papogi

Under Section 125, employers can allocate pre-tax credits (dollars) to be used as the employee wishes, including paying for health premiums, purchasing ancillary coverage such as STD and life insurance, and putting money into a 401(k).

Your thinking is right on. The cost and coverage provisions in 125-4 do not apply to FSA's.

Anyone have a good on-line source for the Mayberry vs. Madison case? It refers to 125 elections after the start of the 125 plan year. Can't seem to find it off hand.

Carolyn: If the employee stops the account, then resumes the account when they return (because they elect to or the employer requires them to), they can either continue the same payroll deductions (thereby resulting in a lower total election) or they can increase deductions to make up the difference (thereby keeping the same election). They have the option. DK Ellerson: Once the employee has made you aware that he/she is not returning, they are terminated. You can take the contributions for the covered period from any unpaid wages, vacation pay or profit sharing benefits. If there are none of those options, you don't have much recourse. You can certainly ask for the money back, but good luck there. Personally, I think employers should offer only the pay as you go option, or the pay as you go and the pre-pay option. The catch up option agreed upon in advance is the one where you can run into these issues.

Understood. Makes sense. Thanks.

If they will be using the catch-up option, then FSA claims can't be held up. They will need to be paid during the FMLA period. If they stopped the account, and will be restarting the account upon their return and not using the catch-up option, then there is a window of non-reimbursement.

JP13 posted previously, but for some reason, the thread is closed. I wanted to repost it for him/her to start the responses. The original post: 401K rollover to Roth I have a 401k from a company that I worked for a few years ago and since then I have stopped contribution to it. I want to roll it over into a Roth IRA if it is possible. How do I go about doing this and is this a good solution.

What I was pointing to is the last line of the notice, which deals directly with employee life insurance. "As is true of employer-provided group term life insurance on the life of the employee in excess of the dollar limit of section 79 that is offered under a cafeteria plan, the total amount includable in the gross income of an employee who receives such insurance under a cafeteria plan is the greater of the employee's contributions toward the purchase of the insurance or the cost (determined under section 1.79-3(d)(2) of the regulations) of the insurance." It's the part where it says, "As is true of employer-provided group term life insurance on the life of the employee..." that is getting me. My thinking after reading your post is that since it is employer-provided, there is no cost to the employee, so they must be taxed using Table I.

I understand your point, Kirk. There are certainly several non-discrimination areas than need to be satisfied, and my answer was not meant as a statement that, since what they are doing seems OK in my view, that all other areas of non-discrimination testing go out the window. The aim of the post was whether, as a classification purpose, separating actives from retirees was OK, and whether that classification allowed them to subsidize premiums at a different rate. That factor alone does not seem to cause any problems. Of course, they also need to separate their population by non-HCE's and HCE's as well as non-key and key for certain testing.

Does IRS Notice 89-110 not apply since this is entirely employer paid? Then they have to use Table I? I know that employee amounts over $50,000 are taxed at the employee's premium or Table I, whichever is greater.

125-2 Q-7(B)(2) states that "reimbursement will be deemed available at all times if it is paid at least monthly..." That's all the guidance that the IRS gives on this. 401(k) rules do not apply.

I don't see that there would necessarily be a problem with 105. I assume you are specifically referring to 105(h)(4). I have always been under the impression that this means, for instance, that if management is provided with certain maternity benefits within the health plan, then similar benefits need to be provided to other employees. Am I missing something?

Employees should be taxed on the greater of the premium or IRS Table I rates for the amount that exceed $50,000.

Since this is a legitimate business classification of employees, I don't see that this would pose a problem.

125 elections must be made prospectively. In other words, elections have to be made before the period of coverage begins. There's no way to set up an FSA today and have it retroactive to 1/1/02. That goes against 1.125-1 Q-15. You need to set up a shortened plan year FSA. The 12-month coverage rule does not apply to short plan years.

That's exactly right. It generally follows the line between the 15% and 27.5% tax brackets. If the employee is in the 15% bracket, usually the credit makes sense. If they are over the 15% bracket, often the DCSA makes sense. Of course, this 15/27.5 line varies depending on filing status. When you work each person's numbers, you find you need to try both ways to be sure. The number of exemptions can affect things, and whether the employee takes the standard deduction or itemizes can affect things. It always comes out close, but one wins. If it even saves $5, it's worth running the numbers.

If you give your employees credits to purchase benefits, and they end up with extra credits, and they have the option of using those credits to fund an FSA (meaning they had the option of taking cash instead) then the uniform reimbursement requirement applies, even though the HCFSA is technically funded by the employer. Since there is a cash option, the plan is operating under Section 125, so all provisions apply. If you have an employer-funded account where, for example, the employer gives each employee $200 dollars to be used only for dental expenses, this is not a true 125 account. These accounts can be funded with $200 up front, or by smaller chunks at each pay cycle. While most employers continue to apply the uniform reimbursement rule even in cases such as these, I suppose you wouldn't have to. Employees could get only that which has accrued in the account. Again, if there is a cash option, then 125 rules apply.

MGB is also correct. I didn't even mention that DCFSA's are not subject to the uniform reimbursement requirement. I completely glossed over that.

Whether a HCFSA is funded by the employee or the employer, the uniform reimbursement requirement always applies. This is the rule that you stated concerning the entire balance being available at any point in the plan year (full amount available at the beginning of the plan year). What you are now hearing about is the IRS guidance issued last month for HRA's (Health Reimbursement Arrangements). HRA's are set up as Section 105 medical reimbursement accounts, and they have different provisions than FSA's. One big difference is that balances carry over to the next year with an HRA, not true with FSA's. Since many people are not aware that FSA's can be funded by the employer, they now immediately assume that an FSA funded by an employer must be an HRA. Not true. Staying with the employer-funded FSA can have some advantages (i.e., FSA's generally not subject to COBRA, simplifying COBRA procedures; balances revert to the employer, rather than carried over to the next year for the employee). Check this out for a decent comparison chart: http://www.insure.com/health/hraworksheet.html

Harry is not saying you can have both. He is saying you have to repay the money, nothing else. Employers have always toyed with the idea of simply reporting the "errors" as income to the employee. The IRS is clarifying that employers shouldn't do that. Instead (not in addition to), they should have the employee send the money back to the employer. While I agree that IRS guidance is almost non-existent with regard to some areas of non-discrimination, a good faith effort to satisfy the rules decided upon by the industry (such as the repealed Section 89(e)), is the safest way to go. Some areas, such as the Concentration Test for Key Employees, are relatively clear cut. I wouldn't dismiss the entire area of 125 non-discrimination simply because the IRS's own lack of auditing and testing has given us little court guidance (standards). There was an intent when the legislation was written, and it should be deciphered and followed as best as possible.

Both Scottrade and Datek continue to offer no fee IRA's (as of today!).

We had a campaign where anyone who started participation or increased their existing percentage were entered into a drawing for a gift certificate to a local mall. Frankly, I don't know how effective it was overall, but I iknow I increased my percentage by one percent in order to be in the hat. I did not win...

The IRS does not see a same sex domestic partner as a spouse. If the domestic partner can be considered a dependent under federal guidelines (defined as person who resides in the employee’s household and who receives at least 50% of support from the employee), then they can be part of the employee's FSA under federal rules. You are correct there. Basically, Section 125 rules are upper limits. You can restrict, but you can't be more generous (unlike COBRA, which are minimum standards). If the domestic partner does not qualify as a dependent under Section 152, the plan doc cannot bypass this.

If you’re talking about self-insured versus full-insured health coverage and how that relates to offering HRA’s (which are always self-funded), that opens up something completely different. From a purely statistical and theoretical standpoint, there should be no difference at all. Whether a company sets aside a fixed premium per person per month for a year to go towards a fully-insured plan, or they set aside an amount equal to the expected claims experience per month per year to go towards a self-funded plan, the bottom line at the end of the year should be similar. If the fully-insured plan offers a low option so that money is freed up for an HRA, the self-insured plan can also offer a low option which allows the employer to predict lower claims experience and result in freed up money for an HRA when someone elects that option. Really, this opens up the constant debate of fully-insured versus self-insured. I don’t see how HRA’s really affect that debate, since they are always self-insured, regardless of the accompanying health plan.

The HRA's that GBurns refers to in his post are the new Health Spending Accounts you are talking about. His post is on the mark.