papogi

I don't have a cite for you, because I don't think it's addressed specifically. I have seen plan designs like this, however, and know they exist. My opinion is that you would have no compliance problems.

You are correct. It depends on what aspect you are looking at. They are plan assets for trust purposes, but they are not plan assets for most reporting purposes.

Based on my understanding of DOL regs, I would say no. Even though the flex credits are from the employer, if there is a cash option, the credits become employee salary.

I have seen this plan design before, and would advise (as you have) against it. Assume an employee terminates with HC and DC accounts. He decides to pre-tax the remainder of the year’s premiums. He is now effectively locked into the coverage up to the end of the year. Assume now that the employee’s child dies. He no longer has need for the DC account. He should have the ability to terminate that coverage, and a prorated portion of the premiums collected up-front would need to be refunded to him [1-125-2 Q7(B)(2) addresses this, but references HC accounts only, although there is no reason to believe the IRS would not apply this rule to a DC account being extended as your client wishes to]. This refunding of monies to a former employee poses logistical problems (e.g., last known address, etc.). Depending on circumstances surrounding the termination of the employee and subsequent hiring by another employer, he may not even be eligible for a DC account anymore (again, monies should then be returned). A former employer has no way to police this, although the compliance to 125 rules by that former employee will still fall under the 125 plan of the employer. They could be setting themselves up for potential compliance problems, even if they are not intended by their former employees. The complications surrounding DC accounts make it obvious why the IRS is silent on them when it comes to extensions of coverage. Since the uniform reimbursement rule does not apply, there is no real reason to offer anything with regards to DC. The former employee leaves, the DC account stops, they go to another employer and can start a new DC account, or just use the tax credit if the new employer has no DC offering. The former employer should not be concerning itself with the DC account at all. As for the HC account, the former employer has similar problems to the DC account. What if the former employee has a status change, and can drop or reduce the account? The former employer should refund monies to the employee under 1-125-2 Q7(B)(2), otherwise some courts could find that this up-front premium payment eliminates the risk for the employer, and that the 125 plan is out of compliance. If the employer understands their responsibility to potentially refund monies to former employees, and are comfortable with the logistics involved, then they might be OK with this plan design for HC. That would satisfy any potential COBRA obligations, and they won’t need to worry on that front. I would steer clear of the DC accounts, however, since it is nothing but a waste of time for everyone involved.

HIPAA only deals with health benefits, and addresses the minimum requirements under which you must allow someone on your underlying health plan. Technically, it has no bearing on 125 plans. For illustration, if your 125 plan does not recognize any status changes and does not allow any mid-year changes (while extreme, this is allowed), HIPAA would require that the newborn be added to the health plan, but HIPAA can't force the employer to allow pre-tax deductions related to that newborn. Additional deductions would need to be post-tax. The 125 plan is separate from the underlying health plan. If the link doesn't work, try going to www.125plan.com, click on Flex Tech Links, then scroll down and click on Change in Status Matrix.

Your interpretation is correct. Status changes do not only allow increases or decreases, but could also allow initial enrollment into benefits (assuming consistency rules are met, as you said). Check out this link for a good breakdown of allowable changes: http://www.125plan.com/COS_Matrix.PDF

125-4 deals with events which allow mid-year election changes. Except as otherwise noted specifically in the regs (e.g., cost and coverage changes do not apply to health FSA’s) this section applies to accident and health coverage, group term life insurance, dep care assistance, and adoption assistance. Keep in mind that status changes do not allow an employee to make any and all changes. Consistency rules apply. For instance, a change in residence is a status change. Under consistency rules, this status change results in few election changes, since it does not often result in a change in eligibility for a qualified benefit. Please post details of your situation so we can address it specifically. It might help illustrate the point.

Good clarification. I originally assumed this was to be an employer-funded health care FSA, but it appears that it could be an HRA.

Sorry, this link should work: http://www.irs.gov/pub/irs-wd/00-0246.pdf

Here is the Info Letter: http://benefitsattorney.com/cgibin/framed/...?ID=399&id==399 I agree that info letters canot change explicit regs, but the regs have nothing specific to help, in my view. In truth, this is certainly open to interpretation, but I would dissallow kindergarten expenses which are educational in nature.

Yes. Differences in contribution based on coverage level is allowed. I'm assuming there is no cash option to the employee for the employer amount. If there is no cash option, then each employee should be given the right to contribute up to the max out of their own paycheck. The employer amount should be kept separate from the employee amount in this regard.

Pre-school is reimbursable. Kindergarten is not reimbursable due to an information letter issued by the IRS which indicated their position that kindergarten is educational in nature. My feeling is that "kindercare," as long as it is submitted and reimbursed as something specifically different than kindergarten, should be reimbursable. While I would allow this, the regs allow room for interpretation. Anyway, that's my take on it.

125-4 allows this. As long as the 125 plan in question adopts this situation as a status change (plan docs may or may not, although most would), then this change to the Cafeteria Plan election would be allowed. Understand that you now have to contend with the provisions of the underlying health plan, as Section 125 does not override that. In your case, OE allows them on the "new" plan, but you want to drop coverage on the "old" plan. The underlying plan should also allow this if it has a provision stating that coverage ceases at the time the employee ceases to pay for coverage. Double check the wording of both the health plan and the 125 plan, but, chances are this is allowed.

No. A loss of such coverage could allow someone onto the plan, but a gaining of such coverage does not allow you to drop the current coverage.

This appears to be OK. As long as the employee salary reduction (assuming this is under a 125 plan) for the health plan coverage does not exceed the actual cost of that health plan coverage, it appears that the salary deductions are only indirectly related to the HRA maximums. Under that description, this plan design would be fine.

This is the best I've found. It's still requires some specific calculating, since the rules have made this determination much more complicated. http://www.125plan.com/FF-DependentCare.pdf

MSA distributions which are not for medical expenses under Section 213 are taxable income. There may also be a 15% penalty if the distributions are prior to Medicare eligibility, death or disability.

Yes. If the employee has agreed to the catch up method of paying FSA premiums after the leave, this pays for the leave period as if the leave never occurred. Claims incurred during that time period are reimbursable.

MSMA, the only common exception to the rule about providing more than 50% support is in divorce/separation cases. In most of these cases, both parents can claim medical expenses on the child, even though only one parent may get the exemption and only one would actually be providing more than 50% support. This isn't related to the original question, but your statement that you were going to add this to your Thompson manual made me think I should clarify this point.

You can't withhold an amount from the last paycheck to cover the employee's potential loss based on the claims history of the terminating employee [125-2 Q-7(B)(2)]. Benefits paid in excess of premiums collected are not taxable to the employee. The IRS sees an FSA as a form of insurance. That's why there needs to be risk-shifting, that's why premiums paid cannot be tied to claims experience, and that's how Section 105 allows the benefits (regardless if they exceed premiums) to be non-taxable to the employee. You are right that an FSA-savvy employee can abuse the system. They can with their regular health or dental coverage, as well. It's just the nature of something that has principles of insurance tied into it. In the end, employers always have forfeitures, and they always "make money" by offering an FSA.

If the plan no longer has any provisions to cover anyone beyond the employee, then the QMCSO has no jurisdiction to force the plan to offer family coverage. The employee may simply have to go out and purchase an individual policy for the child.

I'm going to backtrack here. There is a difference between dependent exemptions and dependent status for writing off health expenses. To Claim Dependent Exemption: 1. Live with taxpayer for the whole year, or be related to the taxpayer. 2. Be a U.S. citizen. 3. The dependent cannot file a joint return. 4. Gross income of the dependent must be under $2,900 as of the 2001 tax year. This does not have to be met if the dependent is under 19 at the end of the tax year or a full time student under 24 at the end of the tax year. 5. The taxpayer must provide more than half of the total support of the dependent. To Claim a Deduction for Medical Expenses on Schedule A (this is the common definition used for FSAs): 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). As long as the mother satisfies the rules under the "To Claim a Deduction for Medical Expenses on Schedule A" section, then expenses should be reimbursable under the FSA. Keep in mind, however, that the 125 plan in question may specify a dependent definition which is more restrictive than this, and that would be allowed. In that case, the only way for the employee to get tax benefits from his mom's expenses is if he tries to write them off on Schedule A, subject to its restrictions.

You are correct. This is a status change which would allow an employee to make a new election, as long as the employer allows this. Since 125 rules are the upper limits, an employer may always make them more restrictive. If an employer decides to make returning employees continue their previous payroll amounts (resulting in lowered annual elections), and does this uniformly, this is allowed.

Under 125-4, as long as the employer did this legitimately (and not to intentionally allow the employee to gain benefits), this would be a status change which would allow the employee onto the cafeteria plan as long as the particular 125 plan in question recognizes this change of status. Cafeteria plans are not required to honor any status changes, and may pick and choose certain status changes to recognize (as you know, most 125 plans recognize all qualified status changes under 125-4). If the underlying health plan allows this employee onto the coverage in a case such as this, and the 125 plan recognizes this change in status for pre-tax payroll purposes, then the employee must be allowed on.

No change is allowed, and your interpretation is correct. As for a cite, 125-4©(2)(iii). It specifically mentions that eligibility must be affected.