papogi

First off, does your employee have any coverage elsewhere? I'm just wondering why he did not sign up for your coverage. Anyway, you will have to look at your plan's definition of "dependent". This child might live with his/her mother, and may be entirely dependent upon her for support. Your plan doc might state that a child must be dependent upon your employee for support, in which case this child does not satisfy the definition of dependent. HIPAA requires that an employee be able to enroll under a Special Enrollment if either the employee loses coverage elsewhere, or the employee's dependent loses coverage elsewhere (and the dependent initially declined coverage because of other coverage, which is the case here). So, if this child is considered a dependent of the employee under your plan, then the employee and the dependent must be allowed on your plan since the dependent lost coverage. If the child is not a dependent under your plan, then no HIPAA event has occurred, and they can't come on the plan. Keep in mind that we are talking about HIPAA's requirements as they are applied to your underlying group health plan. Your Section 125 plan may or may not allow any status changes (it probably does), so it may end up that this employee and dependent can come on your plan, but must do so with after-tax dollars.

Ginny, responding to something you raised several posts back. STD and LTD are benefits you would probably want to take deductions for on an after-tax basis. Taking pre-tax deductions for STD or LTD will make the benefits received under those plans taxable. Taking post-tax deductions for those benefits allows the benefits to be received tax free. Secondly, some employees might prefer post-tax deductions for other benefits (medical, dental, etc.) since it bows them out of Section 125 constraints and will allow them to more easily drop dependents off the plan mid-year after having large bills paid. I wouldn't even offer a post-tax option for most benefits to avoid this situation, but a wise employee might ask for post-tax deductions for the very reason I mentioned. Also, to back up a minute (my mind is going too fast!). Ginny, you said you use the pay-as-you-go option. If that is the case, and your LOA employee is now in a period of time where no payments are being made, and you are planning to recoup the money upon her return, and you are wondering what the term date should be if she does not return, then the term date should be the date that the coverage was paid up to. Since you aren't under FMLA rules, you aren't technically required to provide continued health coverage while someone is on LOA. You can apply the more generous FMLA rules if you wish, but you aren't required to in this case. If the employee is on LOA as of today and calls you up right now and says that she quits, then the term date can be last date that coverage was paid for. That might be several weeks ago.

I wanted to clarify something I said earlier concerning FSA's and LOA. I said, "If an employer pays FSA premiums on the employee's behalf while on LOA, and the employee never returns, then the FSA term date should be the day before the LOA." Employers have the right to waive the requirement that employee's pay their share while on LOA. If the employer pays their share, with no intention of asking for the money back from the employee, then I think the term date should be the date the employee tells the employer that he/she quits. Unless the employer has something that states they are paying the employee share and the employee need not repay the employer as long as the employee returns to work after the LOA. In reality, no premium payments are being made at all in a situation where the employee is planning to use the catch-up option, so the term date in that case would be the date the LOA started. I hope I'm making sense. I think I'm starting to go in circles

Unfortunately, this is the reason that a complete SPD and employee handbook is necessary. The provisions for the case you describe should be addressed, so that all parties are well informed. I do know that's difficult, especially for small employers. Let's look at non-FMLA LOA. The argument is that you "agreed" with the employee to pay for his/her health coverage once salary substitutes have been depleted while on LOA with the goal being that the employee would return. If the employee returns for one day, they've upheld their side, then they could terminate and elect COBRA. If the employee does not return, as you said, the question is what the term date should be. The date the LOA started, the date you found out the employee will not be reurning, the date the LOA was supposed to end? With an agreement stipulating the return of the employee, you could possibly (this seems risky to me) require that the term date be the commencement of the LOA. Without this agreement, and without the procedure documented for employees to understand, I would think that most courts would argue that the term date should be the date you are notified that the employee will not return. Courts generally rule in favor of employees, not employers. They also tend to rule in favor of anything that allows coverage continuation. Having a retroactive term date that would require back-payment of large COBRA premiums and that could otherwise potentially create a 63-day break in coverage would not be lost on the court. If this leave were an FMLA LOA, the date an employee notifies his/her employer that he/she will not be returning to work becomes their term date. They are no longer under FMLA, and COBRA should be offered.

Pay-as-you-go works with either pre-tax or post-tax dollars. If an employee has any vacation days, for instance, the deductions can be taken from that until it is used up. Those would be pre-tax. Payments made after all of those sorts of things are used up would then be post-tax. I can tell you this: The pre-pay option can't be the only option offered to employees (but it can be limited to FMLA employees). The catch-up option can be the only option for FMLA employees as long as it is also offered to unpaid non-FMLA employees. Pay-as-you-go has to be offered to FMLA employees if that option is offered to unpaid non-FMLA employees. Pre-pay and catch-up may also be

In the situation Carolynn describes, the employer should send a letter to the employee asking that the reimbursement be returned. But that's about all they could do. It serves as another example showing how important it is to have the policies documented and communicated to the employees. Pay-as-you-go is something used expecting the employee to return. If an employer pays FSA premiums on the employee's behalf while on LOA, and the employee never returns, then the FSA term date should be the day before the LOA. Ginny, I have several clients who pay bi-weekly (26 pays), but only take payroll deductions on a twice-monthly (24) schedule. Not a problem.

Have you had any similar instance in the past that you can use as a precedent? I’m assuming not, otherwise you wouldn’t have posted. I also assume that your plan doc and/or any employee handbook does not address this at all. You will be setting a precedent here, so be prepared to offer the same solution to any other employee in a similar situation in the future. Without an employee handbook or anything else, the FMLA rules will still be helpful, since they are the standard out there. We need to be sure whether or not this employee was first using the “pay-as-you-go” option or not. For “pay-as-you-go”, employee contributions can be made post-tax or pre-tax from any compensation you pay the employee while on LOA. If the employee ceases to make payments, you could require that the employee begin paying with after-tax dollars to you following the regular payroll deductions, or you could recoup the money upon the employee’s return (catch-up option). Under FMLA, the catch-up does not have to be agreed upon prior to the LOA as long as the employer and employee were originally using the pay-as-you-go option. In your case, FMLA rules don’t directly apply, so I would think you would have no problem recouping the money when the employee returns.

Is this an FMLA leave, or has that time period elapsed, as well? There are certain FMLA LOA rules that may apply, and may not.

The 2% admin fee issue only matters when looking at whether or not COBRA should be offered after the year in which the termination took place. It does not affect the plan year in which the term happened. For HIPAA-exempt flex accounts (this is most FSA's) flex COBRA must be offered for a period up to the end of the current plan year if the employee has not been reimbursed an amount equal to or greater than he/she put into the account year to date. HIPAA-exempt FSA's do not need to offer flex COBRA past the year of the term date if they charge a 2% admin fee, but again, they do need to offer it inside the year the termination took place if the employee hasn't gotten out of the account an amount equal to or greater than was put in.

Absolutely. After the LOA, the employee can come back on to pre-tax payroll deductions.

The 500 Index Fund is designed to mimic the Standard and Poor's 500 (S&P 500) index. If you hear one day that the S&P (not the Dow, but they usually mirror each other) is up 2%, your fund is also up 2%. The S&P 500 consists of bigger, well established companies. The Stock Market Index Fund is designed to mimic the entire market (typically the Wilshire 5000 Index). Many investors like this fund for long term investing since it automatically diversifies you among many investment sectors (large cap, small cap, tech stocks, utility stocks, etc.). It's nice and simple. You're buying an even cross section of the market. The downside is that if you want to increase your exposure to small cap stocks, you can't do it in this fund. Again, it's an unalterable cross section. The Growth and Income Fund invests in stocks that are "poised for potential growth" but also invests in stocks with above average dividend yields, hence the "income" part of its name. Dividend yields are pretty low these days, so total return on most growth and income funds out there tend to simply mirror the major indexes. Without knowing more details, I would opt for the Total Stock Market Fund, but my inclination is minor. Over the long term, all three of these funds will probably end up with really similar performance results.

I, too, see nothing in the rules that require employee premium payments to be paid on the same schedule across the board af far as non-discrimination is concerned. It could cause some embarrassing conversations trying to eloquently justify such a policy to the rank and file, but as long as it's a documented practice, it does not seem to cause a problem legally.

There is no time period that an IRA created via a 401(k) rollover needs to be an IRA in order to take advantage of the first-time home buyer provision. You'll pay tax, but you won't pay the 10% penalty.

I will private message you.

Self-funded?

If it ever does pass, my guess is that most employers would eventually adopt the new rules and use them to their fullest in order to stay competitive with the employer next door (how many employers use a DCFSA limit lower than $5000 anymore?). Good point concerning FICA savings. That may well remain a big enough reason to continue to offer FSA's, even with this new disadvantage thrown at the employer. I agree with you that this will probably be a moot point. I remember HR-1764 back in 1997, and that one went nowhere. While it was more sweeping than the current HR-3105, I think the new incarnation will probably end up in the dustbin, as well.

I have some opinions about the carryover concept, and I wasn't sure your reasons for the original post, so I figured I would offer them up in hopes of drawing out any other opinions. I have real reservations about the carryover idea. I understand its primary aims, and they are well intentioned: Tempering the "use-it-or-lose-it" rule should allow for (1) increased participation by employees, and (2) reduced flurry of wasteful claims at the end of the year simply to clear out the account. I see some problems that it will cause, however. First, lessening the risk that the employee has in the agreement with the employer will cause some employers to abandon the FSA completely. From my years of administering FSA's, I can see that there are almost always experience gains. An employer overall pays almost nothing to offer an FSA benefit, and often gets something out of it. Allowing money to be transferred to the next year, or allowing terminated employees to spend down their carryover amounts or take the carryover amount as cash substantially reduces the employer's risk. Perhaps enough to cease offering the benefit, thereby reducing nationwide FSA participation. Administratively, it will be a bit of a nightmare, particularly for employers who process flex in-house. Keeping track of separate carryover amounts versus current year amounts will increase administrative costs, and from a practical standpoint, could cause errors in participants' accounts. In the case of health care accounts, the $2000 limit doesn't help shift much risk back to the employee, since most employers have a health care limit of $2500 or less. When Bush's $500 carryover idea came out awhile ago, I looked at the forfeiture history of 25 of my FSA clients. Under the current regs, they all had experience gains in the time period I examined. Applying the potential $500 regs, 7 of the clients had their forfeitures effectively drop to zero, and the rest had them drop substantially. A $2000 reg would have even more impact. I know that experience gains are not the reason that employers should implement FSA's, but without them, employers will fear losses from terminating employees who clear out their accounts enough that they might not offer the benefit. I can visualize many ways for an employee to abuse this potential new ruling, too many ways to list them here. From a pure fairness standpoint, it seems that this eliminates so much of the employee's risk in an FSA, that the required risk-shifting characteristic would be in jeopardy. Frankly, I'm amazed this idea has gotten as far as it has.

Bush's $500 carryover was in a budget proposal. I know of a $2000 carryover measure currently being tossed around. It is HR-3105, and you can see it at the URL below: http://www.benefits.net/ecfcnews/hr3105.pdf

Basically, Section 125 allows an employee to get around payroll constructive receipt issues. Under 125, employees choose between taxable cash and non-taxable benefits, and the employee costs for the benefits are not included in their gross income. The benefits offered under a 125 plan (flex plan or cafeteria plan) are each governed by separate tax codes. For instance, Section 105 deals with medical, health, and accident benefits, Section 129 deals with dependent care, etc. Again, Section 105 addresses medical and health benefits, and specifically can allow benefits received from these plans to go to the recipient tax-free. FSA’s can be offered in or outside of a cafeteria plan. A typical FSA is completely employee-funded (not always). A 105 reimbursement plan is company-funded, but risk-shifting rules and uniform reimbursement rules, etc. still apply.

The IRS says that compensation is what you earn from working, and that any amounts you exclude from income are not considered compensation. They do not specifically address disablility income, although they do say that amounts on line 1 on a W-2 are considered compensation, so that should serve as a safe harbor here. Spousal Roth IRA's can be funded if filing separately. To do so, however, the taxpayer's modified AGI must be under $10,000 if the taxpayer lived with the spouse at any time during the tax year, or under $110,000 if the taxpayer did not live with the spouse. The limit on the spousal Roth IRA contribution for 2002 is $3,000.

This is a good question. I know that IRS officials have "informally indicated that employee flex plan contributions may be paid from 'salary substitutes' such as severance pay." Outstanding vacation pay is definitely a salary substitute. Some states, however, do not allow flex plan contributions to be taken from salary substitutes. So, first you'll have to find out the rule of the state in question. Also, if an employer wanted to take this iffy, but possibly defensible approach to flex plan contributions and salary substitutes, I would think it should be clearly outlined in the plan doc in the separation from service/termination area.

Since there is no clear cut definition, you will just have to use a reasonable interpretation (hence SLuskin's very defendable position to steer clear of government agencies). The IRS will look at a person's job responsibilites and duties, not just their title. They will look at the source of the person's authority (the higher-up the grantor of authority, the better chance of being an officer), and they will also take into account the term period that the employee is elected or appointed to (longer term meaning a greater chance of being an officer). Also, an employer with over 491 employees can have no more than 50 officers. Yes, the 5% and 1% ownership qualifications will not apply. You are correct that this is a vague area, as are several things in Section 125.

Government plans get around ERISA's Form 5500 filing requirements, but they still have to abide by Section 125 non-discrimination rules for qualified status. The definitions are the same as for non-governmental plans. The IRS does not outright define HCE's, and instead leave it open to judgment in each case. What it does tell you is that officers, 5% owners, HCE's, and spouses/dependents of those individuals are all highly-compensated individuals. Section 125 does not override separate non-discrimination rules that apply to each benefit offered under the 125 plan, rather they operate in addition, so you'll have to address each benefit separately. As far as key employees, they generally are those who are officers and make over $130,000, 5% owners, or 1% owners who make over $150,000.

Flex COBRA should be offered for the remainder of the plan year if the employee has put more into the account than what has been reimbursed out to the employee. COBRA need not be offered after the plan year in which the termination occurs if the FSA is exempt from HIPAA and if the employee will put more into the account than they will get out. The usual 2% admin fee guarantees that the employee will put in more than they get out next year. And the FSA is exempt from HIPAA if the employer offers other health coverage which is not exempt from HIPAA and the maximum reimbursement from the FSA is not greater than two times the employee's salary reduction election (or if greater, the employee's salary reduction election plus $500). Jbentz is correct that you would lose your tax benefit by funding with post-tax dollars. There are two main reasons to elect flex COBRA, and they may apply to you. First, electing flex COBRA may allow you to compile receipts with dates of service after the term date in order to submit them, clear out the account, then cease flex COBRA payments. Second, you may want to continue the account to the end of the year, even though you will have put more into the account than you got out (because of the 2% admin fee). You will have to calculate if you stand to lose more now by not electing flex COBRA, or if you stand to lose more by paying the admin fee for several months. You still lose in this example, but you limit your losses. You would use this avenue especially if you expect reimbursable expenses toward the end of the year.

Agreed. I also understand the difference between these various fees and expenses, and JohnG's explanation is very good. I was being too vague, but I just didn't want BigAl going away thinking that a no-load fund costs nothing to invest in. Even though their marketing expenses and expenses used for drumming up business will be far lower than a loaded fund utilizing a sales force, those expenses are still in there (truth be told, long ago I used to work for a company identified by a big rock as part of sales force JohnG describes). Even the no-load companies are in the business to make money. Believe me, I am a strong advocate of no-load funds as well, but BigAl, don't think that you just invested in Enron.