payroll frequencies. For instance, FSAs funded over 20 payroll frequencies, versus the full 24 or 26 payroll frequencies within the plan year. Doing so will complicate DC FSAs for DC participants, and particular attention will be required through out the plan year because the annual election is deducted over fewer payroll frequencies, which can affect FSA account balances. This can be a problem through out the plan year. An altermative is to withhold missed FSA deductions on the first payroll frequency to cover those that were missed. For example, if 2 payroll frequency FSA deductions were missed, double the FSA deductions on the first payroll frequency following conclusion of the 'extended' annual open enrollment.

http://www.conexis.org/pdfs/IRS%20Informat...%20Expenses.pdf The above link is the letter, IRS Info Letter 2000-0246. Also see : http://www.irs.gov/irb/2006-24_IRB/ar09.html "This document contains proposed regulations regarding the credit for expenses for household and dependent care services necessary for gainful employment." "Credit" refers to the tax credit when filing income tax returns versus Sec. 129 for a dependent care spending account plans. "Household" refers to housekeeping services provided in the taxpayer's home, in addition to providing child care services, versus Sec. 129 for dependent care spending account plans.

Some comments in the article aren't clear. "and meets federal standards under both the Americans with Disabilities Act and the Health Insurance Portability and Accountability Act because it is voluntary and separate from the health insurance policy. " Quoting BeniComp President and CEO here. UHC is a big player in HRA and HSA markets.

There's no regulatory or compliance reasons for the plan/company to limit medical FSA elections for married couple employees. Dependent Care FSAs for child/dependent care expenses are limited to $5k by IRS regs, making it necessary to coordinate married couple Dep. Care elections/reimbursements. Some caution about married couple participants- it's common for married couples to claim reimbursement for each other's medical expenses. I've discovered duplicate claim payment is possible, and can be exploited (corporate auditor and his wife, gotta love it). Duplicate claim payment detection is usually a function of the admin system and it's capabilities and limitations.

Here's a link to the article: http://www.usatoday.com/printedition/money...ealth11.art.htm QUOTE "Because of that, the amount workers pay in premiums has not increased in three years, he says. Part of the drop came from switching to the high deductible, says Martin, who also credits better health among employees for the rest. Starting this month, that type of insurance policy is being offered by the nation's largest health insurer, UnitedHealthcare, in a move seen as part of a growing effort by employers to both shift additional medical costs to workers and provide incentives for workers to pay more attention to their own health. Under a typical scenario highlighted by United in its marketing materials, an employer would offer workers a high-deductible health plan, such as one with an annual deductible of $2,500 for a single worker and $5,000 for a family. Workers who want to offset the deductible can volunteer to be tested once a year at a workplace clinic run by a benefits administrator called BeniComp, of Fort Wayne, Ind. BeniComp provides the testing, which checks for nicotine use, blood pressure and cholesterol levels and height/weight ratio. Workers who don't smoke or meet specific target levels for the other conditions can earn up to four $500 credits toward the annual deductible. Those who don't meet the standards can sign up for weight loss and other health management classes through United." AND ""A key protection in the Americans with Disabilities Act is that your employer can't discriminate against you based on health status," says Karen Pollitz at the Georgetown University Health Policy Institute. "They can't even ask about your health, with the only exception being if they ask through a voluntary program. You could argue that this program is not voluntary." Doug Short, president and CEO Of BeniComp, likens the program to a "good driver" discount for auto insurance. Results of the individual employees' tests are not sent to the employer, he says. Short says the supplemental plan, which his company has offered separately from United since 2004, is licensed in 37 states and meets federal standards under both the Americans with Disabilities Act and the Health Insurance Portability and Accountability Act because it is voluntary and separate from the health insurance policy. United is offering the policies to midsize employers in Rhode Island, Pennsylvania, Ohio and Colorado and may go nationwide next year. "We're not grading or penalizing or rewarding anything that is a health factor," Short says. "If a person comes in with cancer, that's not in the grading scheme. We're only looking at things the employee personally controls." UnitedHealthcare says the policies would cut costs for employers, initially by switching workers into high-deductible policies: Just changing from a policy with a $500 annual deductible to one with $2,500 could save up to 25% on the premium, says Tom Beauregard, who oversees the program for United." END QUOTE

When the cobra election is made the 3 payment options for Medical FSA are 1. withhold from the final paycheck 2. allow cobra participant to issue a personal check or a combination of 1 & 2 the two 3. pay monthly FSA cobra payments Without the option to withhold from the final paycheck, the tax savings benefit is lost, which is the sole benefit participation in the FSA provides. It provides incentive to continue participation on a post employment basis while maintaining tax savings. The option reduces the incentive to spend the annual elected amount before termination, helps avoid forfeiture for those with expenses after termination, while maintaining the tax savings benefit. How can the employer withhold for COBRA if the employee has not elected COBRA? Cobra election by the participant/EE is voluntary. Participant/EE can waive coverage under COBRA. Cobra compliance by the plan/ER is mandatory. It must be offered to terminating participants/EEs.

The PD can be written in such a way as to allow the ER to minimize the risk of loss by withholding the remaining balance due for COBRA from the final paycheck. Assuming no conflict with state/local laws with respect to payroll withholdings. It is impossible for the ER to eliminate 100% the risk of loss in the Medical FSA. It is the intent of the regs for the ER/plan to bare some risk of loss. If the risk is eliminated, the plan does not comply. The size of the organization administering the plan bares no relationship to compliance. Some of the big players administer 125's in a way that eliminates the risk referred to in the regs and are never the less out of compliance. Not everyone plays by the rules. Some believe they're above the rules.

I know little about disorders and specialized services/items associated with 'over the usual cost'. Participants and service providers are a primary source of information about disorders and expenses. I would take advantage of information provided by participants and service providers. Example: Participant purchases shoes retail and has ortho work on a shoe that includes specialized services necessary for the customized work. Making a determination is fairly straight forward, deduct the retail cost from the cost of the orthopedic work, reimburse the balance. There may not always be a retail equiveliant. Corrective shoes are often available only from an ortho shoe specialist. An attempt to establish a retail equiveliant might be like comparing the cost of an unrestricted, retail grocery store diet with an IV drip for solid/liquid restricted diet, and impossible to arrive at a cost equivelient. IV for solid/liquid restricted diet would be administered in a hospital setting and usually covered by insurance. When establishing retail equiveliant is a problem, I'd request an EOB from the insurance carrier, (if not covered, it would establish a dx), reimburse participant based on the EOB, less a nominial amount representing retail value of shoes. For documentation purposes and to establish price, request participant provide an advertisement from a well known retailer, or a written receipt/estimate from retailer. Reimburse based on the EOB, less retail cost. I would't hesitate to use a Payless type of retailer. The ortho shoe is more medical treatment than the utilitarian clothing item shoes usually represent to the rest of the population. Usually only one shoe/foot is involved. Should reimbursement be based on 1/2 of the retail value of a pair of shoes? It's not even possible to purchase one shoe, however it is possible to establish the value of one shoe. Sec. 213 does not require treatment be the least expensive available to the tax payer. For example, the deduction allowed for Lasik surgery vs. deduction for eyeglases is based on the cost of the procedure chosen by the tax payer/participant. File insurance claim for EOB, use documentation such as advertisement or written receipt/estimate from retailer provided by participant, receipts from ortho service provider. If in serious doubt about a procedure, defer to plan sponsor 'claims committee'.

Lucky you.

EEs are entitled to a refund of Fed, FICA, State, local and municipal tax EE paid on the premiums.