papogi

You have at least one plan document to consult. If the payroll deductions for the employee are pre-tax, you will have two documents to consult. First, if there are pre-tax deductions, then a Section 125 flex plan is in place. The IRS is pretty clear about what constitutes a status change and would allow someone to drop coverage mid-year. Allowing a mid-year drop outside the 125 rules could result in your plan losing its qualified status, opening a can of worms. If this person has not gone through one of these status changes, they are locked into their coverage until open enrollment, if you have one. If the deductions are post-tax, or are completely employer-paid (based on your post, yours are not), then you only need to look to the plan doc of your underlying plan to see if employees can drop coverage mid-year at any time. Most underlying plans allow this, although some don't. Dropping coverage is easier than adding coverage. It's the rules attached to Cafeteria Plans that usually lock people into coverage. That's the price they pay for the pre-tax benefit.

Agreed. It would be considered creditable coverage. As an aside (and I'm not jabbing Jbentz, because I made the same assumption before I edited my response), since most inmates are male, we assume this spouse is male. Nowhere in SLuskin's post does it clarify gender.

Based on my reading of the regs, this is a loss of coverage (albeit provided by the government), and the spouse should be allowed to enroll into the employee's coverage, per HIPAA provisions. Up to a 12 month pre-ex period would apply, if the underlying plan imposes one. As far as the cafeteria plan, if the plan is written such that a loss of coverage is a status change, then the additional payroll deductions for the spouse should be taken pre-tax, as well. Cafeteria plans are not required to allow any status changes (although most do, as we know), so checking the current wording of the flex plan is the only way to be sure. The spouse might have been in prison, but I think this is really no different than a child losing coverage under SCHIP, for example.

You can have as many IRA accounts (regular or Roth) as you want, as long as you don't contribute more than $3000 (as of 2002) each year to all of them in aggregate. You can contribute to your existing Roth IRA, and/or you could open another one. Keep in mind that many IRA custodians charge a $10-25 fee each year for each account, so don't open another IRA if it mostly mimics a current one you already have. It would then be better to simply add to your existing IRA. As far as paperwork and fees, it's easier to have fewer IRA's. Depending on your diversification based on your IRA investment selection, having 2 to 4 IRA's is not uncommon. It all depends on your time horizon, current diversification, and risk tolerance. Before you add to your existing IRA or open a new one, be sure you are maxing out any employer match dollars in your 401K.

No.

Yes. Self-employment net losses should not be subtracted from salaries/wages when determining total compensation. This individual may contribute to his/her IRA.

The tax on your conversion is based on your marginal tax bracket. The $2000 estimate was just that, an estimate. If your $7000 Trad IRA account is made up entirely of tax-deductible contributions, then the entire amount becomes taxable income, taxed at income tax rates, on line 15b of your 2002 1040. If you have any non-deductible contributions in your Trad IRA, that amount will be reported on form 8606, and only the taxable portion (account surrender value minus non-deductible contributions) should be on line 15b.

The total amount you can contribute in 2001 to all of your IRA's (traditional and Roth) is $2000. Since you have already contributed $2000, you can't open a Roth for 2001. If you did, this amount would be considered an excess contribution and would be subject to a 6% penalty yearly until you correct the error. With that said, you could then just open a Roth IRA for 2002. Actually, you can open a 2002 Roth IRA anytime between 1/1/02 and 4/15/03. Converting to a Roth is usually a good idea for most people, but not everyone, depending on certain circumstances. Generally, it is recommeded, however, especially since you have many years until retirement. There is no penalty to convert. You just have to understand that the $7000 in your Trad IRA will be taxable income on your 2002 taxes (that is, if the contributions you put into that account have been completely tax-deductible). Roth IRA's are to be made up of after-tax dollars. This is how they are tax-free upon qualified withdrawals. Having both a Trad IRA and Roth IRA does not allow you to save more. The 2002 annual limit is $3000, and this is an aggragate allowance for all of your IRA's. It's not $3000 here and $3000 there. Without knowing your details, I would recommend converting your Trad IRA into a Roth IRA, setting aside the extra money you'll need at tax time to cover the tax on the conversion (a little under $2000) then seeing if you can free up any more money to add a 2002 contribution to the account as well.

Taken out of USC Section 1169, a medical child support order (court decree) meets the requirements only if such order (1) clearly specifies the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate recipient covered by the order, except that, to the extent provided in the order, the name and mailing address of an official of a State or a political subdivision thereof may be substituted for the mailing address of any such alternate recipient, (2) a reasonable description of the type of coverage to be provided to each such alternate recipient, or the manner in which such type of coverage is to be determined, and (3) the period to which such order applies. In my business, I don't have access to the in-house procedures that the individual businesses follow in determining whether medical child support orders are qualified or not, so, as it turns out, I can't help you as much as I'd hoped. The law only requires the above, however, so you should be able to go from there. Sorry.

I should be able to get you what you want, but I'm not sure specifically what you are asking for. Do you want to know what documentation is required for the dependent, or what the effective date would be? I'm not sure what you're getting at.

Sorry for my response above which was indeed incorrect. The last thing I like to see on message boards is answers from people who just want to hear themselves speak, while offering no useful information. It was not my intent to be in that number. Sorry for the error.

For distributions from Roth IRA's that are owned less than 5 years and whose owner is under 59 1/2, earnings are taxable. Also, the amount that represents up to your basis would be subject to the 10% penalty unless the money is used for one of the qualifying expenses (e.g., first time homebuyer, higher education, health insurance premiums for unemployed, medical expenses exceeding 7.5% AGI, and a few others).

You are correct. Since he is dropping a dependent, he cannot add a HCFSA. His change in cost has no effect on his eligibility for a HCFSA, so that doesn't help, either. Sorry to have put you on the spot for more details, but they did help.

Since Darla didn't give details of this situation, we can only talk hypothetically. Assume the employee had the spouse covered under his/her plan, and did not have an FSA. They divorce, and the spouse loses coverage. The employee can go to single coverage. He/she could decrease an existing HCFSA, but would not be able to start or increase a HCFSA. Assume the employee was covered under his/her spouse’s plan, and had no coverage under Darla’s plan. They divorce. This is a loss of coverage under HIPAA. He/she can enroll in Darla’s plan, and can start a HCFSA. Concerning the higher copays or deductible, this would not allow an employee to start or increase a HCFSA. The IRS states that cost changes and coverage changes are not events which allow an employee to change his/her HCFSA or start one [1.125-4 (f)(2) and (3)].

The reg still exists, but I agree you can't get it at Archives and Records. 1.125-1 was last amended on January 10, 2001, but the amendment was to question 8. Since the regulation was originally published in 1984, no revision has ever been made to question 15, the one which deals with elections needing to be made before the plan year. I don't know where else to tell you to look, but the regulation still applies. Does someone else know where to look for this on-line?

It's in 1.125-1 (Q-15). The first paragraph of the IRS answer states it this way: Generally, in order for participants to avoid constructive receipt with respect to taxable benefits offered under a cafeteria plan, the taxable benefits must at no time be currently available to the participants. Thus, a cafeteria plan should require participants to elect the specific benefits that they will receive before the taxable benefits become currently available. A benefit will not be treated as currently available as of the time of the election if the election specifies the future period for which the benefit will be provided and the election is made before the beginning of this period.

In your SPD, the section that deals with eligibility should have a portion added that states that pre-existing dependents are allowed onto the plan when another dependent goes through a status change. Your current clarifications on eligibility and open enrollment might not address this. It might currently read that you can come on the plan when the employee is hired, or if you go through a HIPAA event, or at open enrollment. This wording is not liberal enough to allow the pre-ex dependents we are talking about. The Section 125 rule only addresses your ability to take pre-tax deductions, and who can be on the flex plan. It does not address the provisions of your underlying plan. I would be sure that your SPD has the language you want.

HIPAA sees only marriage as an event which allows an employee to add "other" dependents, and the underlying health plan must be at least this generous. The plan may be more generous and allow pre-existing dependents onto the plan when only one is in a Special Enrollment period, but the plan should have this provision in the plan doc since it is not required by law. The Section 125 "tag along" rule only addresses entry into the cafeteria plan (the ability to have pre-tax deductions). Section 125 does not require a flex plan to allow any mid-year changes at all. If your flex plan does allow changes (obviously most do), the IRS gives you the list of allowable changes that won’t compromise the pre-tax feature of the benefit. The IRS says that you can add pre-existing eligible dependents to the plan when only one goes through a HIPAA event or a status change, but consistency rules still apply. Assume your underlying plan has a provision which allows this (most probably don't). The IRS now says it is no problem to add pre-existing eligible dependents onto the flex plan along with the Special Enrollment dependent and take pre-tax deductions for all of the dependents. Without this statement, only the HIPAA-affected dependent could come on at that point. That's how I read it. The IRS also says that you can add pre-existing dependents to the plan when only one has a status change, although consistency rules still apply. Since consistency rules still apply, this seems to take us back to before the IRS even made that statement. It seems to be an empty statement. The IRS does state that the employee needs to be newly entitled to family coverage. They’re basically saying that if the status change entitles you to what your employer classifies as “family” coverage (payroll deductions can get no greater for more dependents) you may as well cover all your eligible dependents since the payroll deduction would be the same. I can think of almost no situations where this rule would apply (if you apply consistency rules), since there always seems to be an alternate way to get the dependent(s) on the coverage if you meet the consistency rules. This is a messy question, and I have more thoughts on this than I have room for here. I’ve pondered the wordings of the regs, their preambles, and the IRS examples for some time, and they are not clear-cut in my view. What is certain is that the IRS has said that they are not trying to reinterpret or change HIPAA provisions. With that said, the provision allowing pre-existing dependents onto the plan when only one has gone through a HIPAA event (or status change) should be in the plan doc before you even begin to interpret and apply these rules.

She should file a form 1040X, Amended Return, for tax year 2000. She can get the form and instructions online at www.irs.com. On it she will end up raising her taxable income for that year by the amount she originally deducted. The IRS does not want 1040X filers to figure any penalty on the form, as they will figure it out themselves and send a bill. Having seen many amended return filed, my opinion is that they won't even blink at this one, and there will probably not be any penalty. As far as the Roth IRA she currently has, she is stuck with it. She can take the money out, but earnings would be taxed, and she would pay a 10% early withdrawal penalty on top of that. She would, however, be clear of her Roth IRA. I think she should leave it there, and simply open a new Traditional IRA. She still has 5 days to set one up for tax year 2001, or she could start one for 2002. Perhaps she is enticed by the tax deductibility of the regular IRA, but there are few circumstances where they make more sense than a Roth IRA. I think her "mistake" is probably the way she really should be going.

How did the employee's medical insurance change? The consistency rules still need to be met depending on the change. He may be able to add the FSA, maybe not. Also, keep in mind that mid-year changes to FSA's do not have to be allowed, and very little is cut and dried with FSA's. HIPAA mandates that changes be allowed to health plan elections in the situations described above, but most FSA's are not subject to HIPAA. What is allowed and not allowed as far as mid-year changes to FSA's should be in the plan doc.

The premium refund, or however you choose to disburse the funds, should be done within the plan year following the year the experience gain occurred. Otherwise, you may run into a deferred compensation issue [1.125-2 (Q5)(a)].

No. Not under a health care spending account. It can, however, be deducted as a medical expense on Schedule A for tax purposes, subject to limits

Yes, if it's specified in the plan doc, then you'll need to follow that. Good point. Experience gains do not have to be addressed in plan docs, however, so you may not find anything in there. As long as it is handled in a nondiscriminatory manner, you can do one thing one year, then something else the next year.

Interesting point. I still stand by my opinion, but this will be a closely watched case if something like this ever goes to court. I can't help but think that if they ever allow election changes due to a miscarriage, they'll have to begin allowing changes due to a child's conception. This employee should have just made a mid-year election change as of the birth of the child. She should have elected an amount that corresponds to her pre-natal expenses at the beginning of the plan year. The birth of the child would (if their 125 allows it) give her the right to increase her FSA, and this would have been effective as of the date of birth of the child. The increased expenses would have then been reimbursable, both for the mom and for the child, since they would have been incurred on the first day that the increase went into effect. This way, she would have avoided being stuck with the large annual election.

Tough one. I can find nothing that deals with this specifically, but pieces in the regs address parts of this. Since elections are really supposed to be made before the Section 125 plan year begins, I don't think that employees should be able to take the allowance and use it for another benefit, even if that benefit is only applied prospectively. I think that the allowance should simply be added to the employee's pay as taxable income, as well as any allowance that was allocated to the benefit early in the plan year before he/she learned that they would not be eligible for the benefit. A prime example of this would be optional additional life insurance that the employee doesn't end up eligible for.