papogi

Any mid-year change to an election needs to be consistent with the change in status/eligibility/benefits. For example, someone having a baby could increase an FSA election or start an FSA. Having a baby would not be an event to decrease or cease and FSA. Even if a plan is written to only allow decreases upon status changes (never seen such a plan, but would be entirely allowed), having a baby would not be an event which would allow you to use that plan provision. Section 125 rules, unlike COBRA rules, are not minimum requirements. They are maximum requirements, and a plan cannot be more generous. If the IRS consistency rules are not satisfied, the plan can’t override that fact. Status changes aside, if the employer stops a 125 plan and starts a new one mid-year, and has everyone come up with new elections, then yes, employees who have cleared out their accounts could stop their accounts mid-year and stiff their employer. Depending upon the nature of the change to the health plan, it’s possible that the employer should not have opened up the doors so widely here. You say they “changed its health plan.” What exactly was the change? Adding a new option, a new network?

It's 1.125-2. mjb, that's a good cite, and probably the closest thing to what the poster asked for.

I don’t think I’ve ever seen it explicitly written in IRS regs that an employer cannot withhold these monies from a terminating employee. Hopefully, someone else can chime in if they have anything better to add. I would point out that if your boss wants to do this, he should do it for regular health insurance, as well. If he only withheld $1,000 in “premiums,” but paid out $5,000 in benefits, he should make the employee pay back $4,000. I’ve never seen it explicitly written in any regulations that an employer can’t do this, either. Of course, I’m not actually saying your boss should do this, but this is essentially what he is proposing. The whole reason that flex plans enjoy tax benefits (first, the payroll deduction is pre-tax, second the pay outs for the FSA are tax free), is because the IRS categorizes the thing as “insurance.” Insurance only exists when a risk-shifting occurs. If your boss removes the risk on the side of the employer, there is no “insurance,” and this would not be a qualified plan under Section 125.

There is no specific guidance that I am aware of for the calculation of COBRA rates in a self-funded environment. What is important, in my view, is that you have a clear paper trail showing how you arrived at your rates, what assumptions were used, and that it shows a reasonable effort to come up with "meaningful" COBRA rates (your formula does this). In the end, COBRA rates are an educated guess. Your documentation should back up the "educated" part of that. In addition, it is most important that the rates are applied uniformly, with no discrimination.

No consequences. Using the max is the better protection for the Plan, and may or may not end up being inflated rates. COBRA rates in a self-funded environment are going to be up to the Plan Sponsor to decide. What rates are you coming from now? If using the max comes to COBRA rates that are too much of a jump (for your taste) over current rates, perhaps blend the calculated rates with the current rates. At the next rate calculation, you might then be able to use the max without causing such a huge jump in COBRA rates. Either way, blending calculated and current rates is always a good idea, I think.

No tax or reporting consequences. As you noted, there might be certain exchange limitations imposed by the custodian in an effort to reduce administration expenses due to too much "trading."

No. My understanding is that this would not be "consistent" as viewed by the IRS based on the intention of the regs.

You are correct. It would be consistent to say that when you have a baby, health expenses would rise. You can start an FSA, or you can increase an existing FSA.

Mary C's warning is correct, but my understanding is that significant cost changes or coverage changes (1.125-4f) is the area that does not apply to FSAs but does apply to H&W plans. The section dealing with changes in status (1.125-4c) does apply to FSAs and H&W plans alike, with the usual caveat that the election change must be consistent with the status change.

That's one of the major differences between Pub 502 and how FSA's operate. 502 applies to Schedule A on your taxes, and is based on when things are paid. FSA's look at the incurred date, just as any "insurance" would. jpod, maybe it is a regional thing, not sure. I work for a national TPA, and over 95% of our flex clients (we have dozens of them) allow mid-year changes such as this. Back in my years as a Flex Supervisor, we never had a client have an Experience Loss at the end of the year, even with the few employees who might have played the system to get out more than they put in.

jpod, it is true that employers do not have to allow changes to FSAs due to qualified status changes as outlined in 125-4. However, the vast majority of plans do recognize these changes in status, and would allow a reduction or stoppage of an FSA if an employee experiences and qualifies status change, and the election change is consistent with the status change. I think you made it sound as if RCR266 has an unusual plan in that it allowed the participant to stop the account, and that plan design is unusual. Still, jpod does offer up something that plans should at least consider. Employers are not required to honor status changes as outlined in 125-4.

MARYMM is correct. For HIPAA-exempt FSA plans (most are) COBRA must be offered for Health FSA’s if the participant has not yet been reimbursed an amount equal to or greater than the amount contributed by the participant. If the participant has gotten more out of the account than he/she has put in, the employer is not required to offer COBRA. Note that even in cases where COBRA is required, the employer need only offer it up to the end of the current flex plan year, and no further (again, assuming the FSA is HIPAA-exempt).

An FSA won't work here for the reason you stated. An HRA will, however. HRA's can only be funded by employers, and can be used for reimbursement of health premiums.

kmh129, this is a good and valid question, but I think responders have stayed away from it because it is very basic, and is asked rather often. Again, it's a valid question for you, and you deserve some good responses and information. I would suggest using the search feature on the boards, and you will come up with lots of good stuff to digest. With that said, I will briefly tell you that you can open a Roth at a bank or investment company, mutual fund, etc. My personal preference is to contact a no-load (no up front or back end sales charges) mutual fund family/company such as Vanguard, Fidelity or T Rowe Price and use some of their on line services to arrive at your investment time horizon (Roth IRA for a 21 year old should be a decades long time horizon) and risk tolerance, and they will be able to direct you to some possible choices. Stay diversified. Don't drop all your money into a fund that invests too narrowly (i.e., no "sector" funds). Places like Scott Trade are usually a pretty good idea, as well. They act as a go between, but the investments they offer will ultimately be the same ones that you can contact directly. That is, if you have chosen no load funds. The good thing about Scott (and others), is that they can provide you with a summary statement of all investments, rather than getting one from each of the fund families you use. If you end up opening just one Roth investment at this point, however, then this "compilation" advantage is moot. As for your fee question, yes, some of these go between companies will charge a fee. Go to their websites to see what, if any, fees might apply when moving monies into the fund you might be interested in. Just some quick answers to the points you raised. Search the forum, and you'll come up with plenty of reading...

Once you convert from Traditional to Roth, you have to pay tax on the funds. There is no tax advantage to open a Traditional IRA, get the tax deduction, convert to Roth, then pay tax on the entire amount converted. It becomes a wash, and is not worth the administrative steps. Just start with the Roth. Contributions (not earnings) to a Roth can be withdrawn at any time and for any reason.

Are you talking about implementing a new flex plan, or just adding a participant to an existing one? If this is a flex plan that already exists, the answer should be in the plan doc as to the effective date for adding participants to the plan who have experienced some sort of qualified status change. If you are talking about implementing a flex plan, that can pretty much be done anytime. You need a flex plan doc, etc., but there is nothing in the regs that says that it must start on the first day of a month. And no, it doesn't have to stop on the last day of a month. It's certainly easier from an accounting side of things to have the beginning and end of a flex plan year coincide with the beginning and end of months, but your flex plan year can be any 12 month span of time.

HIPAA Special Enrollment would apply in this case, so the employee and spouse could come on the plan (the plan that the employee originally opted out of), as long as the employee opted out at last year's open enrollment because he/she had coverage elsewhere. That's how I remember the HIPAA regs to read anyway.

Nothing definitive from the IRS on this that I've ever seen. My opinion is that you are OK, especially if you do this for all of your DC accounts. That way, you can prove to the IRS that this is your normal practice. From an administrative standpoint, you have to be careful, though. You could end up with someone terming from your company mid-year, and has sheltered $5000 from taxation that might not otherwise have been sheltered if it were deducted over the entire year. The IRS won't look kindly on that, but there's nothing explicit in the regs to prevent you from doing what you said.

Good point, QDROphile. Viewed as a salary increase, that would not be a status change to allow a change to the FSA election, to allow some or all of that $500 to go into the FSA. I didn't think it through well enough from that perspective.

The employer can begin to offer $500 mid-year. They can send out a form for employees to fill out saying how much, if any, they want added to the FSA. Employees who think that adding $500 to their FSA will create a balance bigger than they can get out by the end of the year can simply then take the $500 as additional taxable compensation. If the employer wants to do this without a cash option, I think they will need to wait until the next open enrollment to do this cleanly. Those people who already elected what they think they will have as expenses over the year will have little benefit (they will forfeit at the end of the year), and they could feel that they were treated unfairly. They will say, I would have saved $500 of my own dollars if I knew the company would begin putting in their own $500. Waiting to do this at open enrollment will make it only a positive for everyone.

My thoughts: #1: The IRS has spoken of the "tag along" rule which would allow other eligible dependents to be added to the plan when a new dependent is acquired. This basically allows it under Section 125, but the underlying health plan must also allow it. This is not a Special Enrollment event for the spouse, so your underlying health plan very well could prevent the spouse from being added until open enrollment. #2: Treas Reg 125-4(f)(4)(i) allows this for the pre-tax deductions for the coverage. As long as the spouse's plan allows the family on their health plan, then your employee can drop coverage under your health plan via the cessation of required contributions language.

I think that this all depends on whether or not a claims payor can deal with the complexities of having two different elections during a year. On the surface, it would seem that you should not allow the full $2400 before the date that election became effective. I also have never seen clear guidance on this, so the TPA has likely come to their conclusion because of administrative concerns. I happen to know that other TPA's are able to administer it differently, however, and my feeling is that separating the two elections makes more sense. Think of it this way: If someone changes medical plan elections during the year, claims should be paid based on the plan in place at the time of services. Really, why should a H/C flex account be treated differently?

I would suggest performing a search on this message board for prior threads concerning basics of investing, starting up a Roth IRA, selecting a broker and/or IRA custodian, etc. There are very good posts out there by John G, Appleby, among many others, that will answer your questions.

Relatives are OK. It can't be someone you claim an exemption for, however, and can't be under age 19. You can't make your plan more lenient than the regs allow, but you can make it more restrictive. You could add a provision that the provider can't be a relative. If the employee complains, they can just cover those expenses under the child care credit on their taxes.

The IRS allows two interpretations. You describe one above, where each person goes off with a $2,000 balance. This is the more typical approach, since it is simpler administratively than the alternative. The second alternative is to look at the claims experience of each person, and create a new balance for each person based on the dollars reimbursed already, and are attributable to that person. In your case, there are no claims, yet, so it would be $2,000 each.