papogi

You don't have to contribute in 2002. For 2002 line 19 (Form 5329) will be $3000 in that case, and line 24 will be zero. An amended return generally must be filed within 3 years of the date you originally filed for that year. Definitely do it this year. Each year you wait adds another 6% penalty to pay. Incidentally, I'm not at all surprised that the IRS did not see anything wrong with your return off the bat. I would be worried, however, since your IRA custodian submitted this information directly to the IRS, and they very well may see it in the future. 6% of an overage probably is not a great amount of money to pay in order to be certain that everything is kosher.

If a 125 plan fails non-discrimination tests, only HCE's or key employees are affected. If a plan fails to adhere to 125 rules, such as in your example, all participants can be affected. The IRS almost never audits 125 plans (I say almost, although I've never seen an 125 audit). Theoretically, if they did, and found yours to be out of compliant, then all benefits that were otherwise available in cash would be taxable. Basically, all pre-tax amounts would suddenly have to be taxed. Employees would pay this tax, and employers would have to pay FICA, FUTA, and any applicable state and local taxes. A penalty could also be levied against the employer for failing to withhold income tax and FICA. In the real world, the IRS has inferred that, even if an audit did take place, they would be likely to use the experience only as an educational exercise for the employer. That still scares me, since there's no guarantee. The best thing to do is notify the employee of the incorrect reimbursement, and ask that a check representing the wrong reimbursment be submitted. In Grande vs. Allison Engine Company, a court found that flex expenses which were otherwise not eligible in the year in question were payable because of the employer's reference to Publication 502, which states a couple things contrary to FSA rules. If employees can prove that they were mislead, preferably in writing, concerning eligible reimbursements, I could see that a court just might allow the reimbursements. I am doubtful of this, however. I think the employer cannot return contributions, and the employees are stuck.

You don't need to withdraw the money. Following the steps in my previous post will get you free and clear by the 2003 tax year.

Good points, especially in light of recent VOLATILITY! I think there is very little risk that mutual fund money will vanish into "thin air." If the market went down to zero, money would probably be worthless, even those under people's mattresses. We would be in a society of bartering at best, and constant theft at worst. It would be a situation of survival. Possible? I suppose. But, again, using that as a reason not to invest isn't good, since raw cash might not be any better in a world such as you eluded to. You don't really need a financial advisor. A little research in magazines, message boards such as this, and knowledgeable friends (with a grain of salt) will get you through most basics, especially beginning in investing. Vanguard has lots of resources on paper and on-line. Good choice. Any individual with earned income (subject to limits) will qualify for a Roth IRA, yourself included. Your owning a business has no bearing.

You have to pay the 6% penalty at least once. If your excess contribution was in 2001, then your taxes filed in April should have reflected this on Form 5329, Part IV. Since you did not apparently deal with this, first you should file an amended return for 2001. This will result in your owing 6% of the excess contribution. It is an additional tax to pay (line 55 on 1040), and does not affect your income. Once this is rectified, you need to be sure to put an amount into your Roth IRA in 2002 that is lowered by the excess contribution from 2001. You will need to file Form 5329 in April 2003 for the 2002 tax year. In Part IV, you will then show the IRS that the excess from 2001 is cancelled out by the lowered amount from 2002. There will be no penalty for the 2002 tax year, but the form still needs to be completed. For the 2003 tax year, there will be no reporting requirement for this situation.

Try here: http://www.benefitsattorney.com/links/Inte...evenue_Service/

There is nothing solid enough from the IRS which would allow this to be reimbursed without doubt. I woudn't do it without further documentation. I agree that the doctor should prescribe something specific. That would at least help.

While it might seem that HIPAA actively-at-work and non-confinement rules could apply here, I don't see anywhere in the regs that it specifically addresses this. You don't state if the LOA is due to a health reason, and this might affect HIPAA's influence here. You could argue that the LOA employees already have coverage, and HIPAA does not say that they must have the ability to change their elections. But what if someone does not have the coverage now, and they want to elect it during open enrollment? Again, it does not appear that HIPAA addresses this specifically, but it seems to me that allowing the employee to begin coverage at open enrollment is consistent with the intent of the legislation, if the cause for the LOA is a health reason. If the LOA is due to a health condition, I don't see how you could treat the employee differently from an active employee under the intent of HIPAA, even though it is not addressed specifically. I think you could run into problems. If the LOA is not health related, HIPAA would not help, and you might get away with this if it is documented, but there might be employee relations issues.

You will have to check into your particular arrangement. Sometimes, it's the employer who handles this, sometimes an accountant, sometimes the TPA, etc. It really does vary. Remember that in order to determine who is a key employee under the EGTRRA guidelines, the tester will need access to ownership data (1% and 5% owners) and earnings data (those above the $130K and $150K threshholds).

No more than 25% of the total non-taxable benefits can be provided to "key employees" as defined in IRC (Concentration Test for Key Employees, or 25% test). This applies to all benefits available through the Cafeteria Plan, including Health Care and Dependent Care Spending Accounts. Basically, of all the dollars being run pre-tax through the 125 plan, no more than 25% of them can be associated with key employees. Not all older employees are "key employees," so that might not be a problem, but I do understand your point that older employees tend to be the key employees. If these key employees have lots of family coverage (they often don't since children are usually grown up and off the plan), and other high cost pre-tax benefits, and your rank-and-file employees tend to be young, single workers paying only for single coverage, then, yes, you may run into discrimination issues.

Correct. If the FSA has fewer than 100 participants and is "unfunded," you have no 5500 filing responsibilities (to the IRS for the Cafeteria Plan, or to ERISA for the FSA).

Check this URL address to an IRS publication which was brought up in the last hour on another similar thread. Look at page 10: http://www.irs.gov/pub/irs-utl/sprsum02.pdf While I did not have access to this web page earlier, and am borrowing the reference, it should confirm the contention that Form 5500 is not required for your POP. Again, your underlying welfare plan might have filing requirements to satisfy for ERISA, but your POP owes nothing. If you have over 100 participants, you have to file under ERISA (but not IRS) unless you are a church or gov't plan. If you have fewer than 100 participants and are "unfunded," you have no 5500 filing to do at all (IRS or ERISA).

Vebaguru, the IRS does not have the authority to eliminate the need to file forms under ERISA to the DOL. Welfare plans (including HCFSA's) may, indeed, need to file a 5500 to satisfy ERISA. However, this confirms that the IRS does not require the 5500 form for informational purposes. If your welfare plan gets by the 5500 requirement for ERISA under one of its few exceptions, then there is no 5500 requirement at all. Generally, a plan is unfunded if monies are paid directly from company general assets (check is written from account set up in sponsoring employer's name), and not paid from a separate account. Keep in mind that HCFSA pre-tax payroll deductions for FSA's are protected from "funded" status with ERISA Tech Rel 92-01.

EBIA verified this independently with Harry Beker, as well. However, I do understand your apprehension.

Check out these links. You have nothing to file under the IRS. You may need to file under ERISA for the HCFSA (and the underlying health plan in the POP), depending on the number of participants and whether or not the plan is considered "funded." http://www.benefitslink.com/articles/sched...edF020412.shtml Especially this: http://www.ebia.com/weekly/questions/2002/.../Caf020411.html HCFSA specific: http://www.ebia.com/weekly/questions/2002/.../Caf020613.html

Form 5500 is not required for cafeteria plans at all. The underlying welfare plan may need filing under ERISA, but the cafeteria plan need not complete Schedule F or 5500. See these: http://benefitslink.com/articles/schedF020412.shtml http://www.kilstock.com/site/print/detail?...Article_Id=1056

HIPAA should not apply to life insurance at all. It does not apply to dependent care assistance plans, either, but the exception for that is also not listed. I think they didn't list life insurnce as an exception since it normally is not thought of as health or welfare coverage. The exception was implied.

Premium Only Plans simply mean that whatever the employee elects in the 125 plan, the premiums can be taken pre-tax. You can still run into over utilization by key employees. Pre-taxed money effectively becomes the employer's money, and this is non-taxable benefits from the employer. In this sense, all the usual non-discrimination tests need to be applied, even to POP's.

I can cite PTR 1.125-2 Q-7(B)(2) to show that the entire annual amount must be made available. I see nothing in the regs which addresses mid-year plan termination. An employer has every right to cease offering a benefit, so I think that's implied and understood in the regs. Once the plan terminates, the industry standard is to have a 90 day run-off period which gives employees time to compile receipts for reimbursement. There is no IRS rule on this, but 90 days is most common. Concerning the warning of plan termination, there might be a certain number of days required under ERISA (30 days??), since this is a welfare plan, but I don't know that for sure. Hopefully someone else can jump in here on that point...

The most recent update from the IRS for mid-year election changes went into effect 1/1/02. These were the significant cost/coverage changes provisions in 1.125-4. Since 125 plans can legally be written to not allow any mid-year election changes at all, these provisions do not make existing 125 docs obsolete. It just means they should be amended if it is the plan sponsor's intent to allow the new changes. The most recent rules on FMLA went into effect on 1/1/02, as well. The changes modified certain provisions, but did not make any previous rules "illegal." So, again, it's still OK to operate under the old plan doc, it just might not be the intention of the plan sponsor. Because there are no deadlines for amendment, and IRS audits of 125 plans are so rare, plan sponsors put little effort in making sure that their 125 plan docs are written to encompass their intentions.

My understanding has always been that restatement applies to pension plans, not fringe benefit plans (125). Periodic amendments may need to be done to include IRS updates which the client wants to add to the plan. For instance, the past couple years have seen many new rules from the IRS concerning flex COBRA, FMLA and mid-year election changes.

You can't cut off the available funds for reimbursement. The uniform reimbursement requirement means that the entire annual election must be available at any point in the plan year while the employee is participating. This sets up the employer for losses. Why do they have to stop the FSA immediately? Why don't they just finish off the plan year? It's of almost no cost to the employer. If they insist on termination, then I guess that's what you'll have to do. You do not have to honor any claims with dates of service past the date of the plan's termination. Flex COBRA should be offered to individuals who have not been reimbursed an amount equal to or greater than what they have actually contributed. Then again, if the entire plan is terminating, there is nothing subject to continuation rights. This will cause some pretty bad employee relations with the participants who were expecting more bills in the latter part of the plan year. I strongly recommend finishing out the year.

Since you want the possibility of forfeitures, realize that the uniform reimbursement requirement will apply to the FSA. In other words, it's possible for employees to clear out the FSA and quit. Even so, you should still end up with an experience gain. With HRA's, you don't have to follow the uniform reimbursement requirement. Further, going the route of the true employer-funded FSA, you bypass almost all COBRA requirements. You have to contend with COBRA for HRA's. There's nothing wrong with sticking to an FSA, rather than going to an HRA.

You'll run into lots of opinions here, and specific details of your particular situation might dictate. In general, yes, the 529 plans are better. You get tax-free growth, the money is in your name, and you have a high contribution limit. Depending on Congress' actions in 2010, it's possible that earnings from 529 plans will become taxable. If your child will hit college after 2010, this is a risk to be aware of. The Coverdell ESA grows tax-free, has a $2000 annual contribution limit for 2002 (more respectable than the previous $500), and will more likely hold its tax-free withdrawal status. One drawback is that Coverdells are in your child's name. You lose control and usually reduce some chances for financial aid. Personally, I think most individuals should max out in the Coverdell first, then put any extra amounts available into a 529.

You can remove amounts that represent regular, yearly contributions without any tax or penalty. If you take out more than your contributions, and go into any earnings, then this would be a non-qualified distribution. You would pay income tax on any earnings. You would not pay the 10% penalty, however, since higher education is an exception that lets you bypass the penalty. If your goal is to have a tax-free and penalty-free withdrawal, the only way is to remove only those amounts that represent your annual contributions. This means you have no possibility of growth. Sure, you have earnings in the meantime, but you can't get at them without paying the tax. In most cases, there are better ways to save for college.