papogi

It should go by scheduled hours. If you go by hours worked, you will not know until after the time period goes by whether or not the employee is eligible to participate in the 125 plan. The problem of individuals sheduled to work 60 hours but only putting in 20 is another issue. These people should be using up all available time off, then you can consider some sort of probation, or the like. Employees sheduled to work 20 but putting in 80 need to be reviewed, as well. It is unfair to these people if this continues on a regular basis. I don't know enough about general employment law, but this seems like it would be illegal since it appears to avoid granting benefits. Incidently, the Section 125 rules that says that employees must be allowed in the flex plan within 3 years and 364 days of employment does not look at the hours worked. For instance, assume regular full-time employees have to complete 6 months of full-time work before they can come on the 125 plan. Also assume you have an employee who has worked part-time for 5 years and is only now going full-time. Since they have already worked more than 3 years, they can come on the 125 plan immediately upon going full-time.

The employee's termination is considered a family status change which would allow an employee to make a mid-year change, e.g., terminate the account. Since 125 plans are not required to allow mid-year changes (obviously, most do), theoretically a plan could require that terminated individuals continue their accounts up to the end of the plan year. Corbel's argument for this that it limits the employer's risk of loss is also purely theoretical. Without payroll deductions to guarantee collection of premium, employees could simply refuse to send their checks in, thereby terminating the account. The employer won't go to a collections agency. I would also argue that this limits the employer's risk so much that the risk-shifting requirement would be compromised. The employee's risk is that he/she won't clear out the account by the end of the year. The employer's risk is almost completely removed. I don't see a plan like this being qualified under 125. I can't see how COBRA would override this, either. The employee can turn down COBRA, but if the plan requires continued participation, they're back in anyway. As far as continuing the account in any manner (COBRA or this unusual avenue we are discussing) there are only two times when it may pay to continue the account. The first one we already mentioned (continue for a couple months, clear out account, then cease contributions). The other is when you make your election based on a large expense to expect towards the end of the plan year. You may have contributed $500 year to date, for instance, and have no claims. You may be better off continuing your account, even though the money is now post-tax and, if through COBRA, subject to the 2% admin fee. You could continue the account up to the end of the year and submit your large bill. Even though you lost money in the account (2% admin fee if through COBRA), you lost alot less than you would have had you not elected to continue ($500).

For individuals who originally opted-out due to other coverage (the spouse), HIPAA only requires that you add the spouse outside open enrollment if they have exhausted their COBRA rights, or, if the coverage is not COBRA, if the spouse becomes ineligible for coverage or the spouse's employer ceases contributing to the plan. A spouse dropping coverage voluntarily at open enrollment is not a HIPAA event. HIPAA gives the bare minimum. Your plan may be written such that a drop at open enrollment is a loss of coverage, but HIPAA won't help.

The TPA. In defense of them, they are generalizing 125 rules and enforcing them how they are applied normally. None of my clients have the provision which allows terminated employees to spend down their accounts. The regulations do not specifically disallow the practice. It's not illegal, and since your plan doc has it in there, and your TPA is hired to administer your plan, they'll have to allow it.

One other complication, if your underlying plan allows a spouse to come onto your plan because the spouse dropped coverage at his/her employer, then you will have to allow the spouse onto the plan regardless of your 125 rules. If your 125 do not allow the change, then any additional payroll deductions for the spouse will need to be taken post-tax. The spouse may be able to come on the health plan, but not the 125 plan.

1.125-4 (a) states that "a cafeteria plan may (the IRS uses the word MAY all over the place to reiterate that it is at the plan's discretion) permit an employee to revoke an election during a period of coverage..." It continues in the same paragraph, "Section 125 does not require a cafeteria plan to permit any of these changes." Further, this is something from a Thompson's publication (I know it's not the IRS, but it shows I am not alone in my opinion), "Plan sponsors should note that while the regulations permit mid-year election changes, the rules do not require plans to allow mid-year election changes. Plan sponsors should consider carefully the implications of allowing various types of mid-year election changes and the circumstances under which those changes will be permitted."

Mid-year status changes are not required under Section 125. While most employers adopt them to their fullest, an employer can limit them. Employers cannot be more generous than the rules in 125, but they can be tighter.

Based on how the flex plan doc is written for the employer, the TPA is probably correct. Some flex plans allow employees to spend down the amount already contributed into a DCFSA even after the term date. This is strongly not recommended. When the employee terminates, they cease participation in the plan. Since DCFSA's are not subject to any COBRA/continuation rights, the account should terminate. The employee can only access the funds deducted from his/her paycheck up to the termination date, and only for dates of service before the termination date. This is the risk the employee takes by electing the account.

I can't think of any legal reason the employer would be forced to pay a share, either. By doing it this way, yes, the employee can use pre-tax money for the group coverage. Since the entire cost of health coverage is going through the employee's payroll, the employer saves a bunch in taxes, FICA, FUTA, etc. mroberts' warning about participation requirements is a good one. Even with the tax savings, it's likely many employees will opt-out and go to spouse coverage, or some other coverage that might be cheaper even with after-tax dollars. All the opt-outs will negate some of the employer's payroll savings. The greater the rate of opt-outs, the greater the reason for the employer to start kicking in some of its own money.

AmyR, since a requirement for FSA’s is that the employee has a 12-month plan year, it has been argued in the past that employees continuing under an FSA in the manner you describe don’t really need to be on COBRA until the beginning of the following plan year. Some employers had a policy such as you describe, but the employee has to elect that option, and it is not automatic. At the point of termination, an employee could revoke the election, or opt to continue the account. The advantage to the employee is that the payments can be made without having to pay the 2% admin fee. They lose the pre-tax benefit, but they save the 2% they would otherwise have to pay. An employee who knows that there will be some hefty expenses in the next couple months might want to continue the account to wrap up these expenses, then drop the account. The new regs concerning COBRA/HIPAA/flex have changed things for most employers. The vast majority of HCFSA’s are not subject to HIPAA. If you offer a comprehensive health plan to your employees, your FSA is not subject to HIPAA. This means that you needn’t offer flex COBRA past the year in which the termination occurs (since the 2% admin fee will mean that the total potential reimbursement will be less than what the employee would put into the account for the year). Concerning the year in which the termination occurs, you only need to offer flex COBRA to a participant if they have not yet been reimbursed an amount equal to or greater than the amount actually contributed to the account by the employee. For instance, if the employee has had no reimbursements, and the account is not funded entirely by the employer, then you would have to offer flex COBRA only up to the end of the current plan year. If an employer allows a terminated employee for whom flex COBRA should be offered to elect to continue the account in the manner you describe, the employer’s responsibility to COBRA should be satisfied. If they make the same offering to an employee who does not have flex COBRA rights (they’ve already taken out an amount equal to or greater than they’ve put into the account), they are being more generous than they need to be, and may set themselves up for losses should the employee clear out their account and stop paying. I think Corbel’s option should be dropped, in favor of the new tighter COBRA rules.

I hear ya'. I should also mention that my recommendations above are based on a flex plan doc that adopts all allowable mid-year changes under 125. A flex plan does not have to allow any mid-year changes, so you can restrict the rules for your employees (as you were proposing to do). You just can't make the rules any more lenient, otherwise you'll violate 125.

Easier stuff first. The FSA's cannot change. I've seen 10-20% used to determine "significant." The IRS provides little guidance. I think 20% should be more than safe. Concerning the election changes, the IRS says any significant curtailment of coverage or increase in cost of coverage will allow employees to elect similar coverage or drop coverage if no similar option is available. If you had three plans and were eliminating two of them, employees would have to go into the third plan with no coverage level changes if the plan offered similar coverage. You can only drop coverage if no similar coverage is available. Your complication, if I'm understanding you correctly, is that you are adding PHCS as a completely new option. When an entirely new benefit package is offered, the IRS says employees can make new elections (even if they had originally opted-out). Your dropping coverage tells one thing, but the addition of a new option tells another thing. If you were just adding the PHCS option without dropping coverage, you would need to allow almost any election change. Since you are adding coverage, you can't go against that IRS statement. I think you need to allow the employees to add and drop at will. This will end up being open enrollment in October, then again in December. Administratively, cost-wise, and employee communications-wise this would be easier to just wait a couple more months.

There are several ways to allow an employer to reimburse medical costs, be they health insurance premiums or actual medical expenses. I know of no tax qualified way to do this, however. I think that's the stickler, and the reason there have been no responses to this post.

I agree with SLuskin's response. I wanted to add and reiterate that, in the case of divorced or separated parents, it usually does not matter who claims the dependent exemption. For purposes of the Child Care Credit and DCFSA's, the custodial parent is the one who had costody longer than the other parent. That makes it pretty bad if you are the parent who had custody just a little less than the other parent, but that's how the IRS writes it.

If it ends up that the coverage is mandatory (minimum participation rules apply, so the carrier may not want to open the door to any exceptions at all), perhaps the employee can sign the GTL benefits over to a charity or religious mission organization.

That makes sense. Perhaps that's the answer. Thank you for your work on this. Could you please post to this thread after you hear something at the seminar? I'd like to know what they have to say.

I don't use the EBIA manuals, so I can't see them in order to review the wording they use. The Thompson flex manual is pretty clear that different eligibility requirements can be applied to different employee classifications and to different benefits. Obviously, it makes me second-guess myself. Highly compensated individuals cannot be favored with respect to eligibility to participate. For purposes of making sure HC individuals are not favored, a “classification shall not be treated as discriminatory if the plan benefits a group of employees” (sec 125) which is a “classification set up by the employer and found by the Secretary not to be discriminatory in favor of highly compensated employees” (sec 410), and “no employee is required to complete more than 3 years of employment with the employer or employers maintaining the plan as a condition of participation in the plan, and the employment requirement for each employee is the same” (sec 125). Each classification of employee would need to be run through this sentence. My interpretation has always been that this would mean that every classification must be effective within 3 years and 364 days of employment [applying clause (ii)], and each classification would need to have its eligibility provisions applied uniformly. I can see the confusion in the wording of the Code, however. It might be worth reminding that the 125 plan is only a pre-tax funding mechanism, and each benefit in the 125 plan may have its own eligibility provisions. For instance, medical may be effective after 30 days, but dental may only become effective after 1 year. This is a common practice to reduce adverse selection in dental benefits, which are often abused. When the employee starts pre-tax payroll deductions for medical, he/she is participating in the 125 plan, even though they can’t yet get dental. Just because someone is now participating in the 125 plan doesn’t mean they can now get whatever they want in the plan. The provisions of the underlying plan still apply. I know, however, that there are a few instances where 125 trumps the underlying plan. I know HIPAA clearly states that employment classifications with regard to eligibility are allowed as long as they are not based on health factors, but that doesn’t really help here since HIPAA doesn’t recognize any potential restrictions imposed if the plan is funded through a 125 plan. I’m still second-guessing myself. Other thoughts?

You can separate employees for "classification" purposes by hourly and salary (yes, non-exempt and exempt can be used in their place), full-time and part-time, and seasonal and permanent. There are more, but the underlying principle is that you can lump employees together based on accepted, traditional employment classifications, and can't classify employees based on any health factors. You can also have separate eligibility requirements for different benefits offered in the 125 plan. The age 21 thing comes in because most 125 plans do not allow under-21's to participate, so in that sense, they are a classification. If your 125 plan doc does allow them, however, they cannot be excluded from the non-discrimination tests. Aside from the age-21 rule, age classifications are not usually accepted employment classifications. For instance, you may have Supervisors/Managers who are under 21, and may have rank-and-file warehouse workers over age 50. The classifications must be consistent with business practices.

Section 125(g)(3)(B)(i) does apply. However, the ruling begins, "...if the plan benefits a group of employees described in section 410(B)(2)(A)(i), and meets the requirements of clauses (i) and (ii)." Section 410 addresses fair classifications of employees. As long as all employees within a classification have the same waiting period, you are within 125. A company can have multiple waiting periods (correctly called probationary periods, as discussed in a previous thread), as long as they are divided among classifications of employees.

A 5500 is not required for a welfare benefit plan if you have fewer than 100 participants and the plan is unfunded (no employee contributions, and benefits paid from general assets, not a separately maintained fund) and/or fully insured (insurance policies, paid for by general assets and/or employee contributions). There are a few other filing exemptions that are not often used, but do exist. Check out "Who Must File" at: http://www.irs.gov/pub/irs-pdf/i5500.pdf

ERISA 405(a)(3) and 405© state that a plan sponsor will be responsible for any TPA fiduciary wrongdoings if the plan sponsor is aware of the wrongdoing and made no attempt to correct it. Otherwise, only the TPA is responsible as long as the plan sponsor can prove that it does monitor the TPA's practices periodically. In Harris Trust and Saving Bank v. Salomon Smith Barney Inc., 503 US 238 (S Ct, June 12, 2000), a TPA can be required to restore inappropriately distributed funds to the plan. There are conflicting cases concerning whether a TPA performing claims administration is also a fiduciary. In general, courts usually decide that TPA's are not fiduciaries when they only process claims, claims are sent directly to them, and the TPA decides whether the claims should be covered. In most cases, I think the employer will still be held responsible, unless they can prove that the TPA was not making the client aware of its practices. Regular monthly reporting is important. Be sure to have hold harmless provisions in your contracts with your clients. The further you are away from being a fiduciary, the better your protections.

What complications would that cause? I know that if the deductible operates on a calendar year basis, but FSA's go from 8/1-7/31, then there would be lots more FSA reimbursements related to deductibles from 1/1 to 7/31 than from 8/1 to 12/31, since that's the period of time when charges are skewed to the employee. The total for the year is the same, however, so it should not matter. If a plan has a $500 deductible, and the employee knows he/she uses it completely each year, then the employee can add that $500 into the calculation when determining an annual election regardless of the plan year dates in the FSA. Are you thinking of something I'm not? Just wondering.

If your participant provides more than half of his mother's support, he can be reimbursed through a HCFSA for her expenses. As far as TPA liability, you will hear lots of opinions on this. You are right that it can be argued that it is the participant's responsibility to submit claims for eligible individuals. FSA's operate like Schedule A medical expenses, except that the tax savings are realized through the participant's payroll. If the employee instead tried to write off expenses for dependents on Schedule A, would the IRS send a letter asking for proof that the dependent is eligible? No. They leave it up to the taxpayer to be honest and truthful, and be subject to any penalties should the IRS perform a tax audit. Why treat the FSA any differently? If the employee is reimbursed illegally, it's between the employee and the IRS. On the other hand, TPA's are hired to administer benefits based on how the plan doc is written. If the plan doc says that dependents up to age 19, and then 23 if a FTS, are covered, then it is the TPA's responsibility to adhere to the written rules. If you reimburse someone outside of the document's eligibility provisions, it can be a breach of contract, and the TPA is responsible. Plan docs for FSA's can have their own definition of "dependent", and don't have to use the IRS definition. If the plan doc does not address dependents, and instead says to follow applicable IRS rules, then you may have a case, but liability seems to be shifting to TPA's as time goes by. My opinion is that, as the plan administrator, it is the TPA's responsibility to make sure that reimbursements follow 125 rules with respect to participant eligibility and reimbursment legality. There is so little 125 IRS audit activity, as well as the view that "it's the employee's money", that there's not much impetus to spend much time on eligibility, however.

Not to try to get around your question, because it is a valid one and should be addressed, but what are the actual circumstances of your employee and the supposed dependent? There are instances where someone can be reimbursed for medical expenses for a "dependent" even though the employee can't take the exemption on his/her taxes. The exemption is largely a moot point when it comes to HCFSA's. There is a slightly looser definition of dependent that should be used for FSA's.

There are no real drawbacks. A couple minor considerations: Remember that the IRS expects all W-2 reporting to be on a calendar year basis. This includes DCFSA's, for instance. The amounts that employees see on the forms may look odd to them, especially if they have a plan year with an account, then a year without an account, or vise versa. They know they elected $5000, but the W-2 for one year says $2000, and the next year says $3000. This causes no problem in the end. When they fill out their taxes (Form 2441 for both years), this all comes out right. It just takes longer, since the employee has to wait until the next tax year to finish the reporting. I have many clients who operate 7/1-6/30, and have even had one who operates 12/31-12/30.