Joe Priselac

I'm feeling a lot positive waves in this chat room. In the short time that I have been tuning in I'v noticed that everyone is guilty, myself included, of being vague or incomplete in our questions and answers. I don't know about the rest of you, but typing is such a burden for a two fingered typist like myself that often I pass on commenting on a question because the proper answer would take too long to type out.

I have to step in and support Lisa. The regulations state the legal maximum benefits and limits. An employer could set up a Dependent care account that had a maximum of $3,000 per year or $416.66 per month. You could even design a plan that only allowed expenses for dependents under the age of six.The regulations state the most you can allow but they don't force you to go to the limit. I know that most employers want to offer the maximum available under the law, but Lisa's concept still allows an employee the $5,000 maximum in all plan years except the first.As a practical matter most people pay their day care expenses weekly or bi-weekly not annually in a lump sum.

Lisa, Sluskin's answer applies to your question. Yvette, If person voluntarilly quits their job, they are allowed to terminate their participation in the Flex Plan. That is considered a change in work status. FMLA leave would be voluntary and still allow a participant to change their election. The real question centers around materiality. How many hours did the employee reduce? If an employee reduced their work by one hour per week, that would probably not constitute a significant change in work status. Usually change from full-time to part-time status is required. What is your company's definition of full-time and part-time employee? Generally, companies change their benefit offerings or employee contributions based on hours worked. Do you have a threshold that triggers such a change? That should be your starting point in deciding whether this employee has made a significant change of work status.

The effect that leaves have on FSA accounts vary with the account and the type of leave involved. An unpaid leave is a change of status and allows participants to change their election. The day care account deductions could be reduced to zero when the employee goes out on leave and started up when they return to work.A different example would involve FMLA leave and the unreimbursed medical expense FSA. An employer could allow an employee to accelerate their deductions to cover the period they are out on leave. This enables the employee to still enjoy the pre-tax benefit of the 125 plan. The employer could "catch up" when the employee returns from leave by adjusting withholding provided it all happens in the same plan year.The after tax payment by the employee while out on leave is also an available option.This whole area can be very confusing. I would suggest asking your FSA vendor as they must have addressed these issues with their other customers. If you need additional help, e-mail me directly.

Are you asking about a dental plan or a dental expense in a FSA under section 125. A dental plan should be operated in accordance to the plan specifications determined by the employer. The TPA acts as an agent of the plan sponsor, the employer. A TPA operates at its own peril if it begins to lose sight of whose dental plan it is administering.In a FSA account the IRS regulations are used as a guide as to what is an eligible expense. If the expense is questionable to the TPA, a written instruction by the plan sponsor, the employer,is sufficient to settle the issue. An employer should hire a TPA for their expertise. We have never been overridden by a client.

Lisa brings up a good point that would probably preclude the employer from utilising a traditional Flexible Spending Account Plan. The other alternative would be a self-funded medical reimbursement plan under Section 105(h). This type of plan is strictly employer funded and does not require the potential of employee reductions which would be impossible where there are no salaries such as is the case with retirees. There are non-discrimination rules that have to be followed. We have never considered the possibility of a plan exclusively for retirees. Does this create a discrimination problem by excluding the active employees?

I don't know of any IRS requirement that original receipts be submitted for reimbursement. In fact we encourage participants to send us Xerox copies of receipts and insurance statements. The mail is not 100% reliable; things do get lost. Replacing a copy is easy, but replacing an original can sometimes be time consuming and difficult. Cheaters can produce excellent fake originals if they are so inclined.

I just wanted to add a coment about outsourcing. Over the years I have had conversations with thousands of employees and many said they would not use the FSA plan if someone inside the company would have access to their claim information. For example,an employee who is going to psychiatrist for emotional counseling mught be reluctant to have someone in the company know their private business. Outsourcing the administration of the FSA plan maintains the confidentiality that many employees require before they participate.

Kathy, An employer can offer a cash incentive to its employees in an attempt to induce them to waive insurance coverage. Thousands of employers both public and private have these types of "cash out" plans. The problem that must be avoided when an employee is given a choice between taxable and non taxble benefits is constructive receipt. The employees who take the health insurance could be liable to taxation on the dollar value of the cash incentive they did not take but could have taken. Adopting Section 125 plan will offer those employees protection from the constructive receipt problem that arises in such situations.

Amy, I agree with SLuskin that you should coincide the open enrollment for health insurance with the Cafeteria Plan anniversary. You can allow an employee to change health insurance plans off anniversary. The employee can not change the amount that is being withheld from their paycheck on a pre-tax basis. If the employee changes to a more expensive plan, the increase in the salary deduction must be withheld after-tax. If the employee changes to a less expensive plan, the deduction amount stays the same and the unused dollars are forfeited.

I am assuming that the employer has a Section 125 plan in place. You can have a negative enrollment approach to POP, but you must notify employees of their right not to have insurance premiums deducted pre-tax. People sometimes don't want to participate because of their concern over reduced Social Security because of lower FICA taxes.

No, the death benefit would be received income tax free just like any other personally purchased life insurance.

Judy, Only employees can participate in Section 125 plan.A self-employed person, as defined in Code Section 401©,is not considered to be an employee under a Code Section 125 flexible benefits plan.

I agree 100% with Lisa.That's why employers should seek professional advice.

As long as they pass the discrimination tests there is no problem with different people paying different amounts. In a Cafeteria Plan there could be multiple medical plans being offered from economy model to Cadillac model. The employer contributes the dollar amount or credit regardless of the medical plan chosen. If an employee chooses a Cadillac plan he pays more than one who chooses an economy model.

M Dean, This employee is unfortunately out of luck. I disagree with Deb H. Steve Martin used to have a comedy routine regarding the IRS. His line was I FORGOT.The IRS doesn't buy that logic.If they did we could disregard the rules and claim we had no idea.The regulations do not cover someone signing up for daycare who has no children and then realising that they are about to lose their money allowing them to change their election.We have all encountered people who go through life in a coma. Sometimes they have to bear the consequenses.K Wermager's question requires the same answer except that vitamins prescribed by a doctor for the treatment of disease are permited. The cite is Neil, Garnett, TC Memo 1982-562

In informal discussions with Harry Beker, the IRS guru for Section 125, he agreed that you could in fact create a reimbursement account for non-employer sponsored health insurance premiums. The key is that it has to be a separate account with a separate election. The basis for this opinion is Rev. Rul.61-146 1961-2 C.B.25. Our plan documents reflect this separation. You can not reimburse for contributions towards the costs of another employer sponsored medical plan.Most of the costs we see run through this account are for health insurance premiums for college students.

Marv, I'm not sure that I understand your question. Are you asking if the employer paid portion of health insurance is taxable to the employees receiving the benefits? The answer is no. Under IRC Sec. 106(a). You therefore don't need to utilize a Section 125 plan to obtain the tax exempt status for the health benefits. Ihope this answers your question.

Tara, There is a rule in the Proposed Treasury Regulations for Section 125 Q/A 7©covering the rules for Health Flexible Spending Accounts(FSA)called period of coverage. Basically it states the period of coverage is to be for a period not to excede twelve months and that claims must occur during this period of coverage in order to be reimbursed. The treasury takes the position that a health FSA is a form of insurance coverage funded by employee contributions.Common sense would indicate that an insurance plan is not going pay for an expense that was incurred before the insurance coverage goes into effect.Tell the employee that you don't buy fire insurance after the barn burns down and expect to collect!

Dawn, I agree with Kip Krause. We administer plans such as you describe. You can link the participation in the self-funded reimbursement plan to participation in your insured medical plan.The parts become one "package" of benefits that you offer employees. Medical plans typically have coordination of benefits clause to avoid duplication of benefits. This is to prevent a participant from profiting by receiving double payment for a medical expense. You should include such language in your self-funded reimbursement plan document.

Victoria, Are you assuming that the adoption assistance plan is within the context of a Section 125 plan? Since it is not a Specified Fringe Benefit Plan or Welfare Benefit Plan on what basis would 5500 filings be required?

I think that everyone is right depending on the facts and circumstances. Thorton should clarify the exact circumstances of Company A. Kip and I are correct, in my opinion, if the self-funded medical/dental plan operates independently of the Section 125 plan. If a company of 250 had a self-funded dental plan for example that required no employee contributions, there is no need for a Section 125 plan because Section 105(h) allows for this type of program. The 5500 filing would include all the financial information relevant to that dental plan. If the company required employee contribution to its medical and dental plans, then they could adopt a Section 125 plan to permit employees to contribute their share on a pre-tax basis. The only dollars actually running through the Section 125 plan would be the employee contributions. The overall costs of the dental plan would be reported on its separate 5500 filing.RLewis is correct if, and we have clients who do this, the employer makes direct contributions to employee spend accounts in the Section 125 or gives credits in the Section 125 Cafeteria Plan.

Thornton, You do not include the company's cost to fund the self-insured medical plan in the 5500 form for the Section 125 plan. They are two separate plans if I corectly understand your question.The self-insured medical plan would require a separate 5500 form to be filed.

Adoption Assistance is not an ERISA plan and therefore not subject to DOL regulations. For example there is no requirement to file a 5500 tax form.

I agree that medical expenses incured in a foreign country would be eligible for reimbursement. I would be hesitant to apply FDA standards since acupuncture and Christian Science Practioners are not FDA approved but still eligible expenses. The IRS usually looks to the jurisdiction where the procedure or medication was administered. If you were in Germany and received a drug legal there but not yet approved in the USA, it would be an eligible expense.