papogi

I have seen nowhere in the regs that says either approach cannot be done, but there are problems (the 12-month plan year rule must still apply, however). For example, 125-2(Q7) says that if someone in one of these types of payment plans separates from service, the employer must “reimburse the employee for any amount previously paid for coverage or benefits relating to the period after the date of the employee’s separation from service.” So, the employer must be prepared to potentially hand this money back to the employees should they terminate. In the case of the DC account (which is not subject to the uniform reimbursement requirement), a minor problem also arises for terminated employees who have already used up the $5000. Keep in mind that DC accounts need to make available to the employee those amounts which have actually been deducted. That means that someone might get his or her $5000 before the end of the year in this case. How do you get a prorated amount back from the terminated employee (if you wanted to)?

It is different from 61-146, but what is applicable is the concept that employers may pay for, or reimburse employees for, coverage purchased elsewhere (outside of a truly employer-sponsored plan). The dollars become employer-provided when the employer pays for it or reimburses the employee for it. Correct, in this case, they want to have the employer pay the premiums. As long as there is no additional subsequent reimbursement to the employee (Rev Rul 2002-3), this should work.

They can sometimes change their Health FSA election in those circumstances, assuming the 125 plan doc allows it. Keep in mind that 125 plans are not required honor any of the status changes outlined in IRS 1.125-4. Most plans honor them all, but they are not required to. Assuming the plan allows a change, and IRS consistency rules allow a change, they might only be able to change it upwards, and other times only down. The consistency rules ultimately mean that it all depends on the particular situation. Check out this link to an interactive site which allows you to try out different scenarios: http://www.changeofstatus.com/

Rev Rul 61-146 allows for employers to reimburse employees for individual health insurance purchased outside the employer. It becomes employer-provided when the employer pays for it or reimburses the employee for it, thereby maintaining Section 106 protection from income.

I would require documentation from the doctor indicating that the hot tub is recommended. Note that he/she can only be reimbursed for the difference between the increase in home value and the actual cost of the improvement. Permanent hot tub installations increase the value of homes, so this will most likely need to be factored in. As for the appraisal (for the installation, I assume), the employee will just have to estimate. The current election cannot be adjusted based on the appraisal.

The IRS rules certainly do not require that, but a specific 125 plan doc might. You'll need to check the particular plan.

My interpretation of the status change rules concerning marriage is that the employee can add the new spouse and any dependents to health coverage. If the coverage is medical, then HIPAA would allow even the employee to add coverage if he/she had originally opted-out of that. If the coverage is dental or vision, then HIPAA offers no help to the employee. In those cases, the employee can only add the spouse and dependents to the existing coverage. If the employee does not have dental and vision, then there is nothing to add to. The fact that the wife has glasses is inconsequential. Consistency rules have to do with whether the election change is consistent with the status change, not whether the election change is consistent with the direct needs of the employee and dependents. For example, if an employee has a dependent who reaches the limiting age, he/she can then drop the dependent. If the employee has another dependent for whom he does not want to pay premiums for anymore, he can’t drop that dependent along with the dependent reaching the limiting age. Sure, the election change to drop both dependents is consistent with the needs of the employee, but it is not consistent with the status change. Say, for example, that the employee opted-out of vision at open enrollment. He now plans to get an eye exam and glasses, but will soon be getting married. By allowing him to come on the vision plan upon marriage, you are allowing him an “open enrollment” to correct mistakes made back at open enrollment.

Health plans do include medical, dental, and vision as you say. However, whenever you apply family status rules, you must also look at the consistency rules. If the employee has medical coverage, then it would be consistent with the status change to add the spouse to the existing medical coverage. It would not be consistent with the status change to then add another type of coverage such as vision. They will have to wait until open enrollment for that.

As an example, a company consisting of 10 people, each of whom is at least a 5% owner in the company, cannot have a working 125 plan even if all of them participate. They are all key employees, and 125 plans are designed to be for the benefit of employees. To the IRS, a company such as the one I described does not have true employees.

Yes. 125-4(f)(4) will allow the employee to drop coverage as long as other coverage begins at the spouse's open enrollment in a couple months.

The problem comes when you apply the mathematical formulas of 1.410(B)-4, which I know some people don’t feel should be used. Since the IRS includes an NHCE percentage down to zero, the safe harbor percentage read from the chart would still apply, in my view. If the IRS felt that a company with no NHCE’s would automatically pass the test, then a 0% concentration would not have been included on the chart. While NHCE’s aren’t really being discriminated against when there aren’t any NHCE’s in the first place, part of the definition of an HCE is a 5% owner of a company, and the IRS does not cafeteria plans comprised of only 5% owners. Perhaps I’m way off base, but that’s what the math says.

My opinion is that you do. The Premium Conversion portion would fail the Fair Cross Section eligibility test, and theDCAP would fail the 55% average benefits test.

It still depends on your income. Check the chart showing 2 kids and $6K daycare expenses at the link above. They take into account federal and FICA (but not state). It is not true that all people would be better off using a DCFSA and the credit to take up anything over $5K. Some people are better of forgetting the DCFSA completely. It is due the difference in the federal withholding tables that payroll uses, and the table or credit percentages used in the child care credit. They don't mirror each other. The differences make it such that each person needs to run the numbers based on their income. The results may surprise many people.

Based on comments made by John Sapienza, Senior Attorney, and Donna Crisalli, Special Counsel, of the IRS Office of the Associate Chief Counsel (Income Tax and Accounting), on May 21, 2002, it would appear this would be reimbursable. They said that "diagnostic procedures themselves qualify as medical care; there doesn't have to be an underlying medical condition. Items such as body scans, pregnancy kits, ovulation monitors, and on-site health fairs that check blood pressure, cholesterol and bone density, are all expenses that would qualify as diagnostic and thus as medical care." Based on that comment, one may conclude that the same principle would carry over to psychological exams. I would caution that these comments were informal, and specifics do not appear in the regs. This is what we have to go on, however.

My thinking is that this would fall under personal use items, meaning that only the amounts which exceed costs of normal items is reimbursable. The cost of non-allergenic pillows which exceed the cost of normal pillows would then be reimbursable since this is being done at the request of a physician. Wood blinds, however, are not special. In fact, $15 vinyl blinds would be just as good as wood blinds at controlling dust. I would not reimburse the cost of wood blinds (which are usually somewhat expensive). Each item should be reviewed, and a determination made whether or not it truly is a “special” item, and different from its corresponding “normal” counterpart.

The answer to your question is yes, they can claim the additional $1000 on their taxes. You might want to check out: http://www.125plan.com/FF-DependentCare.pdf It gives some examples and a chart showing that most people are better off taking the credit rather than the DCFSA. The cut-off dollar amount changed.

No, definitely nothing before the wedding. In this case, expenses incurred after the wedding date and after the date the employee signed the change in election form could be reimbursed. Notice that it doesn't necessarily go back to the wedding date. It goes back to the date the employee signed the change form.

I don't know any specifics, but I know that nothing has ultimately come of it, yet. I'd be surprised if he hear anything in the next 6 months.

You are correct. Reimbursable expenses under flex must be incurred by the employee, spouse or dependent as listed below (Section 152): 1. Live with taxpayer for the whole year, or be related to the taxpayer. 2. Be a U.S. citizen. 3. The taxpayer must provide more than half of the total support of the dependent. If the person is a foster child, the parents typically reveive state funds to cover the child’s expenses. If the parents still provide more than half of the support, then the foster child is a dependent. If the parents do not provide more than half of the support, the parents may still be able to deduct these medical expenses as charitable contributions on Schedule A (they should see Pub. 17). It is item #3 that these grandparents will have the problem with.

Check out the below threads. They address your questions, and, since I am the one answering, they show my point of view (although you may find differing ideas): http://benefitslink.com/boards/index.php?showtopic=14348 http://benefitslink.com/boards/index.php?showtopic=15553 http://benefitslink.com/boards/index.php?showtopic=15456

No. STD premiums paid (deferred compensation issues), and STD benefits paid (not a medical expense, even if the benefits are taxable to the employee) have no connection to a Health FSA.

I would give the employees checks. This way, you are not fiddling with potentially carefully thought out annual election amounts. You used the word "must", which the regs don't use. Forfeitures don't have to be treated as 125-2 spells out, but it does tell you some ways forfeitures cannot be treated.

As long as a plan document expressly states that COBRA coverage must cease when a qualified beneficiary becomes covered under another group health plan, then this can be done. It is entirely possible for a former employer to cease COBRA coverage on this basis. In the past, if there was a "significant gap" between the COBRA coverage and the new coverage, then the former employer must still extend COBRA coverage. While HIPAA has undone some of that language, I can't see any court ever saying that becoming covered under a new employer's FSA would constitute a replacement for the former employer's coverage.

Hopefully they're prorating the cash out credit and giving that amount to the employee in his/her last paycheck. That's the only fair way to handle it.

Exhaustion of COBRA is a HIPAA event which will allow the employee to add the spouse to the underlying health plan. Depending on the wording in the 125 plan, any increased payroll deductions for the spouse’s coverage should be taken pre-tax (most 125 plans would see this as a status change and allow an election change, but this cannot be assumed).