papogi

Try here for some OTC guidance (not set in stone, this is just one place's interpretation of the new OTC reg): http://www.125plan.com/OTC.pdf -or- http://www.ibenefitresource.com/otcdocs/otc_chart.pdf And here for a general list: http://www.cigna.com/health/consumer/medical/fsa_health.html

It depends on the industry and the prevailing benefits within that industry. Companies must stay competitive with their peers to get the good employees. It also depends on the employer’s willingness to accept risk, and their perception of how much a provision like this actually controls the risk. For instance, when you say to an employer that a new employee hired on October 1 can elect a $5,000 Health Care FSA through the end of the year, submit a claim for $5,000, then terminate employment, this makes some employers want to impose a prorated FSA election provision. Some employers don’t even flinch, however. Some don’t want to deal with the administrative burden of having varying FSA caps based on hire date. Sometimes, employees don’t like that the new guy can put the same amount into his FSA even though he was hired mid-year. Employers have to find out if that’s the case in their company. We have some employers set up a $2000 annual limit, then have new hires eligible to come on the plan either at open enrollment or at the mid-point of the plan year (if they were hired prior to the mid-point). Those people would have a $1000 limit. This approach prorates the limit, but allows only one time mid-year for newbies to come on, thereby simplifying the administration of such a provision.

...and almost all of the plans we administer do NOT prorate based on date of hire. Guess it depends on many things.

No. Again, Treas Reg 1.125-4 (f)(4)(ii) only says that an employee can make a prospective change to their election if their coverage changes under another employer’s plan and the plan years differ. It says nothing about how they have that coverage with the other employer in the first place (whether it's through a boyfriend or a legal spouse).

I know that some plans do cover opposite sex domestic partners, and if a domestic partner is considered a dependent under tax code (dependent defined as person who resides in the employee’s household and who receives at least 50% of support from employee), then those domestic partner benefits should be non-taxable. In any event, your employee can certainly drop her single coverage if she has a status change. The course of events you described in your later post would constitute a status change. Treas Reg 1.125-4 (f)(4)(ii) only says that an employee can make a prospective change to their election if their coverage changes under another employer’s plan and the plan years differ. Your description would fit into that, as I read it.

I'd be very surprised if the boyfriend truly has this girlfriend covered under his plan (the plan might think they are married, when they aren't), although it is technically possible. She can't drop her individual coverage without a status change or open enrollment, and realizing you have coverage elsewhere is not a status change.

I read the other post you refer to (1/5/04), and I found it very interesting, as well. It does seem that a twisted reading of the regulations might allow an employer to operate an FSA in this manner (paying out funds to employees in installments, rather than all at once). Treas Reg 1.125-2 Q-7 (b)(2) only requires that funds be “available at all times,” and that employees “must be eligible to receive the maximum amount.” The regs state that “available at all times” means that funds must be paid at least monthly. It does not specifically state that the funds must be paid in their entirety to the employee in such and such a time frame. Technically, a plan operating this way is still saying that employees are “eligible to receive the maximum amount,” albeit on a drawn out schedule. As long as terminating employees are justly reimbursed a lump sum representing the outstanding amount due to them from the employer, then the risk-shifting regs are being followed, or so it would seem. I can see how one could arrive at this conclusion. In a sense, employees never really know if their employer’s 125 plan is in compliance. They see how the plan document is written regarding status changes, reimbursement procedures, etc. and have to assume that these provisions are being applied, and are being done uniformly. The provision regarding terminations is no different. If it is in the plan doc, aside from interviewing all employees about all provisions, an employee must simply assume that the employer is following the plan doc. If a plan operates this way, I would think that the EOB should state the total amount eligible to be reimbursed. That’s what the employee can use to make sure that he/she received that entire amount following termination. With all this said (I played devil’s advocate here a bit), my personal opinion is to avoid operating plan this way. I feel that it goes against the intent of the legislation, could be outlawed if the issue is pushed in court, and would then require plan document rewrites and employee recommunication, as well as potential fines (very highly unlikely, however).

Treas Reg 1.125-1 Q-15, first paragraph, addresses this. Elections must be made before the benefit is available. If the benefit becomes available on 1/1/04, then no change can be made after 1/1/04, even if the first payroll deduction has not been taken. If, however, your open enrollment period ends 12/1/03, and the benefits go into effect 1/1/04, then the IRS would not care if you allowed a change to the election during the month of December because it is still prior to the benefits becoming available. If that is the direction your question is going, then unfortunately the answer is what you don't want to hear: check the plan doc. The plan doc deals with open enrollment processes, and the IRS does not care about those details. If you wish to provide a way for employees to make changes in the month of December (continuing my example above), then you only need to do this on a non-discriminatory basis. Allow everyone a re-evaluation period. Again, it must be prior to the benefits becoming effective.

A Roth IRA can be used to pay for higher education, but only the original contributions can be taken out penalty free and tax-free. Using earnings in a Roth IRA for college avoids the 10% penalty, but does not avoid income tax. If you want to avoid paying taxes, you can only take out your contributions, thereby getting no growth on your money. The Coverdell IRA is not subject to income tax, although there are lower contribution limits. There are lots websites which compare the various savings alternatives, highlighting advantages and disadvantages, as well as addressing financial aid ramifications. While not a finance website, this site about babies is a very good place to start: http://www.babycenter.com/baby/babyfinance...babycollegeBkmk

Yes, but only if the plan allows employees to drop dependents mid-year without a qualifying event. Rev Rul 2002-88 states that if a spouse is removed from coverage in anticipation of the divorce, COBRA coverage must be made available to the spouse when the divorce becomes final (almost surely causing a break in coverage for the spouse). The ruling does not alter the rules already in place for the plan regarding dropping spouses from coverage, particularly Section 125 rules. If the plan in question is operating under Section 125, with pre-tax payroll deductions paying for that spouse’s coverage, the employee cannot drop the spouse in anticipation of the divorce. The divorce is the qualifying event, and that must occur first. Few plans allow dependents to be dropped in the middle of the plan year without a family status change, since most plans are under Section 125.

The regular IRA gives you a small tax break up front (if you are able to deduct the contribution), but forces you to pay tax on the entire appreciated amount upon distribution. A Roth IRA allows you to pay income tax on your relatively small contribution, then pay no tax at all on the entire appreciated amount. Regardless of your retirement tax bracket relative to your current tax bracket, that is a potentially big advantage for the Roth. There are some on-line calculators at places like Vanguard and T Rowe Price which let you run the numbers and compare traditional versus Roth, based on your assumptions.

The only exposure to the employer by making no effort to police this is that they could be hit by the IRS for underwithholding. When the employee fills out his/her taxes (Form 2441), they will end up paying income tax on the amount which exceeds $5,000, but the IRS will never get any FICA or FUTA on that amount, and they won’t like that.

You're certainly able to impose this limitation. The issue is that very, very few companies would have such a stringent dependent eligibility provision, and in your battle to hire and keep good employees, you could very well lose to the competition over something such as this. To an employee, this is a huge disadvantage to his/her dependent in college, and may be enough to make that person look for work elsewhere. College kids are not typically big risks. They are young and healthy, their parents are no longer having kids (no premature babies to pay for), and their parents are not very old, yet. All in all, these are employees to keep.

The uniform reimbursement requirement of FSA's will still apply even if the account is funded by the employer, and they can't recoup this money from the employee. Say an employer gives 300 for single, and 600 for employee plus one or more. If an employee goes from 300 to 600, the employee has access to 300 up to the change date, then up to 600 (can be pro-rated) from the change date going forward. The grand total available to the employee would be either 600 or 300 plus the pro-rated amount. If the employee goes from 600 to 300, the employee has 600 available up to the change date, then up to 300 (possibly pro-rated) from the change date and on. Again, the total available is no more than 600. The 300 given to the employee after the change date is not in addition to the 600. If the employee only comes up with 100 in claims furing the 600 period, then he/she can still get the 300 (or pro-rated amount) with dates of service after the change date. This would be one equitable way of handling this sort of issue.

Notice 2002-45 illustrates the IRS's interpretation of this issue (even though it actually addresses HRA's). It states, "A medical care expense may not be reimbursed from a 125 health FSA if the expense has been reimbursed or is reimbursable under any other accident or health plan." Harry Beker's statement certainly does not coincide with previous thought.

If the child is a dependent under tax code, then the COBRA payments can be pre-taxed.

In your first paragraph, you say cafeteria plan, inferring that you are talking about all the benefits under the café plan. In the second paragraph, you mention the annual election changing, inferring that you are only talking about the FSA portion of the plan. If you are talking about the entire café plan, if the cost change is significant, employees would see this as an increase in costs, and the election change rules under 1.125-4(f)(2)(ii) and (iii) would allow them to make some election changes. With regard to the health FSA, cost changes do not allow any changes there. I would think that the employer could stop contributing, but the employee would still have access to what the employer’s “election” was before contributions stopped as long as dates of service are before the stoppage. This means the employer could still be forced to pay out, due to the uniform reimbursement rule. If the employee was adding a certain amount to the FSA on top of the employer’s contribution, the employee’s election should continue unchanged. Again, the employee could go for the full amount, however, with incurrals prior to the stoppage of employer contributions.

I would not allow it, since no services were provided. A fee such as this would not be medical services under Section 213, I think.

No. Consistency rules will say that a decrease in costs will allow new participants to enroll, but an increase will not.

You are correct. Only qualified beneficiaries are eligible. After that, a newborn can be added, and other eligible individuals can be added at open enrollment. The employee can’t add the spouse when electing COBRA.

The original post did not say that this plan was through an insurer. You might be right that no insurer would cover a sibling, but I know of some self-insured plans that do. The answer will be in the plan doc.

Specifically, what rules?

Absolutely. Check the plan doc. That's where the answer is.

What is the plan's definition of dependent? That's the place to check, as the answer to this question might vary. My guess is that this person is an eligible dependent.

But consistency rules will only allow the employee to start up or increase an existing health FSA upon the birth of a baby. The birth still won't help her drop or decrease this account.