papogi

I say no.

You are not required to deduct on Jan 2. The IRS gives no real guidance on how to do this. To illustrate something similar, it is legal for people paid bi-weekly to have 125 deductions taken only twice monthly. The IRS doesn't pay lots of attention to how the deductions are taken. As far as I know, you could take the deduction on Jan 2, and it would be the first deduction for 2003, or you could wait until the second pay in January and end up only with 25 pay periods (if bi-weekly) over which the 125 elections are deducted. Does anyone know otherwise?

No. She can't stop the account in this case. As long as she gets her reimbursements in a very timely manner, she's making her money stretch out by having the DC account. If she stopped the account, she'd be paying the daycare provider with after-tax dollars. I would re-explain the value of the account, as it is actually helping her out here. Again, this assumes that the reimbursements are coming on a timely basis.

For HCE's you have to look at non-discrimination with regards to benefits (benefits should be available to employees on a non-discriminatory basis, and I like the Section 89(e) math to determine non-discrimination with regards to utilization, although you'll see differing opinions on this due to the lack of IRS guidance), and eligibility (Fair Cross-Section test: Basically, if you have a high concentration of HCE's, then the participation by NHCE's must be high to pass, whereas a low concentration of HCE's allows lower participation by NHCE's).

The 25% concentration test applies to key employees, not HCE's. I know they often mirror each other, but not always. If you determine that this HCE is key, then, yes, no more than 25% of the total non-taxable benefits can be provided to all key employees. If a 125 plan fails this test, all key employees must be taxed on their option to receive cash or other taxable benefits in place of non-taxable benefits. If all key employees have a total of $50K being run through the 125 plan, then the non-key employees need to have at least $200K going through the 125 in order to keep the key employees safe.

A loss of such coverage would be grounds to change medical elections under 125-4(f)(5), but gaining such coverage would not. Without a loss of eligibility for the current coverage, as you said, I don't there are any avenues to drop the coverage. That's my take.

The clarification was published in the December 29, 1997 Federal Register (62FR67687). It can be found here: http://frwebgate3.access.gpo.gov/cgi-bin/w...action=retrieve As you can see, it addresses only portability provisions.

My understanding is No.

Tigger, the COBRA premiums would be after tax, but to take it further, there might still be reasons to purchase flex COBRA. One would be if the employee has not been reimbursed at least his/her contributions. He/she might want to continue flex even with after tax dollars in order to extend the termination date long enough to cover a bunch of expenses they can stack up in the next couple months. Then they could stop paying premiums and stop flex COBRA. The other would be if the participant started the account because he/she knew of a big expense coming late in the plan year. Even if the employee continues the account clear up to the end of the plan year, they may stand to lose less than if they don’t elect flex COBRA. They may pay more in premiums because of the 2% COBRA admin fee, but they would stand to lose only this small percentage, rather than potentially several hundred dollars that may be sitting in the account at the time of termination. Jeff V, a plan may be required to offer flex COBRA, regardless of its wording. Since this person has apparently not been reimbursed at least what has been put in, the plan will have to offer flex COBRA. The first question to ask is whether this health FSA is exempt from HIPAA. A health FSA is exempt from HIPAA if both of these are true: 1. The health FSA benefit does not exceed either two times the employee’s salary reduction election or, if greater, the employee’s salary reduction election plus $500. Assume, for example, an employee puts in $600, and the employer puts in $700. The employee is eligible for $1300, but only puts in $600 ($1300 is more than twice $600). This FSA, so far, is not exempt from HIPAA, and is subject to its rules. As another example, assume an employee puts in $100, and the employer puts in $600. The employee is eligible for $700, but only puts in $100 ($700 is more than $100 plus $500). Since such a large portion of the FSA is funded by the employer, the IRS sees this more like employer-provided insurance and is subject to HIPAA. Most employers’ health care FSA’s are funded entirely by employees. These are exempt from HIPAA since the IRS does not see them as employer-provided insurance. 2. The employee has other group health plan coverage for the year available from his/her employer, and the other coverage is not limited to benefits that are HIPAA excepted benefits. If the only other available coverage has limited scope benefits (exempt from HIPAA), the health FSA would not be exempt from HIPAA. If you determine that the health FSA is exempt from HIPAA (most are), there are two special exemptions from COBRA: a. COBRA need not be offered after the plan year in which the termination occurs. This applies if the amount paid in would exceed the benefit. The 2% administrative fee guarantees this, assuming that the FSA is funded completely with employee contributions. b. COBRA need not be offered at all if the remaining balance available is less than the premiums required to continue the account. Even if the health FSA is exempt from HIPAA, if item b immediately above does not apply, then flex COBRA must be offered for the remainder of the current plan year. All qualified beneficiaries can elect a health FSA. If you determine that the health FSA is not exempt from HIPAA, COBRA will need to be offered under the usual COBRA rules (18, 29 or 36 months). All qualified beneficiaries can elect a health FSA.

Your assessment is correct. He is no longer a participant. He can submit claims with dates of service which are while he was participating. If he has no claims during that time frame, he should seriously consider electing flex COBRA, which he almost surely would be entitled to. He could elect it and keep it long enough to at least recoup his actual contributions, then drop it if he wants.

It’s in 1.125-4(f)(5)(i).

Great question. Assume you have two employees, each making $20K. Under your example, the participants still have $20K taxable (since the premium is taken post-tax). The opt-outs are given additional compensation, and this money is taxable, as in any 125 plan, as well. The bottom line is that participants have lower taxable income than non-participants, so they are effectively trading compensation for qualified benefits. Had they not elected the benefit, they would have greater taxable income. Purchasing benefits with after-tax dollars does not require a 125 document, and this is not the sticking point in this case. The issue comes up when an employer gives extra compensation to non-participants. If there’s a choice between taxable cash and qualified benefits, then there’s a need for 125. That’s how I read it, anyway.

1.125-4 says that losing coverage under state-sponsored coverage is a status change, but gaining eligibility is not. No change is allowed.

The spouse gaining employment and eligibility for another health plan means that the employee can drop health coverage for that spouse. Since a Health FSA is viewed as a health and welfare plan, the general thinking is that coverage can be reduced or dropped, along the same lines as the regular health coverage. Hopefully, the spouse’s new employer offers a Health FSA. If so, they can effectively increase their annual election by participating in that FSA, as well.

Your thinking is right, but for another reason. Commencement of employment of an employee’s spouse (and the spouse gains eligibility for the new employer’s plan) will allow your employee to decrease or stop the Health FSA election. The consistency rules prevent your employee from increasing the account in this case. Had the spouse lost coverage mid-year and come on your employee’s plan, then the Health FSA may be raised. That’s an example of when an FSA may be raised.

As far as I’ve seen, the IRS has never given clear guidance on what to request as proof of a status change. My thinking is that some sort of documentation should be required in all status changes. It may be a letter from an employer in the event that a spouse goes from full-time to part-time, for instance. Some status changes are such that official documents are readily available (e.g., marriage certificates, etc.). If you run into some type of change where no real documentation seems to be available, or the other party refuses to provide documentation, you will have to decide if a signed affidavit is sufficient. I would think it would be in those cases.

If an employee gets married, this triggers a HIPAA special enrollment. Under HIPAA, the new dependents and the employee can be added to the medical coverage (any health plan subject to HIPAA), even if the employee had originally opted-out, and 125 allows a change in this case under 1.125-4(B). Keep in mind that a 125 plan does not have to allow this change. HIPAA requires that the underlying plan be made available to the employee and spouse/dependents, but the payroll deductions for such coverage may have to be taken post-tax if the 125 plan does not allow a change in this case. As for your other example, the 125 consistency rules prevent this. The only way for the employee to drop coverage following marriage is when that other coverage actually becomes effective [1.125-4©(3)(iii)].

No problems. Regardless of his age, if he is an active employee and meets all plan rules (both the 125 plan and any underlying health plan he may sign up for), he can be treated as if he were 35.

Looking specifically at my example above with key employees, the 25% Concentration Test does not apply to qualified plans. It is a test specific to 125.

Gburns has some good points concerning 106. My opinion is that this plan does require a 125 document, however. Since the value of ½ the premium is available as cash or benefits, then all employees are in constructive receipt of that ½ premium without 125. The employee who decides to take the coverage in lieu of the cash is in constructive receipt of ½ the premium, so they need to pay tax on that amount, unless a 125 plan is in place.

The only dollars to include in the 25% test are dollars which are going through the 125 plan, and those can be decsribed as any dollar for which there was a cash option. For instance, pre-tax payroll deductions and flex credits for which there was a cash option are all dollars which should be included in the 25% test. The automatic employer-provided siingle coverage should not be included, as long as an employee cannot opt-out of the single coverage and receive cash. The same rule applies to the flat $20 credit towards the FSA. If there’s no cash option, the dollars are not to be included in the test.

The employee can submit claims on that amount for any qualified dependent or him/herself. While ideally the $200 would only be for the new spouse, there is no way to police this, and the IRS does not need you to. There is no worry.

The employer is offering a choice between taxable compensation and qualified benefits. Assume you have two employees, each making $20K. One employee decides not to take the coverage. I think that what mrilao is saying is that this employee’s $20K taxable compensation will rise by ½ the premium. The other employee decides to take the coverage. His compensation stays at $20K. If my assumption is correct, this would be a 125 plan. Because the employee who decided to take the coverage now has lower taxable income, he essentially purchased the coverage with pre-tax dollars, so 125 has to be involved. Most companies give you nothing, and ask you to reduce income and buy coverage with pre-tax dollars. This employer gives you something, then says if you don’t want it, you’ll get more money. Either way, the participants have lower taxable income, and the non-participants have higher taxable income, so it is 125.

I’ve never seen any guidance from the IRS on anything like this. I think you have several possible options. First, the employee can and should take some responsibility for this in not taking the time to look at paystubs (that’s why he gets them). If employees are allowed to make mistakes, employers should be allowed to, as well. He had an entire year to notice this and have it corrected within the plan year. So, the whole election could be made null and void. The employer and employee lose their tax benefits, but the employee gains the assurance that he got his entire election through payroll, with no chance of forfeiture. Another option is to let him keep the money, submit eligible claims for the past year to the claims processor to justify his having the money, then the employer could reimburse him an amount of money which represents his lost tax savings (the tax taken out of the FSA amount through payroll), plus the tax on that, since it will have to be given to him with after-tax dollars. The employer is still out their tax savings. Lastly, he could send a check to the employer which represents the entire past year’s election, reduced by the taxes he paid on that money but shouldn’t have. Then, with eligible claims, he would be reimbursed the full election. The employer is out their tax savings in this approach, as well. You can brainstorm potential problems with any of the above options. Any one of them could be argued as being a fair and honest attempt to correct the wrongdoing, however.

Yes. We have customized benefit statements which show last year's election, and indicates that they can leave everything as is, and current elections can rollover (less the FSA election).