JWK

Actually, I suspect the original post was asking about pre-tax transportation benefits, and correctly noted that these cannot be offered under a 125 arrangement. This is true because they are excluded from income under section 132 and section 132 benefits cannot be offered in a 125 plan. As for the original question, it is true that a formal plan document is not required for this benefit. However, it is desirable to have at least a written policy to define which employees are eligible, to explain the benefit, and to make sure administration is consistent. You'll also need to decide how to substantiate expenses as eligible for reimbursement. Further, before implementing the program, think about what impact it will have on other benefits, e.g., compensation for qualified plan purposes.

If a plan determines benefit accrual service using the elapsed time method, do you have to credit partial years of service? You don't have to credit partial years for vesting (1.410(a)-7(d)(1)(iv)), but what about for benefit accrual? And if you do have to count partial years, how do you calculate the service? Days between employment commencement date and severance from service date divided by 365? If you have a cite to a reg, I'd appreciate it. Thanks.

I understand that this bill (which extends the exclusion for educational assistance) has passed both House and Senate. Does anyone know if the president signed/vetoed?

I understand this legislation (which extends section 420 transfers through 2005) was passed by both House and Senate. Does anybody know if the president signed/vetoed?

That would not pass muster if the choice is solely up to the employee. That's the very essence of the constructive receipt doctrine. The amount is taxable as soon as it's made available without a substantial restriction.

I agree with dsilver. This employee can't simply decide in December 1999 that he wants to receive some of his compensation in 2000. Unless you have a deferral election in place before the tax year in which services are performed, the IRS will assert constructive receipt and taxation in the year in which the comp is earned. There are lots of letter rulings in this area. Also, see section 451 of the Code. There are many traps for the unwary in setting up a nonqualified deferred compensation plan. Consult with an advisor who knows the tax and ERISA rules applicable to these arrangements. [This message has been edited by JWK (edited 12-03-1999).]

Your question points out one of the major risks when a qualified beneficiary elects COBRA for a health FSA. The recently issued proposed COBRA regulations address this problem by allowing most FSAs to avoid having to offer COBRA for plan years after the plan year in which the qualifying event occurs. To qualify for this exemption, the FSA must fit the HIPAA exemption (i.e., the employer must also offer a group health plan and maximum reimbursements under the FSA cannot exceed 2x employee contributions or, if greater, employee contributions plus $500). It sounds like your FSA may qualify. Also, since this participant has already reached his maximum reimbursement amount for 1999, under the new proposed regs, you do not have to offer COBRA for the FSA even in 1999. A couple of caveats. First, a court would not necessarily defer to the IRS's position in proposed regs. So, even though the IRS wouldn't penalize you for not offering COBRA, you could still be vulnerable to particpant litigation. Second, a number of practitioners question whether the IRS really has authority to redefine a group health plan and limit COBRA in this way. This uncertainty perhaps increases the likelihood of a participant challenge, as noted in point 1. But it's hard to garner much sympathy for a participant because the only participant who can benefit from contributing to the FSA in subsequent plan years is one who wants to "abuse" the uniform coverage rule. Third, I would think you'd want your COBRA communications and your plan documents to be amended to reflect this new rule before you started enforcing it. It may be too late for this participant who has already terminated employment. I'd be interested in hearing others' comments on "operational adoption" of the new rules before an actual plan amendment. I'd talk to legal counsel before doing anything, but it's good to know that employers now have more options to deal with this problem.

I'm a little rusty on these rules, but they are set forth in detail in Treas. Reg. 1.125-2, A-5©. Generally, the days that can be sold are treated as elective days and must be cashed out or forfeited at the end of the plan year. Also, the nonelective days are used first. Therefore, if you make this change, employees will not be able to carry over that elective week of vacation. And, if they have three weeks of vacation and use only one week, they can only carry over one week. The third week has to be cashed out or forfeited (because the elective days are used LAST). This rule applies to all participants in your cafeteria plan, i.e., it includes those who elected not to sell a week of vacation. Also, if you're in a state like California that vests vacation (meaning vacation days can't be forfeited), you HAVE to cash out the elective week at the end of the year. There are lots of issues to address in considering this change, including how to treat accrued vacation days and how to deal with all the people madly using up vacation days at the end of the year so they don't get forfeited. You can also have an employee relations issue if employees have been used to carrying over vacation days (maybe this is a problem you're trying to address). I recommend you contact your professional advisor to thoroughly hash out the issues. [This message has been edited by JWK (edited 11-24-1999).]

I'm a little confused by your question but will try to give you some ideas. Your title mentions an FSA participant but your question text refers to premium only. To me, an FSA means a flexible spending account and premium only means paying health premiums on a pretax basis through a 125 (cafeteria) plan. In either event, I think you first need to look at your plan document which should have a deadline for submitting status change requests. Typically this is 30 days. If the participant waits longer than 30 days to request a change, it's hard to argue that the change is "on account of" the change in status. Also, if you are in fact talking about a premium conversion plan, I don't see how dropping coverage after having a baby is consistent with the change. Is it possible that this participant has experienced some other change that is causing her to want to drop coverage (e.g., maybe her spouse got a job?)?

State and local governments can NOT sponsor 401(k) plans (unless they are pre 5/6/86 grandfathered plans). Code, section 401(k)(4)(B)(ii).

Before you start thinking about communications, you may want to re-think the idea of a vesting schedule in a 403(B) plan. Very few 403(B) plans have vesting schedules because of the maximum exclusion allowance (MEA). The contributions count against the MEA in the year after they vest. It can be tricky to monitor the MEA, and, unless somebody knowledgable is performing MEA testing, it's easy to exceed the MEA in the vesting year (because employees won't know that they should cut back their own contributions). See Example 25 in the IRS audit guidelines for 403(B) plans.

Expanding a little bit... According to IRS regulations, health insurance premiums cannot be paid through a medical expense FSA. See Treas. Reg. 1.125-2, A-7, (B)(4). However, I believe it is possible to set up a separate reimbursement account that only reimburses eligible health insurance premiums, i.e. those that would be deductible under Code section 213. You need to be very clear with your TPA that the premiums have to be reimbursed from a separate account than the health FSA. I think the rules would be similar as for a DCAP (no uniform coverage rule, but there would be a use it or lose it rule).

Thanks to both respondents. I have requested the plan document. I learned that it is becoming more common for plan documents to provide that spousal beneficiary designations are deemed revoked upon entry of a final divorce decree in an attempt to avoid this problem. Also, apparently there's a split among the courts as to whether the plan administrator needs to request and review a divorce decree or can simply distribute in accordance with the beneficiary designation on file. As the respondents implied, there's some uncertainty in this area and the "right" answer may depend on what jurisdiction's law is controlling.

Participant in 401(k) plan is married and names spouse as death beneficiary. They divorce. Divorce decree does not mention retirement plans or employee benefit plans of any kind. Participant neglects to change beneficiary designation. Participant dies. Is there any argument that plan can pay death benefit to participant's brother instead of to ex-spouse?

The only initial HIPAA notice I'm aware of is the one advising employees of the special enrollment periods. This notice has to be provided "on or before the time an employee is offered the opportunity to enroll in a group health plan." Usually you'd put it in your annual open enrollment materials. There's model language in the regs.

You are correct according to the final COBRA regulations (which officially take effect for QEs on and after 1/1/2000, but which in this situation I would follow now). In A-1(B) of the -8 regs, the following sentence appears: "If a qualified beneficiary entitled to a disability extension experiences a second qualifying event within the original 18-month maximum coverage period, then the plan is not permitted to require the payment of an amount that exceeds 102 percent of the applicable premium for any period of COBRA continuation coverage." [This message has been edited by JWK (edited 10-08-1999).]

If an employer sponsoring a cafeteria plan adds a new benefit during the plan year or expands eligibility for an existing benefit, can participants modify their elections to add the benefit or add eligible dependents? Any IRS guidance on this?

Employee terminates while eligible spouse is confined in hospital. Can plan terminate spouse's coverage (subject to any COBRA rights) without violating HIPAA's rules against discrimination based on health status?

How do you calculate imputed income in a group term life plan that discriminates in favor of key employees? I do not understand the "tabular" premium described in 1.79-4T, A-6. I'd be interested to see an example of how the imputed income is calculated.