papogi

The idea is to raise the deductible on your medical plan (and/or make other cost-reducing changes to your plan) so that money is freed up for the employer. This money is then given to employees in the form of an HRA for them to use as they see fit, within regulatory constraints, giving them the control. They will get only the benefits that they, specifically, need. They will also have the ability to carry the money over to the next year if they are healthy, and create a medical expense "cushion" in the event that the money is suddenly needed some day. There are some recent threads which discuss HRA's and FSA's. Employer-funded FSA's are worth a look if you are interested in HRA's. You'll have to look at your particular situation, what your employees use their health dollars for, whether your employees want this level of control, and whether you can free up enough dollars to make the whole thing worthwhile.

(edited) The eligibility test (Fair Cross Section test) for the POP should look at all non-excludable employees. Part timers are not considered excludable for this test (in some cases, part timers with less than 1000 hours worked in a year can be excluded). Although employees who work less than 30 hours are not eligible in your plan, they are non-excludable, so discrimination testing (specifically, Fair Cross Section) should take them into consideration. The three year rule also only applies to eligible employees. An employee could work less than 30 hours per week for a lifetime and still never be eligible for your POP. Once that employee goes over 30 hours per week, however, you must let them on the POP without satisfying the 90 day wait. Or, you can specify in the plan doc that they become effective on the first day of the following 125 plan year.

aearle, based on my reading of 125-4, employees in your situation can elect the new option regardless of their current election. Those who have opted out of similar coverage in the past may elect the new coverage. Further, employees currently in similar coverage may drop their current election and opt for the new benefit. In fact, it doesn't even have to be significantly better. If you read 125-4(f)(3)©(iii) closely, it gives eligible employees in your situation free reign to elect the new option.

billfgrady says there are only 5 employees, and they are all key.

What info specifically? It's a common practice, so there is lots of guidance to help. Please give particulars.

The provider does not have to be an actual daycare center. If it is a center, the IRS has some rules for the center to abide by in order to be qualifed (care for more than 6 individuals, receive a fee for services, comply with state and local laws). A provider can be a paid neigbor, or any individual, as long as the individual is not the spouse of the taxpayer, an under age 19 child of the taxpayer, or any dependent of the taxpayer. If the provider is an individual, the rules relating to qualified daycare centers do not apply. As long as the parent does not knowingly put a child into a non-qualified center and claim expenses, you have no real way to know for sure if the daycare center is qualified. You can ask them to sign something indicating that they adibe by the three rules above, thereby being qualified. The only way it should ever come up is in an audit, and I can't see that mislead customers (ones who can prove they had no reasonable way to determine the center's qualified status) would be held accountable.

In this case, all individuals are considered key employees, and must be taxed on their option to receive cash. This undoes the 125 plan as if it never existed. This is the problem in setting up 125 plans for employers who are so small that they can't pass the key employee test.

The uniform reimbursement rule still applies. While they are no longer participating in the health care FSA (I gathered this was the benefit you were speaking of), they still have access to their full year's election as long as the dates of service are before the termination date. The individual may have flex COBRA rights, as well, depending on other factors.

Are they exactly 5% owners, or are they over the 5% threshold?

MSMA, the term ''governmental plan'' means (quoted): a plan established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing. The term ''governmental plan'' also includes any plan to which the Railroad Retirement Act of 1935, or 1937 (45 U.S.C. 231 et seq.) applies, and which is financed by contributions required under that Act and any plan of an international organization which is exempt from taxation under the provisions of the International Organizations Immunities Act (22 U.S.C. 288 et seq.). These advisory opinions issued by the DOL support the stance that schools, in general, are given "governmental plan" status. http://www.dol.gov/pwba/programs/ori/advis...ry95/95-15a.htm http://www.dol.gov/pwba/programs/ori/advis...ry92/92-10a.htm And it’s fine if a very small number of covered employees are from the private sector: http://www.dol.gov/pwba/programs/ori/advis...ry99/99-15a.htm

The uniform reimbursement requirement is outlined in 125-2 Q7(B). You can find it here: http://www.125plan.com/Section%20125-2.pdf

Scottrade is OK with Roth IRA's for minors, as well. Depending on the amount of earned income that the minor has, this will affect the investment choices (the minimum requirements still apply in order to set up the account in the first place).

Joe Vasko, check out page 10 of this IRS release. There are no filing requirements for the 125 plan for the IRS. There may be for the underlying health/welfare plans under ERISA. An FSA is a health/welfare plan under ERISA, so an FSA with more than 100 participants will need a 5500 filed to satisfy ERISA. The Cafeteria Plan itself has no filing responsibility. http://www.irs.gov/pub/irs-utl/sprsum02.pdf

MSMA, I will be on vacation for the next few days, so I can't look into this for you right now, and, like you, I don't have this immediately available. Hopefully someone else can chime in. If nobody does, I'll check into this upon my return...

While 125 requires elections to be made before the coverage period begins, the IRS has also indicated (remarks made at a March 31, 2000 ECFC Conference with Harry Beker present) that true employer administrative errors should be able to be corrected, even retroactively. In this case, I would allow the elections to be retroactive to the proper begin date, as long as it is obvious that this is an employer administrative error. Pre-tax payroll deductions will have to be taken retroactively, as well, which you indicated. If someone terminated, you may not have any salary or salary substitutes from which to take these past payroll deductions. I think that their elections still should be honored.

No 5500/Schedule F is required for the Section 125 plan. However, a 5500 will be required for ERISA purposes for any underlying welfare plans within the 125 plan unless this is a church or gov't plan.

I agree. These expenses would be qualified adoption expenses.

The change in rates does not have to be imposed by the carrier/insurer. It can be an increase or decrease imposed by the employee (such as moving btween full-time and part-time) or the employer (change in contribution amount) [paraphrased from 125-4]. So, yes, it can be a change in policy from HR/his employer. If the employer announces a rate change/employee contribution change effective 8/1, then the employee should have a time frame, usually 30 days, to make a corresponding change to his benefits. The decrease in cost to him makes the employer-provided insurance a possibility which was not there before. You could almost even drop this in under a new coverage option becoming available (if the employer did not allow him on the plan previously), yet another option for him to come on the plan. If he was allowed on the plan earlier, but the employer only asked him not to be on the plan, then the new coverage option will not allow him on the plan. However, the rate change will.

I was under the impression that this employee wanted to change his election because of open enrollment, and now wanted to elect the regular group health plan. If so, these elections would have to have been made before 8/1 (the coverage begin date). You mention that the employer is only now picking up the cost of insurance for out of state employees. This opens up a new avenue for the election change. If the cost of a group health plan significantly changes, this typically qualifies as a status change under 125-4, as well. This decrease in cost to the employee related to the group policy should allow him on that plan, as long as the request for the change was made within the plan's specified time frame (usually 30 days). Will the company pay his portion effective 8/1? Is that the effective date of the change in the benefits? This would be the change that the employee may have right to change his election in accordance with. If so, the change can only be done prospectively (not back to 8/1). Let me know if we're getting closer. The details are what makes it work or not.

While 90 days is the most common, we have clients with as little as 2 months, and as much as 4 months. The IRS has no maximum, but the longer you draw it out (3 months really should be enough), the longer the client has to wait before they can close out some financial numbers for the preceding year.

IRS Reg 1.125-4 outlines all the possible mid-year election changes under Section 125. A plan doc can honor all, some, or none of the allowable changes. These are IRS maximums (you can be more restrictive, but you can't be more generous). Specifically, 1.125-4(f)(4) states that "a cafeteria plan may permit an employee to make a prospective election change that is on account of and corresponds with a change made under another employer plan (including a plan of the same employer or of another employer) if (i) [not quoted] or (ii) the cafeteria plan permits participants to make an election for a period of coverage that is different from the period of coverage under the other cafeteria plan or qualified benefits plan." This is the part which is most applicable to your situation. The regs can be found here: http://www.125plan.com/FlexLinks.htm#Inter...e%20Regulations Specifically, 1.125-4: http://www.125plan.com/Section%20125-4.pdf

The underlying health plan operates 8/1 to 7/31, and the 125 plan operates on a calendar year basis, and I'm assuming open enrollment is in June/July, just to confirm. He should be able to elect the group medical plan effective 8/1, and be able to make pre-tax payments for that coverage under 1.125-4(f)(4), assuming his employer's 125 plan allows mid-year changes. Incidentally, 125 elections must be made before the period of coverage begins, so to be effective 8/1, he had to turn in his change request before that in order to be considered at all. The same 1.125-4 rule will allow him out of the premium reimbursement plan 8/1, as well (I assume this plan takes pre-tax payroll deductions from the employee). Again, this all assumes the 125 plan doc in question allows these particular mid-year election changes, and that the changes were requested before 8/1. Without both points satisfied, he's out of luck.

The IRS has not clarified the relationship between HRA's and HIPAA. It is possible that individual health policies (typically not subject to HIPAA) funded with HRA dollars will become subject to HIPAA. The jury's out on that one. For ConceptCorner's purposes (he/she is bent towards the no carryover provision), this makes employer-funded FSA's that much more attractive. We already know how FSA's and HIPAA interact. I like IRC401's HIPAA terminology.

The only way to get into a pre-tax group medical plan under 125 mid-year is with a status change, and the election change must be consistent with the status change. Has this employee gone through a status change?

If they want to do a MRP, I would recommend allowing the carryover provision, thereby really setting up an HRA. If they want employee forfeitures, they can go FSA. You also simplify some other things if you go FSA, but we've talked about that before. If you try to do an MRP without carryovers, I think you should just go FSA.