papogi

I'm not sure how to get it changed (the obvious choice is to write your congressman, but than can be throwing something into an abyss), but I can give you what is probably the reasoning for the rule. A HCFSA works differently than a DCSA. Since there is no Federal dollar limit for a HCFSA like there is for a DCSA ($5000), the IRS doesn't really care how much tax protection you received from your employer, and how much you were able to write off on Schedule A. There really is no limit. For this reason, a divorced couple can claim medical expenses for a qualified dependent under IRC Section 152 for the same dependent, even though only one parent gets the exemption. In a way, there's very little for the IRS to police. For DCSA's, the IRS must be concerned with the $5000 limit. Assume that each parent files single after a divorce. They no longer even list the SSN of the former spouse on their 1040. Without that cross-reference, it's extremely difficult for the IRS to be sure that each parent does not each have a $5000 account on the child. They can cross reference based on the qualified individual listed before completing From 2441, but that's not on the front of the 1040 where they really want to see it. It does seem unfair, I agree. And it's also frustrating that it seems that the only reason the IRS is not fair is because of system limitations. I mean, there doesn't seem to be any real reason the IRS would not want each parent to be able to have tax protection for otherwise eligible expenses.

A change in work schedule (hours) qualifies as a change in status. As long as he is eligible under all other rules (spouse, if any, works), etc. then this would be allowed. He should also look at whether the tax credit is better than the DCSA. The 15%/27.5% tax bracket is usually the cut-off. If they are over the 15% bracket, the DCSA is probably better.

There have been a couple threads in the past that might help. The problem is that the healthy people are usually the ones who want to opt out of the plan, so you can run into some adverse selection allowing people to opt out. Also, if it is an insured plan, the carrier may specify that all eligible employees must participate, or at least specify a minimum participation percentage. I think that legally you can require participation and people who insist on opting out can simply find a new job.

If you quit a job in order to become a full time student, then this would be a change in your employment status and would be a status change. However, since IRS consistency rules must apply to all status changes, this would mean that the only change that would be allowed is for you to come on his coverage, which you already are. You can opt for the university coverage, and have double coverage for a period of time, then drop his coverage at the next open enrollment.

Yes, the employer can specify whatever they want (deductible and copays only, for example). I agree with you on the advantages of an employer-funded FSA. No doubt HRA's have and will get all the press, but many employers may really want employer-funded FSA's if they knew they existed. Many companies only see FSA's as employee funded vehicles, which they don't have to be.

Several of the big mutual fund families have websites which include Roth IRA conversion calculators (I think T Rowe Price, for one, has this feature). They may help you decide whether it is better for you to convert your traditional IRA's into Roth IRA's or leave them as they are. At least it will get you in the ballpark.

mbozek, I agree. The only way to make the benefit tax-free (both the contributions to the plan as well as the benefits paid from the plan) is if the domestic partner is a dependent under Section 152.

You can have different plan years, one for the premium conversion portion, and another for the FSA's. There are other recent threads which outline some problems with this, however, and points are brought up by many people. One big issue relates to the plan year of the underlying health plans. Since cost change provisions of 125 do not relate to HCFSA's, when employees are making their new health elections and you are also potentially raising their contribution levels, they cannot make a corresponding increase in their HCFSA's since those elections are made at another time. For ease of deductible tracking and how it relates to HCFSA's, and for ease of Form 2441 preparation by your DCSA participants, all plan years (underlying plans, 125 plan, FSA's) really should be calendar. If they're not currently, I would look into changing them.

According to the IRS, only the custodial parent can have a DCSA. Who gets the exemption does not matter. The child must live with one parent for more days than the other since there is an odd number of days in a year. Even if they have to break it down into hours, only one parent can be the custodial parent. If it turns out to be her, then she can open a DCSA for the amount she expects to pay over the year (even though the expenses are only incurred over half the year). She will then get it all back by the end of the year. I see no way that she won't have to contribute to the account through the whole year. As long as she is the custodial parent for the child in the eyes of the IRS, no change in eligibility occurs when the child goes to live with the father, so the DCSA must continue through the entire year.

An FSA just for certain expenses is allowed. The expenses under Section 213 are qualified medical expenses which can be reimbursed under an FSA, HRA, 105 plan, etc. An employer has the discretion to limit the allowable expenses. The IRS still says these things are reimbursable, but if your employer's plan does not allow it, the employee can always write those expenses off on Schedule A of their taxes (subject to the 7.5% AGI floor). An FSA is still an employer plan with an SPD. Employers can specify a definition of dependent which might be more restrictive than that under Section 152. An employer can also specify what changes of status they will honor under the FSA. They can also specify which expenses they want to allow under the FSA.

Beth N, I agree with you that if an account is offered under 125 (meaning there is a cash option), then the uniform reimbursement rule applies whether you are talking about employee or employer money. If there is no cash option, then the monies are going through a 105 reimbursement plan, so 125 rules don't apply. The account is a 125 plan if there was a cash option, even if the FSA is funded by extra employer credits (they become the employee's, and he/she makes an election to put them into an FSA). The account is not a 125 plan if there is no cash option to the employee, and in this case operates under 105. It is then possible to have an account made up of 125 amounts and 105 amounts. As long as the plans do not discriminate in favor of HCE's, then the employer can give the 105 plan only to those people who participate in the FSA (in the form of an employer match). I hope I'm making sense. Everyone, jump in here if I'm not.

Beth N, the 25% rule is the Concentration Test for Key Employees. No more than 25 % of all dollars funneled through a 125 plan can go toward benefitting key employees. This includes pre-tax health premiums, HCFSA amounts, DCSA amounts, etc. Since there is no cash option for true employer amounts as in a matching set up, my understanding is that employee money is treated as if it went through the 125 plan, and the employer money as if it went through a basic, bare bones 105 plan. Whenever there is a choice between cash and a qualified benefit, 125 allows the employee to get around the constructive receipt issue. If there is no cash option (and this is certainly allowed, based on the plan design), then the plan is not qualified under 125. This essentially makes it a simple 105 plan.

Concerning your first situation, my take is that the employee's payroll deductions for family coverage would then have to be taken pre-tax. Since the employee has dependents that would make pre-tax deductions allowed, I don't see that the employer could legally force the employee to make post-tax deductions simply because it was the domestic partner and dependents that came on before the employee's own dependents. The pre-tax deductions should begin as of the addition of the employee's own dependents. As for the second situation, if a domestic partner is a dependent under Section 152 and can be added to the employer's plan without incurring any post-tax deductions (e.g., the employee already had family coverage, and the employer is not incurring any greater premium with the addition of the domestic partner), the employee would not have to pay tax on the benefits paid from the plan.

Sorry, I misunderstood. The answer to your question is No. Amounts deducted for DCSA's are sometimes taxable in situation such as this because the taxpayer must reconcile all dependent care amounts on Form 2441 (they have to have DC expenses for the amount removed for DC purposes to remain untaxed). There is no such form for health care purposes. Whatever is removed from an employee's paycheck for HCFSA purposes remains untaxed whether any reimbursement is ever asked for. Let me know if this doesn't address your question.

HCFSA's do not have this same rule. Both parents can have HCFSA's and have expenses reimbursed on the child independently of one another. In other words, each parent can have their share of medical expenses reimbursed through their own HCFSA, regardless who gets the exemption or who the child lives with primarily.

Since the child lives with the mom for more days than the dad, she can open the DCSA and be reimbursed for expenses incurred by her. It does not matter who gets the exemption. The father will not be able to open a DCSA or take any child care credit on his taxes as long as the child primarily lives with the mom.

Regardless who gets the exemption for tax purposes, a qualified individual for the child/dependent care credit or a dependent care account must live with the taxpayer for over half the year. Even though both parents get the exemption, only the parent with whom the child lives for more days than the other gets the ability to get the child care credit or have a dependent care account. Incidentally, a health care account does not work that way. Under the situation you described, both parents could have a health care account and be reimbursed for expenses incurred by the child.

There's a little bit about plan docs/SPDs in the bottom of this article: http://www.kilstock.com/site/print/detail?...Article_Id=1101 Try here as well: http://www.hrahelper.com/

The IRS allows people out of DCFSA's if they elect the account by mistake (e.g., they don't even have any children). This provision doesn't help here, since this account was correctly elected. The IRS would allow an election change if there were a change of providers (that might have happened), or a change in cost imposed by the provider (that didn't happen). There is no change in eligibility, meaning there still is a child who needs daycare, and both parents still work (I only assume this employee is married). I wonder who is providing care through the interim. I would think there should have been a change in the provider, and this would be a status change to (as the IRS puts it) "reflect the cost of the new child care provider." The IRS doesn't seem to have a problem with the new cost being zero. There would then be another status change when the regular daycare provider returns. Now that status changes are involved, the rules under the 125 plan in question concerning how many days an employee has to notify HR will come into play.

Situation 1: In light of Harry Beker's recent comments on improper FSA reimbursements, I think you have to ask for the money back first, then do the payroll correction. Yes, it's multiple steps, but it's the right way to do it. Situation 2: I'm in complete agreement with you. 'No' to both questions.

MSMA, try these (especially the digested version from AON): http://www.fei.org/gr/download/DOL_Revises..._Procedures.pdf http://www.dol.gov/pwba/pubs/claimsfs.htm

Back in 1998, custodians thought that conversion Roths needed to be separated from contribution Roths. Regs were clarified since then to say that they can be combined, although some custodians may still want them segregated. Once your conversion Roth has been there for 5 years, then there are no complications. The complications come in determining taxable portions of distributions taken from Roths before the 5 years has elapsed. And those complications are even worse if there are multiple conversions at different dates in the same conversion Roth. For your own peace of mind, you could segregate the conversion Roths for at least 5 years, get past any complications, then do a custodian to custodian rollover into another of your Roths if you wish. If you are very sure that you will not take any early distributions, combine them all and take the 5 year risk. Once it passes, there's no problem.

Perhaps these clients have heard of the new HRA's, and are twisting the definition of them. Your original post mentions that the "new product" is funded by the employer, which HRA's are. HRA's are designed to reimburse medical expenses, including health insurance premiums. They have no relation to retirement plans, however. Just a guess, but I'm wondering if this is what they are referring to.

Without FMLA, an employer can pretty well do as they please as long as its provisions are documented and applied uniformly. Many small employers follow FMLA rules anyway (or most of the rules), but the provisions should still be documented in the SPD.

mbozek is correct. Whether a 401(k) is funded by "elective deferrals" or by employer-provided credits doesn't matter. Since the employee had a cash option (he/she could have opted not to use the credits and instead taken the cash, thereby increasing salary), the channelling of the employer credits into a 401(k) is effectively the same as a true "elective deferral."