Lisa Hand

Prop. Treas. Reg 1.125-2 Q/A- 7(a) details that health FSAs must "exhibit the risk-shifting and risk-distribution characteristics of insurance." The final sentence reads: "A health FSA will not qualify for the tax-favored treatment under section 105 and 106 of the Code if the effect of the reimbursement arrangement eliminates all, or substantially all, risk of loss to the employer maintaining the plan..." Section (b) details Uniform coveage and states "The maximum amount of reimbursement under a health FSA must be available at all times during the period of coverage." and states "...the payment schedule for required premiums for coverage under a health FSA may not be based on the rate or amount of covered claims incurred during the coverage period." Hope that helps.

Please remember the Message Boards are not for direct advertising of products by vendors. Thanks Lisa Hand

SLuskin, you are correct. S corp, partnership ect, Section 318 attribution applies. The only structure with an exception is the spouse of a sole proprietor who is a bonified employee and the IRS looks at those real closely.

A good way to avoid confusion on the FSA COBRA options is to have a separate COBRA notice for specifically the FSA, that way employees can not say they thought it was part of the health insurance COBRA and declined by mistake.

The $5,000 is for married, filing jointly and head of household $2,500 is the maximum is married, filing jointly If the spouse is a full time student, then a calculation needs to be done to determine their maximum permited

2003 medical mileage per mile is 12 cents 2004 has been revised to 14 cents

Just a reminder, advertising is for the Yellow Pages, this forum is for questions and answers and general information. Questions about software, recommendations ect are fine, direct advertising of specific products is not.

Since this is federal code governed by IRS, we have always followed the IRS's procedure on this, taxes and submissions like Form 5500s met deadlines if postmarked by deadline and if the deadline is on a Sunday, the next business day after the deadline. That said, if the plan documents and communications materials (educational materials, SPD, Plan Information Summary, status letters ect) clearly say it is 90 days and must be recieved in the office by that date, then that is the rule for that plan. But this needs to be in writing and should have been clear communicated to the participants. If that is the case, then a denial letter with a copy of the previously provided materials would be the response to the appeal.

Section 213(d)(1) defines "medical care" to include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. Feminine products are considered personal use items because they are not treating anything, but rather used for a normal body function. They do not affect that function.

jashendo - On what do you base your conclusion that the birth of a child (addition of a dependent) does not meet the consistency rule to permit an increase for the medical FSA?

Don't you have participants sign a claim which includes a statement verifying the expenses are for themselves or their dependents (along with other appropriate legalize) and documentation verifying the expense?

The plan sponsor has the flexiblity to define their plan and its benefits as long as they are not trying to make the definitions less restrictive than federal code. Making it more restrictive is fine, it just needs to be clearly defined in the plan document, SPD and edcuational materials. For example, some plan sponsors do not permit all of the allowed change of status events, which is perfectly acceptable. They can not, on the other hand, permit changes that are clearly defined as not permited under the regulations.

I would agree with MSMA that since the clip ons are used only with the prescription glasses, they would meet the "but for" requirement of an item not being personal use since it would not be used but for the specific medical condition, in this case prescription glasses. This seems to be similar to the discussion we had recently on remote control devices for hearing aids. It has no other purpose but to work with a prescription device. Also there could be cases where regular sunglasses could be medically necessary and prescribed by a practioner, such as after eye surgury or injury. Those cases would require proper documentation from the provider.

Per the IRS Informational letter on Kindergarten dated Sept. 7, 2000, "Section 1.44A-1©(6) provides that if a portion of an expense is for the care of a qualifying individual and a portion is for other purposes, a reasonable allocation must be made, and only the portion of the expense attributable to care is an employment-related expense. However, no allocation is required if the portion of the expense for the non-care purpose is minimal or insignificant. Accordingly, whether or not an expense qualifies for the dependent care credit depends on the nature and primary purpose of the services provided and is primarily a question of fact. In order for an expense to qualify in full for the dependent care credit, any portion of the expense for purposes other than care must be minimal or insignificant and inseparable from the portion of the expense for care." So the provider has answered the question for you by allocating the expense to something other than care. If it is allocated to a purpose other than care, it is not inseparable and is not custodial care, therefore not reimburseable.

Regardelss of where it is provided, at a chiro's office, physical therapy facility or directly to the massage therapist (LMT), a licensed practioner should veryify that it is medically necessary for it to be reimbursed through a 125 Plan. Note practioner, not MD, so, of coure, the practioner (LMT) providing the treatment can verify it is medically necessary.

Other providers call it a Reservation fee. However, basically it does not represent custodial care, since the child was not at the facility during those periods, so it is not a valid dependent care expense. One additional question, where is the child when he/she is not at the daycare facility? Hospital? or in some other type of facility? At home, being cared for there by a family member? Depending on the answers, there may be other custodial care expenses or the participant may have a valid change of status to lower their allocation, since a change in cost or coverage applies to dependent care.

The renewal date of the health insurance, not the retirement plan or fiscal year, is one of the main issues to consider. While it is not that great of a concern with a POP, if the plan anticipates adding FSAs, an important item to consider is the strict rules on change of status as they apply to Medical FSAs. If the health insurance and 125 plan are not on the same renewal, the plan could place their employees in the situation of the 125 plan renewing and then several months later the health plan changing at renewal. While they would be able to make adjustments for any premium changes, no change to the Medical FSA would be premitted, even if the health plan has changed. (Treas. Reg. 1.125-4). The DCA tracking for off calendar plan years is a pretty simple issue to deal with most software packages and prudent plan design. The IRS frowns on repeated short plan years when it appears that they are being used in an effort to circumvent the regulations. Establishing the first plan year as a short plan year is not an issue.

One note on the suggested correction. If you determine a mistake was made, to correct it, any amounts reimbursed in error would have to be refunded by the participant to the plan since they are not valid expenses, then the entire amount would have to be reversed through payroll and taxed. You can not have it both ways, correct the "mistake" and let them keep the erroneous reimbursements.

I would not recommend the above suggestion to change the plan for a number of reasons. I entirely agree with Kip, you are taking over the administration, only. You should have an informational session to explain your services, not open enrollment. As a TPA, you should also have a legal guide which assists with these issues, since the advise and answers here are not in any way legal guidance.

Any change to the original claim should be clearly documented in writing as to why it was changed, the regulation requiring the change and portion of plan document which requires it. Additionally, it must include an explaination of how to appeal the ruling, the timeframe in which to do so and the timeframe in which the response to the appeal will be forwarded.

A number of good points have been made. One more needs to be considered in our litigious society. HIPAA requirements and limits aside, the possible liability of having someone at the employer seeing the personal health information of the employees can create a legal nightmare for a small business owner. The ability to properly adjudicate claims aside, who actual adjudicates them? The boss? The boss' secretary? Their spouse? As mentioned, this would most likely have a chilling effect on participation with employees not wanting their employer to see this information. But it also has a more serious side. What is to protect the employer from a former employee claiming they were fired because of their personal medical information or a dependent's medical condition? The small business owner does not want to know John's wife has cancer or that Jane is taking the AIDS cocktail and if they do, they are leaving themselves wide open for this type of legal action.

One more point, since the discussion seems to be this is a personal use item instead of a medically necessary one, the following section of Pub. 502 seems to address it well. "Personal Use Items You can not include in medical expenses an item ordinarily used for personal, living, or family purposes unless it is used primarily to prevent or alleviate a physical or mental defect or illness." I think it is pretty clear that a remote control which controls only a hearing aid meets the definition of a device that itss primary use is to alleviate a phyiscal defect.

I was specifically addressing the issue of the spring break and two weeks at Christmas detailed in the posted query.

The amount paid to simply hold or reserve the space, but not to enable the pariticipant to work, is not valid for reimbursement. While the employee does at the above indicated rate have more than sufficient expenses to max their benefit, you still do not want to process as valid claims time periods which are not.

The maximum for the Medical FSA is set by the employer.