papogi

Honestly, I don't know this for sure. My reading of ERISA's HIPAA provisions and its definition of a group health plan would seem to include 401(h) accounts. Other thoughts...

I know this thread was not posted on the cafeteria plan board, but, if you take pre-tax deductions, this will help you with your decision. As a self-funded company, you have some latitude how you apply your underlying plan. You do not have the luxury, however, of bypassing Section 125 rules if you take pre-tax deductions. In this case, the coverage should probably be effective on the day you receive the employee's election. Section 125 is clear that elections an only be made on a prospective basis. This applies to all benefits offered under 125, such as medical coverage, FSA's, etc. If you do not take any pre-tax deductions, you can do what you want, although mroberts' warning of the precedent being set is a good one. Even in this case, I would still make the effective date the date you received the form. Allowing coverage for past dates welcomes adverse selection, and may not look good in the eyes of a stop-loss carrier, if you contract with one.

I don't know this answer for sure, but I do know that employee benefits cannot be garnished. If the 401(k) is an employee benefit, it cannot be garnished. Also, the code clearly states that 401(a) plans [401(k) plans are first 401(a) plans] are for the sole use of the employee and beneficiaries. Hopefully someone else knows positively...

Yes. There is no tax and no penalty in this case. You have to use the money towards the house within 120 days of receiving it, and you can take out up to $10,000 for this purpose. If you are married, your spouse can take out $10,000 as well.

Situations (1) and (2) of the ruling operate under the assumption that elections from one year carry over to the next, unless they are changed. Only new hires, and the entire employee population for the first year of automatic enrollment, will be put into the default plan unless they make a specific election. The ruling doesn't say that some waiver needs to be filled out each year by all employees. Only those people trying to opt-out will need to provide proof of other insurance. Your suggestion of rolling elections is the way to go, and this ruling doesn't go against that. In fact, Situation (1) supports this and affirms that the IRS has no problems with pre-tax payroll deductions under those circumstances. The ruling is really there to give instruction for the relatively few companies out there who have a mandatory, basic employee-only plan and that only allow employees to opt-out if they can prove other coverage. It's the question of pre-tax versus post-tax payroll deductions for someone that effectively doesn't have a choice between benefits and cash that the ruling is trying to shed light on.

Your $5900 liquidation amount should go to you tax free. This amount is less than your contributions, so it can be labelled contribution amounts. The 10% penalty withheld should be added into the total of line 59 on your 2002 Form 1040, and will be returned to you. Perhaps you could lower your withholding on your paychecks for the rest of 2002 to help even things out. Just remember to raise it back to normal again for January 2003. As for your loss of $500, if your adjusted gross income (AGI) is $25,000 or greater, you can't deduct any of the loss.

You don't specify if this is a traditional IRA or a Roth IRA, but my guess is that it is a traditional IRA. I will first go with that assumption. I will also assume that the traditional IRA was made entirely of deductible contributions. Let me know if any of this is incorrect. You will owe the 10% penalty, and income tax on the total amount liquidated. You have paid the 10%, but you will still owe income tax on the total. Unfortunately, you will not be able to deduct the loss you had, either. If your traditional IRA was made entirely of deductible contributions, your basis was zero, there would be no deductible loss. For a Roth IRA, money originally contributed as yearly contributions can be taken out anytime without penalty, and with no tax since Roth IRA's are comprised of taxed dollars. Only earnings would be taxed and penalized, and you have none. If it was a Roth IRA you had, the 10% you had withheld should be returned after you file your 2002 taxes. As far as deducting the loss, assuming this is the only Roth IRA you had, the loss is the difference between your basis (total contributions) and the liquidation amount. Whatever your loss, it is only deductible to the extent that it exceeds 2% of your Adjusted Gross Income, and is reportable as a miscellaneous itemized deduction on Schedule A (not Schedule D).

To take this further (I have more thoughts now), I noticed that you mentioned no "default" election in your case. The company will need to decide on the most basic level of coverage (i.e., cheapest), and any individuals with this election who actually wated to opt-out but had no other insurance will need to have their deduction taken post-tax. Also, the company will only need certifications of other coverage for those employees wanting to opt-out. This does not need to be done (and isn't in the IRS' example in 2002-27) for the entire employee population. Individuals in what constitutes the "default" election, but who have legitimately elected the option, will have their deductions taken pre-tax. This means that you could have one employee with no other coverage elect the default plan because he knows he'll be forced there if he tries to opt-out. His deductions would be pre-tax. Another employee could try to opt-out, not be able to prove other insurance, then be forced to take the default plan and have deductions taken post-tax. I don't think this disparity is what the IRS intended, although I'm sure the interpretation is correct (until we get yet another bulletin updating this).

Assume an employer has an employee-only default election, and the employee can only opt-out of coverage if they can provide written proof that they have coverage elsewhere. If the employee wants to opt-out, but cannot prove he/she has coverage elsewhere, that employee's payroll deductions will be taken post-tax. Since the option to receive cash is removed in this case, Section 125 protection does not apply. If the employee has a family and elects family coverage, then he/she is actually making an election and is not taking the "default" election, so Section 125 protection would apply in this case. I know I'm just restating some things from the ruling, but I think it makes more sense.

Based on my understanding of the regs and the previous posts... Question 1: 64-146 clearly states that this is legal under 106. Question 2: It is a self-insured medical reimbursement plan as described in 105(h)(6). Question 3: A self-insured medical reimbursement plan can reimburse expenses described in 213(d), including insurance for medical care [213(d)(1)(D)], so it should be able to reimburse other medical expenses as you described. Does anyone see this summary as wrong? This has been a very good thread.

I'm backing up here. 61-146 does seem to be the easiest way to go. I always have my head buried in 125, so I admit exploring 61-146 and its use here has been educational. Under 61-146, the employer ultimately pays the entire amount. Under 125, the employer and employee both pay (but the employee's salary reduction ulimately means that the employer pays the entire amount), so 125 would still be good if the employer ever thinks that an employee portion will be required.

The way to get around the tax issue is to set up a Section 125 plan. That's really the fundamental purpose behind it. The problem small employers have is grappling with the various non-discrimination rules, particularly the key employee test. Also, the employer will need to shift some of the premium to the empoyee.

You can rollover amounts from a traditional IRA that represent the portion that would otherwise be taxable into a qualified plan. The 60-day rule still applies, so monitor the rollover closely. Depending on the make-up of your trad IRA, this may be the entire balance, or only a portion of it if you have made non-deductible contributions. The rules of the qualified plan are the limiting factor here. Check with the destination plan to be sure that they accept IRA rollover contributions.

Yes, because no change is being made to the 125 election. If the underlying plan allows the dependent on either through HIPAA or a loose late enrollment provision, the dependent is basically on the 125 by default if the employee already has family coverage. The 125 plan is not a benefit plan, it's simply a pre-tax funding issue, and the election remains unchanged with the addition of a dependent under these circumstances. Section 125 is better seen as a "benefit funding mechanism", not a "plan." The underlying plan will always dictate whether or not a dependent can be added or not. Section 125 will only dictate how that dependent is paid for. Assume the employee had single coverage. Also assume that you have a 125 which does not allow any mid-year changes. In this case, the dependent in question could come onto the underlying plan through HIPAA's loss of coverage provisions, but any additional payroll deductions associated with the added dependent will need to be taken post-tax.

Agreed. Since this employee's election is already family, there will be no change. In hindsight, the root of PhilB's recent question was whether a loss of free health services constitutes a loss of coverage under HIPAA, since we don't need to be concerned with 125. With this in mind, the following posts make sense. Perhaps it should have been originally posted on another board.

The coverage doesn't have to be from another employer. A child losing coverage under a state-sponsored plan, for instance, has lost coverage, and a parent could then add the child to their group coverage at work. If the student had actual coverage through the school, and this has now ceased, the student should be allowed on the employee's plan.

I don't have any stats, but I can tell you that I work for a large TPA who has clients all over the country. We definitely are finding that more and more clients are adding benefits for domestic partners. Incidentally, I see that your location is NJ. We have more clients from NJ with domestic partner benefits than any other state.

For regular contributions to either a Traditional IRA or a Roth IRA, there is no waiting period. If this is a Roth you are talking about, you can take out an amount up to your total contributions without any penalty, and no tax since Roth IRAs are made up of taxed money. If this is a Traditional IRA, you will pay tax depending on the proportion of your IRA which was made up of deductible contributions and earnings versus non-deductible contributions (the proportion attributable to deductible contributions and earnings will be taxed). For the Traditional IRA, you may also have to pay a 10% penalty unless the money is used for a qualifying expense. I strongly urge you to try all other avenues before tapping the account. You'll lose valuable growth time, and you will only be able to replenish what you took out following the yearly limit rules (e.g. $3000 each year, as of 2002).

Roth contributions do not need to be shown on any tax forms. Since you both are over 50, each can contribute $3500 for tax year 2002.

I also see nothing anywhere which would prevent your client from imposing a longer waiting period to these late entrants. As long as waiting periods are applied uniformly to a specific class of employee or benefit, and are not based on health factors, they are normally fine. I admit I’ve never seen it applied in this exact way before, and HIPAA does not specifically cite this distinction as OK or not OK, either. I understand that there are employees who waive coverage because they have coverage elsewhere, and that this other coverage may end (hopefully that other employer is following the rules with regard to employees dropping coverage mid-year). When that coverage ends, a HIPAA special enrollment period begins with your client. HIPAA states that the new coverage must be effective no later than the first day of month following the submission of the request for late enrollment. They will not be able to impose their waiting period in those legitimate cases. They will only be able to impose the waiting period for those people they are allowing on the plan for no reason. Again, if Section 125 is involved, all of this is moot, since none of these changes should be allowed, anyway. Your client may be taking post-tax deductions (if the coverage were completely company-paid, nobody would waive it), which should allow them to drop coverage whenever they want, but most plans would not allow them to come on the plan whenever they want. The FSA portion of their benefits must still abide by certain 125 rules. Hopefully your client is not allowing people on and off the FSA whenever they want, as well. I know you are asking for an answer to a very limited question, and you seem to be getting roundabout answers. This is because your question appears to be a question that the client should have never been put in the place to ask in the first place. Putting band-aids all over the holes in this plan which has very little regard for adverse selection is not addressing the root of the problem.

Yes, for the cost rules to come in to play, the change must be "significant", a term which the IRS is careful to only hint at a definition for, and completely avoids in 1.125-4. I have seen both 10% and 15% being used as a standard for "significant". You're right that this could cause a hindrance for some employees who want to make a change 9/1, but the rule stating that elections can't be made retroactively is a fundamental rule for 125 plans.

Section 125 is clear that benefit election cannot be made retroactively. Elections cannot be made after the beginning of the coverage period, unless there is a status change. My thinking is that elctions will need to be made on 7/1 using existing rates, then elections can be changed on 9/1 based on the "cost and coverage rules" provisions in 125. I don't see how any elections made 9/1 can be made retroactive to 7/1, when 2 months of claims experience is already known, and still be in compliance with 125.

It does not matter that your plan does not provide for dependent only coverage. An employee can decline your coverage because he doesn't want it, but if one of his eligible dependents loses coverage elsewhere, this is a HIPAA event which would allow both the employee and the dependent to come on your plan. Since the mother seems to be the guardian, the mother probably takes the dependent exemption, so the child does not satisfy your plan's definition of dependent. Since the HIPAA rule explained above applies only to eligible dependents, this is a moot point.

Before I go further into your question, I wanted to ask if you take pre-tax payroll deductions for your health benefits. If you do, then you and your employees need to abide by the Section 125 rules which give you both the tax advantages you enjoy. Section 125 clearly states that employees can only change their elections with qualified status changes. They should not be able to drop coverage simply because they don't want to pay the premium any longer. That might be allowed in the provisions of your underlying health plan, and would then be fine if the payroll deductions are taken post-tax. If they are pre-tax, they do not have the luxury of being able to drop coverage whenever they want. That alone would eliminate a large chunk of the problem you have posted about.

mroberts is exactly right. Company-paid and pre-tax employee paid STD and LTD yield taxable benefits. Post-tax employee paid STD and LTD yield non-taxable benefits. You might want to start offering your STD on an after-tax basis at the start of your next Section 125 plan year. Incidentally, I am a Flexible Benefits Supervisor at a large TPA, and we service enough clients that we see a wide variety of things. I'll be the first to tell you that the knowledge at this message board is very deep. It's an active board, so you get anwers quickly, and you get enough eyes looking on each situation that you're bound to get some usable information.