Joe Priselac

The answer to your first two questions is yes, it is permissible. The last paragraph would describe an impermissible plan design. The HRA can not pay before the annual deductible has been satisfied unless it is reimbursing certain excepted benefits like dental.

Proposed IRS regulations state that administrative fees can be paid on a pre-tax basis through salary reduction. It could be argued that the FICA tax savings that the employer would get could more than offset the administrative cost without having to make the individual participants pay.

Mal, I work with many unionized governmental groups. Many of the typical concerns or rules do not apply in these situations. ERISA along with most of the nondiscrimination rules one would normally be concerned about do not apply. You can bargain a Cafeteria Plan with the eligibility rules you specified. I believe that the newest incarnation of the Section 125 regulations allows for such an eligibility rule for "regular" groups.

Jala, Welfare benefit plans ex. medical, dental vision, etc. are required to file an annual 5500 if they have more than 100 participants. The plan numbers for welfare plans should be 501, 502, 503, etc. Do not use the same number for more than one plan. If the medical plan is 501, the dental plan would be 502. The 5500 filing requirement for welfare benefit plans is independent of your cafeteria plan. Some employers get confused and think they do not have to file a 5500 if they do not have a Section 125 plan. As an example, an employer (no cafeteria plan) with 250 covered employees in a dental plan should file a 5500.

Nancy, To answer your question directly, the one person c-corporation could not have a IRC Section 125 cafeteria plan because it could not pass the key person concentration test. The Section 105 plan is an excellent alternative.

As far as I know there is no requirement to perform actual calculations and have a permanent record of the test results. In some situations it is obvious that certain non discrimination requirements are being met without actually performing the calculations of a discrimination test. For example, an employer whose plan prohibits key employees from participation would not be required to perform the calculations of the key employee concentration test to determine that the plan was in compliance. In other situations it is less obvious if a plan is in compliance and therefore the tests should be performed.

There is no requirement that a cafeteria plan have a trust. Benefits are typically paid out of the general assets of the employer and as such can be invested in an interest bearing account. The interest earned would belong to the employer.

Yes, The employee can change their election due to a shift change.

I had a similar situation where there were 18 doctor/owners and two employees. It was a C corp. I had them put in a 105(h) plan. Each employee, doctors included, had a $2,000 reimbursement account for eligible expenses. The accounts are employer funded. No Section 125 key employee concentration test to worry about.

Are you trying to put in a spending account type of program for these doctors so they can pay for eligible items on a pre-tax basis?

How would this group pass the key employee concentration test? No more than 25% of the benefits can go to "key" employees. Since everyone is "key" in your example, I would assume they would fail the test which would make the benefits taxable.

Yes, They could add the health FSA.

One question no one asked was whether the school district employees were unionized. I work with many school districts here in New York and they are all unionized which means that some of Kathleen's analysis would not be applicable. I recently was invloved in a contract negotiation where the unionized administrators negotiated for a 105(h) plan in which they would have $2,500 available. The other unions representing the teachers and support personnel did not have a similar provision in their contracts. The administrators make more money than the teachers and the support staff, BUT because all these employees are covered by a collective bargaining agreement the discriminiation rules do not apply. In addition, ERISA doesn't apply to governmental employers. For example, the 5500 filing requirement for welfare plans does not apply to school districts.

Once the employee becomes ineligible to participate because of their stock ownership, they are treated like a terminating employee.

The employer could in effect operate the dependent care plan like a POP plan- withhold the monies pre-tax and pay the daycare center. The plan document and SPD should describe this option to the potential participants.

A IRC Section 132 plan can allow either parking or transit pass benefits on a pre-tax basis. Parking can be operated on both a reimbursement basis or a direct employer paid basis. The limit is a monthly limit of $185 effective 2002. Your question about wether you handle this account like a dependent care account, pay as you go, or like a health FSA, fully funded isn't really that important for a 132 plan since we are dealing with a monthly limitation. As a practical matter most employees pay their parking expenses on a monthly basis. Transit passes on the other hand can only be operated on a reimbursement basis if they are not "readily available" to the employer from the transit authority. This has forced many employers into the cumbersome practice of having to internally distribute the transit passes to their employees. The monthly limit for transit passes is $100 begining January, 2002. The readily available rule states that an employer can only use a reimbursement system if the charge for the transit passes is more than 1% of their value. Some transit authorities accept debit cards which eliminates the internal distribution hassle.

The limit effective 01-01-02 is $100 per month for transit passes.

bbruno, Section 152 of the Internal Revenue Code is where you find the definition of an eligible dependent. For the individuasl to be considerd an eligible dependent, the employee must be able to claim them as a dependent for income tax purposes i.e. provide more than half their support for the year. Depending on their individual circumstances, some might be able to have the benefit tax free. In addition to the support requirement, the domestic partner must also live with the taxpayer for the entire year and their cohabitation must not be in violation of any local laws.

Todd, Yes, yes and yes.

Jamie, The company would adopt a Section 125 plan allowing employees to reduce their taxable incomes to pay for dependent care expenses on a pre-tax basis. If this is a company operated day care facility, the normal procedure of employees submiting of expenses could be dispensed with. The facility would have the record of who and for who much each participating employee utilized the facility. We have some clients in this situation. We write a check to the facility for all the employees instead of reimbursing each employee separately. For the employee it works similarly to a POP plan.

If the plan is fully insured, there are no discrimination rules that have to be complied with. Absent insurance company restrictions, you can pick and choose who you want to cover and for how much. In New York, one of the states that mandate a minimum level of STD coverage, as long as you give everyone that state minimum you can give the highly compensated an enhanced benefit. There is no adverse tax consequence and is a common practice especially among executive owners.

There is no such thing as not having an estate. The estate may only consist of the last paycheck, but that is the person's estate. They could have named their boyfriend/girlfriend as the beneficiary on their life insurance, but if they have relatives and you pay the friend you could be liable to pay the relatives. If the person doesn't have a will, every state has a law of intestacy that determines who gets what and in what order. Kirk is a lawyer and can explain this much better than I can, but I would pay the estate of the employee and let the legal process take over.

Deacon, Insurance premiums of any kind are not eligible for reimbursement under a health FSA account. Long term care insurance is not available on a pre-tax basis through a Section 125 plan.

The short answer is yes. A plan could allow an employee to sell vacation days and use the credits generated by the sale to pay for any other benefit available under the cafeteria plan.

To expand on the previous reply, A Cafeteria plan under Code section 125 is considered a statuatory fringe benefit. Which means that your employer, the county government has to comply with the requirements set forth in the In ternal revenue Code. In Section 125(d) It states that the "the term cafeteria plan means a written plan..." It is clear that to have a valid plan your employer must have a written plan document. There is a difference between a plan document and a summary plan description. Distribution of a summary plan description is typically an ERISA requirement to which your county is not subject. It could be argued that the county could get by with just a plan document, but from a practical point of view a written summary of the plan would be an effective way to communicate the provisions of the cafeteria plan to the employees. Why have a benefit that no one knows about or is misunderstood?