Jacmo

R Robertson--Your second post (6/24 2:42 pm) is the correct assumption. You are doing a simple "salary reduction", premium only plan (POP), not a more complicated "flex credits" plan. (Keep it Simple Sweetie). You won't do a "lump sum payout".

You are correct--impossible for HCE to utilize. They would automatically fail the 55% test. Solution is to remove the HCE from the plan, and add all DCAP deductions back to W-2 as taxable income. (Be sure that prior payroll records are cleared out correctly--DCAP deductions go into a separate box on the W-2 and you don't want that showing up at W-2 time.)

The one word that concerns me in the OP is "wrap". It indicates that the employer has done a wrap ERISA plan document incorporating the AFLAC products. In which case, the AFLAC products are employer sponsored plans.

I agree with papogi. If the regs will allow a participant to decrease or cancel election "because grandma has agreed to watch the child for free", then the kindergarten watching the child for "free" ought to be just as good. Regs. 1.125-4(f)6, Example 5

cathyw--see IRS Notice 2007-22, "Examples", "Permanent Rule Examples", Example 7. The example does not fit your circumstances, BUT----there is a key statement that might apply to your situation. In the example an employee fails to be HSA eligible 7/1 because his participation in a calendar year health FSA is not disregarded coverage until 1/1/08. I think that may apply in your situation. You are changing your 125 plan to include a new limited purpose FSA, in addition to the general purpose FSA which employees have already elected for. It would seem that their participation in the general purpose FSA would not be disregarded coverage until 1/1/08, for purposes of being HSA eligible.

cathyw--thanks, now I understand. However, I still don't think so. Those employees who are covered by the FSA are covered until the end of the plan year by that plan, even though you are amending the plan to include a new type of FSA (the limited purpose FSA). J simmons makes an important point with his statement--"If it is by individual choice rather than........." but I see the outcome differently. Usually, election changes are allowed due to circumstances beyond a participants control, or certain life events, or court ordered events, etc. I see the individual choice in this instance as being a non-qualifying event, and that you have a new plan in addition to the general purpose FSA. Changes in cost or coverage or not qualifying events for FSAs. But that's just my take.

Correct me if I'm wrong folks, but if I understand correctly, mid year rollovers are not permitted (at least, not without tax consequences). The following info is from IRS Notice 2007-22, under "Qualified HSA Distributions": "A qualified HSA distribution may be made at any time prior to January 1, 2012. However, even if the qualified HSA distribution reduces the balance of an FSA or HRA to zero, the health FSA or HRA coverage does not end. If the FSA or HRA is not HSA-compatible, employees can become eligible individuals only after transfers at the end of the plan year. Consequently, qualified HSA distributions from health FSAs or HRAs that are not HSA-compatible and that take place at any time other than the end of a plan year, generally result in the inclusion of the distribution in income and the imposition of an additional 10 percent tax." And further down-- "Unless a participant has a change in status as provided in Treas. Reb. 1.125-4(a), health FSA elections may not be changed during a plan year......."

Does your organization have a 125 plan, and/or do ERISA filings? If so, you are stuck with a short plan year (6 months)--there are no 18 month plan years. (Even though your insurance carrier could conceivably give you an 18 month rate guarantee, if fully insured). As best as I can tell, you can't pro-rate the deductible, at least, not to the point that it pulls the annualized total deductible down below the limits of the current definition of an HDHP. In other words, if implemented 7/1, you are stuck with the 2007 minimum deductibles of 1100 or 2200 between 7/1 and 12/31.

To be a little more helpful-- In IRS Notice 2004-23, under the heading "Preventive Care Safe Harbor", a short list of acceptable preventive care services is given, then this final paragraph: "However, preventive care does not generally include any service or benefit intended to treat an existing illness, injury, or condition".

If your employees are making pre-tax payroll deductions/contributions to their HSA, then they're doing it through a 125 plan. The advantages to the employer are the same for this benefit as for any other benefit under the 125 plan. I.E., the employer saves the matching FICA on every dollar pre-taxed thru the 125 plan. (And perhaps FUTA and SUTA taxes).

Point taken, Mr. Moderator (mjb). More than likely, a specific determination will be needed with regard to any program offered. To make a specific determination, see IRS Notice 2004-23, IRS Notice 2004-50, and 2004-33. If these notices don't address your situation, use your best judgement. Informal, non-binding remarks might be helpful.

Actually, I don't think any 125 plan is exempt from the A/D rules. I'm not aware of a rule that allows collectively bargained employees to be exempt from testing, etc. If their wages are being reduced pursuant to a salary reduction agreement, then it should be through a 125 plan. You could have separate plans, or different requirements by job classification, etc. within the same plan. But you've still got to include all participants and eligibles in the various tests, as far as I know.

I have a detailed, exhaustive narrative and flow chart produced by EBIA (I think). It is 21 pages long, about half of which is a narrative and the other half a flow chart. It covers every conceivable event for all affected benefits. All code references are to 1.125-4. The flow chart starts off with Step 1--Did employee request a change within 30 days of the event? Step 2--Does the event, benefit affected, and related consistency requirement allow a change?--Yes or No Step 3--If yes, complete change of status form There are no exceptions to the 30 day rule. However, as LRDG noted, we have allowed changes due to administrative error (and documented them as such). Keep in mind that, although most 125 plans are written to allow the most liberal interpretation (within the confines of 125), some employers (usually very large employers) choose to further restrict the qualifying events under their plan, but they cannot liberalize the rules, such as adding days to the 30 day rule or adding qualifying events.

Let's see what happens. Nice, big dreams in this proposal.

An on-site clinic that provides more than nominal medical benefits (e.g., a flu shot or aspirin) and preventive care would likely be considered other medical coverage that disqualifies an individual from HSA eligibility. -----Informal, nonbinding remarks of Elizabeth Purcell, IRS, Office of Chief Counsel, Mar. 25th, 2005 ECFC annual conference

Sorry--I didn't mean to imply that the DOL was auditing FSAs. I meant that these were the only types of audits we are seeing (Health and Welfare benefits--ERISA issues). I am correcting myself--FSAs are ERISA plans!

I've been doing this for 20 years and never had a client audited for a 125 plan. However, I had an associate who worked the eastern part of the state that I'm in, that had a number of clients audited for their 125 plan. Those audits occurred as a by product of, or in conjunction with, a routine payroll audit. In my whole career, I was only indirectly connected with a 125 audit, which for the agent involved, was a total nightmare and consumed 1 to 2 days a week of the agents time and dragged on for 5 months. But I've heard of nothing in recent years. We occassionally see or hear of random DOL audits which have far more serious financial implications, as a rule. And the DOL is not as easy to "negotiate" with as the IRS.

Seems to me that this is just a typical 125 plan. But I would be curious to see the Plan Doc. and SPD (or whatever they have in writing).

To have a 125 plan there must be a choice between nontaxable benefits and cash. If I take health insurance and sign the 125 form for a reduction of $650, then decide to cancel (for a qualifying event), I don't get the 650 as cash. I only get 150. Therefore, the 650 election is not a true representation of the facts. This looks more like a scheme to rip off extra FICA savings for the employer.

CassieG--yes--employer can have both, as long as they control who signs up for what.

Sounds like a MERP.

Try the following site: www.irs.gov/irb/2007-20 irb/ar10

You're in a rough situation. Somehow, you've got to end their participation in one or the other. It will not be very likely that you could "recall" all HSA contributions. Employer has no control over those accounts. What you can do: Do a plan of correction on the 125 plan. As part of the corrective action, 1) terminate participation in the FSA 2) make whole anyone who is in a negative position (more deposits than receipts) 3) payroll deduct from those who are in a positive position (more claims than deposits). 4) All pre-taxed amounts are to be added back to those participant's w-2s. I wouldn't envy the job of communicating this to the employees.

Check into the rollover rules. Those who want to participate in the HSA can rollover their Gen. FSA dollars to the HSA (and also participate in the Lim. FSA). Self correction:--rollovers can't be done mid year. Also--see post started by barnard. Same type of problem.

Since it's a voluntary product, it's not an employer sponsored plan (unless the employer has inadvertantly made it so). Maybe she can go after the agent or agency that was doing the enrollments. But I don't think she has much of a case either way.