papogi

I don’t see any problems with that. Remember that the Section 125 plan is separate from the underlying benefit plan, and the 125 serves only as a way to use pre-tax dollars to pay for those benefits. In your example, the medical plan goes into effect after 3 months. That doesn’t mean that all benefits that will be paid for with pre-tax dollars must also become effective on that date. The effective dates of each of the benefits is governed by the provisions in the document for that underlying benefit, not that of the 125 plan.

Is this FSA being funded by credits, or by employee-elected payroll deductions. Your example shows credits being used for other benefits, not the FSA. Maybe you are using the term FSA to talk about the benefits, in general, and not specifically a flexible spending account? The credits themselves are used for employer-provided health benefits, and are protected from taxation by Section 106. The benefits received from that coverage are tax-free under Section 105.

No. It’s no different than an employee who has health coverage now as a full-time employee, and plans to move to part-time in a couple months with no benefits, and has an expensive surgery in the next few days in order to get it covered by insurance. The employee is “gaming” the system in both cases, but is doing so within all applicable rules.

The code does not address this specifically. Since you are making the elections prospectively, you are abiding by the regs as much as possible, and have an arguable case for your procedures. My feeling is that you would be safe if the IRS looked at this, but again, this is not addressed in the code.

The Kaiser numbers are total premium. Multiply those numbers by 12 and you get $4020 single and $10884 family. Those are annual premiums. The DOL numbers are actual employer amounts, after the employee portion is removed.

The underlying health plan is not required to have an open enrollment. Since 125 plans (the funding mechanism to pay for the underlying health plan with pre-tax dollars) are required to have 12 month plan years, except for intitial short plan years, then you will have a section 125 annual enrollment. That will allow participants to make new FSA elections each year, as well as allow participants to switch from pre-tax to post-tax, thereby dropping out of the 125 plan and allowing them to drop the underlying health plan under the cessation of required contributions language. Or, in theory anyway, they could continue on the health plan with post-tax contributions. As for coming on the health plan, the rules under HIPAA special enrollment are the minimum necessary, so no open enrollment is required for the underlying health plan.

Two points of view taken from an earlier thread covering the same topic: 1. Section 125(g)(3)(B)(i) says that if the plan has an employment requirement in order to be eligible to participate, it must be the same for all employees. For example, you can exclude part time employees if you wish, but if you include them, they can't have a longer waiting period than fulltime employees. Also, you can't have managers or salaried eligible at 30 days, and hourly eligible at 90 days in the same cafeteria plan. This view is taken from the EBIA Cafeteria Plan manual, p. 201 which says, "Whatever the plan's actual employment requirement, it must apply the requirement equally to all employees. For example, the plan cannot provide that one group of employees is eligible to enter the plan immediately, while another group must complete 6 months of employment." On p. 828 of the same manual, EBIA gives more examples of the same. 2. On the other hand, Section 125(g)(3)(B)(i) says "...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. The inference could be that as long as all employees within a classification have the same waiting period, you are within 125. A company could have multiple waiting periods, as long as they are divided among classifications of employees, and applied uniformly within each classification. Therein lies the reason that nobody has responded to this question.

This appears to be something that should be addressed in the plan document, and might be in a section that deals with prorating employer contributions based on mid-year hires or changes in status. As long as the document is not contrary, the employer has every right not to increase the employer contribution for the last 3 months of 2005 in this case. However, I know that some employers do have a policy in place that would allow for an increased employer contribution in your example.

If you think you can have the participant obtain two bills (one for the first time period, and another for the second time period) rather than one, that seems to be the best way, I think. It helps the employee by being able to clear out last year’s account, and it’s completely legitimate based on dates of service. If you can’t get two separate bills, I would suggest prorating the bill based on the total number of days that the bill represents, and you can then “create” your own set of two bills, and will have an argument behind it should the IRS ever audit the plan.

Absolutely. You should send a letter to the individual explaining the issue and the need to have the funds returned. I doubt you'll have much luck, but it could go either way.

I can think of no cite that outright says that an employer can only have one enrollment period. I can direct you to 1.125-2 Q-7(3) where the IRS says that a plan year must be 12 months long. In addition, 1.125-1 Q-8 says that you can’t revoke an election after the period of coverage has begun. Those two things together say to me that your TPA’s interpretation is incorrect. In any event, tell them you don’t want to use their procedure of allowing multiple enrollment periods. You have just one, and you follow IRS rules regarding mid-year entry, changes and terminations. Section 125 is a set of “upper limitations”. As plan sponsor, you can be less generous if you wish, and you should be able to dictate the provisions of your plan to the TPA (even though I don’t think you are being less generous, and actually feel that your TPA has adopted a far too liberal interpretation of the regs, and are not doing their job to ensure Section 125 compliance for their clients).

True. I don't think that this interpretation was intended by the IRS, but that is one way to read it. I think the intent was not to lump HC and DC into one thing, especially since rules are already in place under Section 125 to prevent discrimination. Either way, I agree that there is some risk. Very small in my view, but risk none-the-less.

I assumed janmin is talking about the new grace period allowed by the IRS through the recently released Notice 2005-42.

In addition, even if the participant doesn’t expect a large bill in the near future, assume the participant expects a large bill just before the end of the plan year. In this case, the participant pays in the rest of the annual election, although it is post-tax, and pays the 2% admin fee. The participant then empties the account completely. The participant loses money, yes, but it might be a lot less than if he/she had not elected flex COBRA and might have stood to lose much more money earlier in the year.

Yes. All key employees must be taxed on their option to receive cash or other taxable benefits in place of non-taxable benefits. In other words, all pre-taxed monies in that POP plan year are now taxable to all key employees.

For an FSA to get around some of the COBRA requirements, one of the things it needs is to be exempt from HIPAA. One of the standards to meet that requirement is that the health FSA benefit cannot exceed either two times the employee’s salary reduction election or, if greater, the employee’s salary reduction election plus $500. In your example where the FSA is funded entirely by the employer, this FSA would not be exempt from HIPAA, so full COBRA rules would apply. By “full,” I mean that COBRA must be offered, and the 18-month (plus) rules apply. The employee would typically pay for it monthly, with the amount being $200 plus 2% (following your example). In your second example, however, the employee puts in $1200 annually, and the employer puts in $2400 annually. The employee is eligible for $3600, and this is more than twice the $1200 the employee is contributing, so this FSA is not exempt from HIPAA, either. Again, full COBRA rules would apply.

You'll have to check with your administrator to make sure they are offering the choice (depending on their system limitations), but I know that most are allowing you to elect the grace period for one and not the other.

You still have to provide the certificate. It's my understanding that group health plans subject to HIPAA have to provide certs upon request within 24 months of losing coverage. There is no 63 day provision. That comes into play when calculating creditable coverage days when applying a pre-ex provision for the next carrier. HIPAA requires that you send out the first cert without any request, and you can document that you had the cert out as fast as you could (the termination was retroactive).

While there are differing opinions out there regarding your issue (largely due to the argument that Section 125 is based on proposed regulations), the prevailing industry opinion and practice, by far, is that the employer cannot get these monies back from terminated employees. Doing so would reduce the risk on the employer’s side that there would not be enough risk-shifting for the benefit to be considered “insurance,” thereby losing its tax-favored status. I am one in that majority view. Every employer who operates FSA’s in this manner will end up with a number of terminated individuals in this situation. My bet is that you also have a number of participants who forfeit monies at the end of the year due to the use-it-or-lose-it rule. Based on my experience with FSA’s over many years, I would also venture to say that your forfeitures often, if not always, offset your losses, and you end up with an experience gain virtually every year.

See Revenue Ruling 61-146: http://www.irs.gov/pub/irs-drop/rr-61-146.pdf

kbs, maybe you can clarify if you really mean the HDHP, and not the HSA. Often, when people talk about the "HSA benefit," they sometimes mean the HDHP (since they are designed to go hand in hand). As AshleyL stated, the employer can't endorse an HSA, or they will have ERISA issues. They can, however, reduce their contribution toward the premium for the HDHP (since the premium will be lower for this plan in the first place, and hopefully the employee's portion would also go down).

Agreed. The IRS does not actually enact the legislation. I was not a careful in my wordsmithing

A DC account does not have the requirement to share risk, so many plans allow claims to be subitted and paid with service dates after a termination. A HC account, on the other hand, has to act like insurance, and the common interpretation of that would mean that claims can only be paid with service dates up to the term date. To allow claims after that would remove a big piece of the employee's risk, and many feel that this is against the IRS' intention in the legislation.

The relatively 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 then 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, then you would have to offer flex COBRA only up to the end of the current plan year. Many employers don't bother making this calculation (did the employee get reimbursements equal to or greater than the amount contributed?), and simply offer flex COBRA for health care accounts up to the end of the current plan year.

The IRS has allowed employees to nullify a DC account elected in error. For instance, an employee might elect a DC account thinking that it covers medical expenses for their dependents. In that example, the employee doesn't even have any dependents that would qualify for DC expenses. Hopefully, this employee doesn't have any other dependents that would qualify for DC expenses. Your argument could be that this employee's account was null at the time of the original election, since there were no eligible dependents. This is still a risky position to take. My feeling is that the IRS would give some credence to your argument in the vent of an audit, but you would be running the risk that the plan could be found out of compliance, making all amounts taxable to all employees. This happens a lot, but it is another example of employees not electing the account properly. The birth of the child and the subsequent onset of day care expenses would be an event that would allow the employee to elect the DC account at that time. The advantage of starting out early with payroll deductions to lessen the blow later on is not worth the potential risk of miscarriage and the subsequent problems this places on the employer, or problems this places on the employee (if the employer takes a hard line on the account).