Joe Priselac

cmpeery, You are misconstruing what the regulation is stating. Lisa and Kirk are correct in that there is no upper limit to what a plan sponsor could state in their plan. I once did a plan with a $25,000 limit, highly unusual, but still allowed. The medical premiums that are mentioned in the cite you gave refer to employee contributions to the FSA. The theoretical position that the IRS takes is that health FSAs are self-funded medical plans.The contributions are considered premiums paid for the coverage.A participant can not get more than five times their premium in reimbursement. Example: annual employee contribution to health FSA is $1,000. The plan could not provide a reimbursement benefit level of more than $5,000 for that employee. We administer plans that "magnify" the benefit but not more than the 500% limitation. There is no connection between their insured medical plan premiums and this rule. I hope this clears things up a little.

Inslady, There is no regulation that says you can have negative enrollment nor is there a regulation that says you can't. As with many issues surrounding Section 125 plans, we have have to infer from informal comments and what the IRS or DOL are doing in related areas. Harry Beker, the IRS guru of Section 125 said at a symposium, informally, that negative enrollment would be fine as long as employees received proper notification of the plan's provisions and were given a reasonable period of time in which to decide. Revenue Ruling 98-30 permits negative enrollment of 401(k)plans. By inference, it would seem that similar negative enrollment methods would be permissible. I don't know what you mean by a prototype to refuse benefits.

I have used this negative enrollment technique extensively for the POP portion of a Cafeteria Plan. What was it that you wanted to know other than whether someone actually utilised negative enrollment?

GBurns, There is a huge difference in our approaches. The point of msearle's question, as I read it, was centered on whether health FSA plans are operated on an allocated or unallocated account basis. Your answer to the specific scenario msearle layed out gave the impression that these plans are operated on an allocated account basis similar to a 401(k) plan when in fact they are not. Remember a health FSA in its operation is nothing more than a 105(h) plan. When an employer sets up a self-funded health benefit the funding of that health benefit is paid from a common comingled account similar to a defined benefit pension plan. I agree that the employer is ultimately responsible financially, but as the old saying goes, the devil is in the details.

In the scenario you outlined the TPA would not need an additional infusion of funds to pay the claim. These programs are typically operated by the employer opening a checking account that the TPA writes checks against when reimbursing participants. The funds are in essence co-mingled because these benfits are paid out of the general assets of the employer.I am curious if anyone administers their medical FSA the way GBurns described.

ljt064 The reason I asked about your wife's employer and her status is that I have seen discrimination testing done incorrectly often enough to become suspicious. Generally, the larger the employer the harder it is to fail certain tests. Assuming that they are right, in my opinion, you can't go back to your employer and legitimately ask for an exception to the the once per year enrollment rule. This is not a change in family or work status that might give you the oportunity to change your election.

ljt064 I am curious about your wife's company. How many employees are eligible to participate in the FSA plan? Secondly,is your wife highly compensated i.e. makes over $80,000 or is she a stock holder in her company? She could continue her participation even if the DCAP failed the nondiscrimination test if she was not a highly compensated employee.

This type of insurance is a permitted tax-free expense.

If there are no employee salary reductions then you do not need a Section 125 Plan. The $1200 account is a 105(h) medical reimbursement plan. The employer can make additional contributions to the plan any time as long as the plan is not structured in a discriminatory manner. The employer can also fund a Section 129 plan i.e. dependent care as long as the statuatory limit that Lisa Hand described is not exceded.Of course any increases in benefits need to be communicated in writing and the plan needs to be ammended. Too many changes will lead to confusion and that is why most employers limit changes to once per year.

This is based on the informal remarks of Harry Beker at ECFC Conference in March 1997. Mr. Beker is the IRS Chief of Branch 6, IRS Chief Counsel's Office. He is the guru of Section 125 and lacking formal regulations over many issues his remarks are often the only guidance available.

Expenses for summer day camp are reimbursable provided that the child is under age 13 and the parent needs the care to work. These expenses are OK even if a sports training program is included as long as the cost for the day camp is comparable to conventional day care.

My experience is that most of my clients have one open enrollment for all non pension benefits per year. Most of my clients have Cafeteria style benefit plan designs which by their nature require a once a year open enrollment. Putting aside the regulatory requirements, I would think it would be easier to take care of the whole "pie" all at once rather than trying to chase employees repeatedly during the course of the year. I find it is hard enough to get employees in the benefits frame of mind once a year. Why subject yourself to more frustration than is necessary?

The answer to your question is yes.Herbal medicines, if prescribed by a doctor are eligible. [This message has been edited by Joe Priselac (edited 12-15-1999).] [This message has been edited by Joe Priselac (edited 12-15-1999).]

Sheila, First, let me correct your misimpression about employer funded spending accounts. Employer contributions to a Cafeteria Plan are tax exempt as long as the monies are used for qualified expenses. Dependent care expenses are qualifying expenses. Second, direct employer contributions to a Cafeteria Plan bypass payroll and all associated issues.This is a much more tax efficient way of "compensating" your employees. The only impact that employer contributions would have is to lower the amount that an employee could reduce their taxable income for dependent care expenses. I hope this helps. If you need more info, feel free to contact me.

Here's a suggestion that might solve your problem with retroactive pre-tax deductions, which by the way are not allowed. As I understand the question, the whole issue centers on the employee contribution for medical and dental coverage. In the real world we all know that many employees are are slow in getting their enrolment materials back to the HR department. Change your 125 plan to make the POP portion a negative enrollment. You give the necessary disclosure to the employee at date of hire which states that their participation will be effective he first of the month following date of hire. Now you have avoided the problem of retroactive pre-tax withholding since the employee has been a participant since the original effective date. the FSA portion of the 125 plan can still be operated on a positive enrollment basis.

I think a little clarification is in order. The original question referred to a Health FSA in a Section 125 plan. A health FSA is nothing more than a self-funded health plan. The Section 105 rules apply to the operation of health FSA like they do for any other self-funded health plan. In section 105(B) it says "any child to whom section 152(e) applies shall be treated as a dependent of both parents for purposes of this subsection". Section 152(e) talks about children of divorced parents. I hope this is helpful.

More than 2% stockholders of Sub S corporations can not participate in a Section 125 plan. Also their spouses and children are not allowed to participate even though they are employees themselves because of the attribution rules contained in Code section 318.

In a divorce situation the child is considered a dependent of both parents. They can submit expenses under a FSA they have payed for such as co-pays.

I am assuming that you are discussing medically related travel expenses. If you are, then those expenses are eligible for reimbursement under a Health FSA.

You can have a plan year be any twelve month period. We have clients with almost every conceivable plan year possible.

The simple answer is no.

Jeff, Let me clarify how we operate these types of arrangements. We don't take money out of the final paycheck without the participant's consent. To do so would be contrary to the proposed 125 regulations, not to mention state laws prohibiting involuntary withholdings. Any employee who wants to make the rest of his/her contributions for the plan year on a pre-tax basis may elect to sign a separate agreement permitting the necessary withholdings.The plan is written so that an employee's termination of employment is a permissible change of status. All employees know in advance that if they elect to participate in the Health FSA they are in for the full twelve months. Since coverage does not terminate with employment, there is no COBRA qualifying event. Therefore no COBRA notification is required. Because of the advantages of pre-tax withholding, most employees elect to have as much of the remaing years premium as possible taken from their last paycheck. However, they have the same availability to pay monthly or per pay cycle as any other employee. That's why we feel it would not trigger the problem you mentioned.I hope this is helpful.If you want to discuss this further you can contact me directly.

Jeff, Your description is basically correct as long as you treat all departing employees in the same way. I have seen employers who force only those employees with a "negative" balance to pay up. We feel that for this strategy to work all employees must pay for the entire annual "premium". The second part of your question is correct in that no COBRA notice would be required. Myvette, In your case, the employee is allowed to submit an expense that was incurred while they were employed. The employee has access to their entire annual election amount not just their cash balance at termination. If your employee had $300 in their account, but had originally elected $1500 for the plan year,they could submit a $1500 expense that happened between Jan 1 and Oct 15 and get reimbursed for the entire $1500. That all changes if they exercise their COBRA rights. In that case they can incur the expense throughout the entire plan year.

A governmental instrumentality can adopt a Cafeteria Plan just like any private sector employer. Because Section 125 plans are Statutory Fringe benefits, the Internal Revenue Code requires a plan document and annual filings of the 5500 form, governmental agencies have to comply even though they are exempt from ERISA compliance.

Sheryl, Yes, I am saying that regarding nonemployer sponsored health insurance.This not to be confused with the MR 106 reimbursement discussion that has been going on concurrently.