papogi

When monies are sent to a TPA to send out FSA reimbursement checks, these funds are not necessarily going through a trust account. As long as the employer has not set aside these FSA funds in a separate account, and sends the TPA the money from an account in the name of the employer, these dollars are “employer” money. When they go to the TPA, they are still employer money, and no 5500 would be required.

The underlying health plans (medical and dental) may allow an employee to drop at any time (most do by their statement that coverage ceases when premiums are no longer paid). Since the plans are being funded through pre-tax payroll deductions, Section 125 and its provisions are called into play. The employer is not in compliance. This one will be pretty obvious to the IRS, and could create a lot of back taxes to pay by the employees and employer, as well as penalties to the employer. This one is a bomb waiting to go off.

I would say not because the consistency rules (no change in eligibility, etc.) are not met in this case to allow mid-year changes. I can appreciate that there might be different interpretations on this, but that’s my take.

Any eligible medical expense not reimbursed through a health FSA can be written off on Schedule A subject to the 7.5% AGI rule. No deduction is allowed for any amounts lost or forfeited in an FSA.

In an ideal world, the HR department should make the correct determination, and you, as the TPA, should simply administer the account based on the info provided from HR. On one day, employers often want TPA’s to do exactly what they tell them to, and on other days, they look to TPA’s for compliance guidance. I would contact the client to get details about the change in status. If it turns out not be a status change or does not satisfy the consistency rules, then the client is usually surprised, and you look good for protecting them from potential problems in an IRS audit. If the status change is legitimate, you can just say that you are asking for further information in order to protect the qualified status of their 125 plan. As liability is slowly shifted to TPA’s (as it has been over the past several years), you have every right to ask for further information.

The only specific IRS guidance on this is that funds must be “available at all times.” If monies are paid at least monthly, they are considered available at all times [1.125-2(Q7)(B)(2)]. I’ve never seen anything that says that this must be in writing for employees, but I would recommend doing so.

GBurns, while 61-146 is not this person’s exact case, it illustrates that an employer can ultimately pay for health coverage purchased from an outside source. That point alone was part of tonjer’s question. 2002-3 goes on to flesh out the concept and point out how to avoid double-dipping. While neither Rev Rul addresses tonjer’s case directly, it does show the IRS’ stance on a plan design in this realm. As far as I know, there is nothing from the IRS which explicitly addresses tonjer’s situation, at least how I read his/her post. I don’t disagree that the employer in question might only have a POP with supplemental plans, but my take is that this is a little more complicated, and that’s why 61-146 and 2002-3 might help.

Revenue Ruling 61-146 and 2002-3 provide some guidance on this. This is an allowable practice.

1.125-4(f)(iii) refers to paragraph (i), Automatic Changes, and says that the cost increase or decrease refers to a change in the elective contributions within the flex plan, and may be due to actions from the employee or the employer (such as reducing the amount of employer contributions). Based on this, and if I’m reading your post correctly, I think that you’re fine. The cost of the qualified benefit does not have to change. Rather, the elective contributions only need to change. Again, this will fall under an automatic cost change, so there is no “significant” amount to satisfy, either.

Status changes are not always completely unforeseen, although in theory they should be. Almost all cases of marriage or birth are events which are completely foreseen and predictable at the time that the employee is making elections for the coming plan year. 125-2 clearly states that a change in providers is a status change, but the problem with this particular case is the timing. This person now sees that a potential status change might occur (such as a person suddenly having a marriage proposal), but the event has to occur before the change can go into effect. The marriage has to happen before any change in election can be made. The change in daycare providers has to occur before the change is allowed. That’s why in this case there is no status change, and there’s probably no legal way to stop the payroll deductions right now. Actually, there will not be any status change for this employee, even in September. That’s when he/she was planning to start going to the paid provider. Now, they will just be staying with the same provider (the parents), resulting in no change in providers. Agreed. The offering of vacation to the parents in September (or anytime) in order to generate reimbursable amounts appears to be the only way through this.

I think that there is no status change here, as well, but I wanted to point something out. A change in daycare providers is, indeed, a status change [1.125-4(f)(6)Example 5]. Hindsight is 20/20, but employees in similar cases can run their daycare accounts in such a way to prevent this. The employee should not have signed up for a DC account. In September, the employee should have started the account, and then stopped it when the parents could begin baby-sitting. The only problem is that the $1200 would have to be deducted over a short time period. The advantage is that this problem would not have occurred.

The regs state that the participant must provide a written statement from an independent third party stating that the expense has been incurred and providing the total amount of the expense [1.125-2 Q-7 (B)(5)]. A cancelled check with pertinent information written in by the participant technically does not meet that requirement. The provider should issue some sort of statement which shows the dates of service, the charges over those dates, the dependent’s name, and the TIN.

Yes.

Section 125 does not define the term, but most people use the standards in Section 414(g).

People on military leave have the option to continue health coverage (including FSA's) under USERRA. The payments to continue this coverage are normally paid by the employee with after tax dollars via checks. 1.125-2 Q-7(B)(3) provides that coverage under a health FSA terminates if required premium payments are not made. This should allow the person to stop the FSA almost anytime, but the employer could say that the employee cannot make a new election for the rest of the 12-month plan year.

If the dependent is paying for the medical costs of the employee, then the dependent may be in a situation where the employee is actually his dependent, and then the dependent can write off these medical costs on his/her taxes. This is probably not the case here, however. If this is a case where the dependent is just being nice by paying the medical costs of the employee, the employee can still receive reimbursements from his/her flex account for those amounts. The IRS doesn’t really care where the actual dollars are coming from to pay the expenses, but they want to be sure that the person is eligible for these tax benefits. They don’t want the employee to get the benefit from the FSA, then the dependent write these off on his/her taxes, for instance.

USERRA says that employees on military leave are entitled to continue medical coverage (FSA included). This is supposed to be for no more than 18 months, but the provisions which allow for flex COBRA not to be offered past the year of the termination should also apply here, as well. Flex COBRA should be offered at least up to the end of the current plan year. As far as the return from military leave, the plan should have some leeway to either require that the employee wait until the next open enrollment or to allow reinstatement under the FSA.

Very true John G. I assumed that the Trad IRA existed prior to 2001. If it did, they're OK. If it didn't, they've got a problem.

The conversion into the Roth IRA does not count against the annual contribution limit. You're OK.

Individual policies can be reimbursed through some sort of a premium reimbursement program (as per Rev Rul 61-146, for example), but are not reimbursable out of an FSA. Insurance premiums of any sort are not reimbursable from an FSA.

Cancer insurance was addressed in IRS Technical Advice Memorandum 199936046. This case is a bit different. I think there will be problems with deferred compensation.

MaryC, as a follow up to your post, are the laws you refer to enforced through the state insurance commision? Do they apply to ERISA-governed self-insured plans, as well? I'm just curious. I don't know anything about MA and RI laws.

I can't see that it would. Without knowing more details, it appears that there could be problems with the 25% concentration test, negating the plan for the executive director. Are there only two people in the company, or are only two people planning to participate?

I wanted to point out that if a 125 plan fails the 25% Concentration test for key employees, then all key employees are to be taxed on their option to receive cash in place of non-taxable benefits (notice it’s not really HCE’s, although they often are key). My guess is that a 1099 is appropriate.

Employees can drop to single coverage in this case. The cost change will be significant, and since no other plan is offered, coverage can be dropped entirely [1.125-4(f)(2)(ii)].