papogi

She can’t change the election. Remember that the tax benefits of an FSA are given to participants because of the “insurance” nature of FSA’s. There needs to be risk involved. If there were no risk, FSA’s would be nothing more than holding tanks for money, and no tax benefit. Employees might choose a richer health plan if their employers offer it because they plan on going in to the doctor and expect something might be wrong in the coming year. If nothing turns out to be wrong, or they decide not to go to the doctor, the employee can’t then move down to a low option with lower payroll deductions. The same is true for FSA’s. She took the risk by electing a higher amount. There is no legal way for her to lower or stop the account in this case.

Actually, now that you write that referencing to Corbel, I remember this coming up some other time on the boards in regard to Corbel. This is one way around dealing with flex COBRA, and whether or not to offer it based on the claims history (for most health FSA’s, if the employee has gotten out more than was put in, flex COBRA need not be offered). I can’t see that an employer could force terminated employees to continue in the plan. You still have the “cessation of required contributions” language which would then terminate the account. If they term and do not make contributions, that is terminating participation in the plan. If they term and continue the account and elect $1, there had better be some reason which satisfies the consistency rules which would allow such a change. Incidentally, any decrease in an account such as this means that the initial election is available prior to the change, and the second, lower election is available for dates of service after the change. If an employee decreases a $2000 account down to $1 on 7/1, they can only get the $2000 with DOS’s prior to 7/1. They can’t elect $1 with the hopes of getting the $2000 with DOS’s after 7/1. Do they force employees to continue buying regular medical coverage, as well? I’m sure they allow that to be dropped. Forcing an employee to continue an FSA is clearly against the risk shifting rules (they’re not forcing people to stay on the regular medical coverage, and are treating the FSA differently), and its purpose is only to eliminate the employer’s risk. I’m sure the lawyer would cite the “proposed” nature of much of 125. I can see your valid question billfgrady, but it’s a question that shouldn’t exist. It’s being entertained only because Corbel takes a severely unconventional view of 125.

My interpretation of the regs are such that the plan that billfgrady describes is out of compliance. I have certainly heard of plans like this, but, in my view, they only exist due to the rarity of 125 audits, and the “Proposed” nature of much of the 125 regs. I think a plan like this would not match the intentions of the IRS in drafting 125, and operating this type of plan would be very risky. I’m sure JerseyGirl did not address this type of plan in her response because it is a fringe interpretation of the regs at best.

If this is going through a 125 plan, this person cannot drop coverage mid-year without a status change. I don't see the valid status change. The employee should just go on medical assistance, then wait for open enrollment to drop the employer coverage.

Activity fees that go toward things that are educational in nature technically should not be reimbursed, according to Pub 503. If the charges are small, incidental to charges for care, and cannot be separated out, then you can reimburse them. It sounds as if these are easy to separate out in your case. I would not reimburse them.

Go here: http://www.125plan.com/FF-DependentCare.pdf That's the best I've seen so far, but there might be some on-line calculators at some financial sites that might help, but they probably don't go into enough detail by factoring in EIC and the child credit. I could be wrong. As a very general rule, if someone is eligible for the EIC, then they are in a position where the credits will almost surely outweigh the FSA benefit.

As for the first situation, this seems to be a function largely of the plan doc. If the plan doc defines this person as a dependent, they should be able to be added within the normal time frame specified in the doc for adding newly acquired dependents. The second situation I think would constitute a loss of eligibility for the current coverage. In example 4 under ©(4), they use a change in worksite as a change in status and allow a change from one HMO to another. While this does not specifically address a situation such as yours, I think it is the intent of the IRS to allow changes which allow participants to fairly utilize their coverage. I doubt that the IRS would require that a participant drive many miles to another state to the clinic for services. I think you have a status change here, but I’m using an uncharacteristically relaxed interpretation of the regs to arrive at that. Whether or not the dependent is a dependent on the employee’s tax return shouldn’t matter. What matters is the plan’s definition of dependent. If the plan has always seen this person as a dependent (I think it has), albeit not enrolled, then there is no increase in the number of dependents here. The employee might not get the exemption, but they can still put the dependent on their medical coverage if the plan says they’re eligible, as long as a status change has occurred. Sure, some plans are written such that it follows IRS rules for exemption eligibility, but this plan appears to be much more generous as far as dependent definition.

You might not have a problem under 125, but does your underlying health plan itself allow someone to come on the plan in a circumstance like this? HIPAA will not provide any help here for your employee, as a voluntary drop of coverage does not trigger a Special Enrollment Period.

In the case of a significant cost increase, 1.125-4 allows an employee to revoke the current election, and move into another plan offering similar coverage, or cease coverage entirely if no similar coverage is available. Incidentally, no change is allowed to the current health FSA election.

A Roth IRA is only a title given to an investment when it is set up a certain way. Say, for example, you go to your local bank and buy a 1-year CD. At the end of the year, you have some taxable interest to report on your taxes. If, however, you tell the bank when you are buying the CD that this is going to be a Roth IRA, they will have a different set of forms for you to fill out (or another box to check on your application, and a place to name beneficiaries). In this case, at the end of the year, you have the interest the CD earned, but that interest is not reported on your taxes. A Roth IRA is a title you give to almost any (not all, there are exclusions) investment, and is basically an agreement between you and the IRS. If an investment is set up as a Roth IRA, any earnings and growth on that investment are not taxable. That’s what you gain. However, the price you pay for that are the restrictions that come with a Roth IRA (e.g., you can only contribute a certain amount each year, you can generally only begin to take money out of it after age 59 ½, and if you take money out before that, you may have a penalty and maybe income tax to pay). Custodians typically charge a small annual maintenance fee ($10 or $15), but this varies, sometimes is not charged at all by some custodians, and often is phased out once accounts reach a certain dollar threshold. A Roth IRA is not designed as a short-term investment device. So, yes, you can invest in mutual funds, index funds or not. You can invest in individual stocks, money market funds, or even open a regular savings account at a bank. All of these can be designated a regular taxable account, or a Roth IRA if you choose. When you buy the fund, you’ll need to tell the custodian (the ones offering the fund) that you would like this to be a Roth IRA. You’ll see no-load, well-diversified mutual funds touted here, and I also subscribe to that, especially for beginners. The Vanguard group of mutual funds is a good place to start, and maybe a good place to stop, as well. Ask for some of their educational material. Just remember that the performance of a Roth IRA is dependent upon the performance of the underlying investment. A Roth IRA doesn’t perform at all, good or bad. It’s the investment vehicle underneath that dictates its volatility, whether it’s going up or down, and by how much.

Cash-out often refers to vacation days, but the term might mean in this case (depending on who wrote it) the broader sense of cashing out of a flex plan. Many employers will offer a number of dollars or credits to be used to purchase all sorts of qualified benefits within the cafeteria/flex plan. In most cases, employees can opt out of benefits entirely and take the dollars or credits as cash, or increased wages. My guess is that this is the meaning of the cash-out option in your question. It’s possible it only refers to vacation days, but an overall cafeteria/flex plan “cash-out” option is more prevalent than the ability to cash in vacation days.

You will find that it is the opinion of most people in benefits (myself included) that you can't withhold any additional amount from the last paycheck to cover any overdraft. Section 125 requires a risk-shifting in order for it to be classified as a form of "insurance" and then get the tax benefits of such a plan. Taking a big deduction from the final paycheck essentially eliminates the risk to the employer, and would bring the plan out of compliance in my view.

In PA, amounts received from an employer to reimburse day care expenses are taxable.

That's the rule for life insurance, but I don't know that the rule applies to AD&D. It might. Someone out there know for sure? That's the tricky thing with AD&D. It acts like life insurance in some ways, but the IRS classifies it as an accident and health plan, not as group life insurance.

The employee can pre-tax the COBRA payments for the dependents on COBRA as long as the dependents (while no longer eligible under the group health plan) are still dependents according to the IRS Section 152 rules. Pre-tax deductions are generally not allowed for individuals who are not dependents under tax code.

Certainly, AD&D is a qualified benefit. The issue is how contributions are made. For instance, LTD is a qualified benefit. If an employee contributes to LTD with pre-tax dollars, benefits are taxable. If the employee contributes with post-tax dollars, benefits are tax-free. I think the question relates to whether or not AD&D benefits follow the same rule. AD&D is odd because it (kind of) works like a life insurance policy (and the general rules I mentioned above do not apply to life insurance). Under 125-2, the IRS classifies AD&D as an accident or health plan. For this reason, I would apply the LTD rules I mentioned above to this benefit, as well. If the employee wants the benefit tax free, then contributions need to be post tax. If they want the contributions to be pre-tax, then the benefit will be taxable. Someone please speak up if they know that this reasoning is incorrect.

Unless I’m missing something, this appears to be a fundamental example of a situation requiring a 125 plan.

DMK, 1.125-2 Q-7(b)(4) states “A health FSA may not treat participants’ premium payments for other health coverage as reimbursable expenses.” Sure, the example it then gives relates to coverage for dependents under a plan offered to an employee’s spouse, but the IRS statement is more encompassing than the example. Their statement says that a health FSA cannot reimburse premiums for other health coverage. “Other” health coverage means health coverage other than the health FSA (remember that even a health FSA is considered health coverage, since it is viewed as insurance itself). So, this would include individual health coverage purchased elsewhere, coverage under another employer’s plan, and even regular health coverage under the existing employer’s plan. To answer your question specifically, premiums paid after-tax to an employee’s employer to cover dependents cannot be reimbursed through the employee’s health FSA.

While you don't have to report Roth IRA contributions on your taxes, you might have been eligible for a credit for tax year 2002. See this link to get started: http://www.irs.gov/newsroom/article/0,,id=...=107686,00.html If eligible (at least 18 as of 12/31/02, not a student, you cannot be claimed as a dependent on anyone else's taxes, and income limits apply) it will almost surely be worth your (or your Dad's) time to file an amended return to get the benefits of the credit.

As I understand it, a plan that covers fewer than 2 current employees is considered a retiree pan and generally not subject to HIPAA. Everyone, correct me if I'm over simplifying things...

Based on my understanding, you need to add in any employee contributions and any employer contributions for which there was a cash option. If an employee could have opted out of coverage and gotten increased wages from the employer (flex credits), then those need to be included, as well.

Based on how you are describing the language of this particular employer's plan, you only have access to up to $2400 per child. Doesn't look like the employee can get $4800.

A 125 plan can specify which status changes it wants to honor. While most honor all of the IRS allowable events, a 125 plan is not required to do so. For purposes of explanation, a 125 plan could specify that marriage is not a qualifying event, for instance. In this case, HIPAA could force the health plan to allow the spouse on, but any increased medical deduction for that spouse would need to be taken post tax if the 125 does not recognize marriage as a status change. Anyway, since this employee was terminated at the time of the marriage, I agree that there is no qualifying event here with regards to the marriage. When you are terminated, and not paying for FSA COBRA continuation, then all participation in the plan ceases, and no changes can be made. Termination is a qualifying event, and the employee may choose not to continue the FSA. Concerning reinstating the account upon rehire, the IRS uses the words “may” not “must” in 1.125-2 Q-7(3). I think it’s is for this reason that you have some people say that a returning employee cannot make a new election in the same year, and others say that the employee can make a new election. I feel that the IRS is very careful about their use of “may” and “must,” because both words appear in the regs in different areas. I think that the regs are saying that an employer can, if they wish, prevent any rehires within the same year from making a new election, but that an employer can allow a new election if they wish. The 30-day stipulation is thrown in there by some plans to prevent an employee and employer working together by having the employee quit and be rehired the next day in order to come up with a new election. If the plan in question does not have any provision for reinstatement for FSA’s upon rehire, this guy’s out of luck until open enrollment.

The IRS doesn’t specifically say that you have to notify FSA participants of their balances at all. It’s up to employees to keep track of their own money. I think you could go either way on this. You would probably be OK saying that they are out of luck, but I agree that the right thing to do is to extend the filing time for these individuals. I bet the IRS would see this as a good faith effort to correct a wrong. The end of April seems like a good cut off to me, as well.

The IRS has given little guidance on this, but has said that flex premiums may be deducted from salary substitutes. Most people have taken this to mean that deductions from severance payments would be allowed. There is no reason that a plan should be required to allow this, however. If the employer wishes not to touch severance payments for pre-tax deductions, they should be allowed to make this decision. Most of 125 is written as an “upper limit” document. Employers can be more restrictive if they wish.