Lisa Hand

The Proposed Regulations issued March 23, 2000, "provide that a cafeteria plan may permit an employee to make an election change, during a period of coverage, corresponding with an open enrollment period change made by a spouse or dependent when the plan of that indiviudal's employer has a different period of coverage."

All Section 125 plans (including premium conversion plans) should have all proper testing done and any company that is not insuring it is, is risking their entire plan. Testing should be done prior to the beginning of the plan year (as was discussed in the last posting on this topic) and appropriate adjustments made to insure compliance prior to the start of the plan year. Interm testing may also be required if there is a significant change in participation during the plan year and appropriate adjustments, if any, made at that time. For example, a large group of employees are hired or the company downsizes either situation could radically alter the testing results.

You might want to query the IRS with that question. It is easily done from their web page. Pub 502 is not going to be that specific in most cases, especially with newer treatments. [This message has been edited by Lisa Hand (edited 03-27-2000).] [This message has been edited by Lisa Hand (edited 03-27-2000).]

For an S Corp, the rule is greater than 2% owners may not participate. Your client should inquire if the company had a TPA or administrator for the 125 Plan and why the owner was permitted to participate. It may be an E & O issue.

If the plan is a under Section 125, usually the SPD and enrollment packet should detail the possiblity of reducing the HCE participation to insure compliance. Joe is correct the testing shoudl be done prior to the start of the plan year, since the elections must be made then. Our confirmation letters also have a reminder statement on them to that effect, so HCE do not call and say the amounts are wrong when they were reduced to meet the testing. If major changes occur mid-year the testing may need to be done again and adjustments could be necessary at that point also. As long as the adjustments are properly made and documented, I am not sure how the TPA is coming to the conclusion that the entire HCE reimbursements are taxable. Did they give you any regulation or reference? [This message has been edited by Lisa Hand (edited 03-22-2000).]

Actually under Rev. Rul. 71-588, an employee/spouse of a sole proprietor may participate in the Section 125 plan as well as other family members, provided that they are bona-fide employees. The coverage must be by virtue of the employment relationship and the family members must meet all eligibility requirements (min. hours per week, ect) of the plan.

For federal tax purposes, LLCs are generally treated as partnerships. Thus, member/owners can not participate in a cafeteria plan. Setting up a structure with the intent to circumvent this rule would probably not stand up to audit.

We are in the process of upgrading to the new Windows version from Datapath - so far so good. Will keep you posted or email me directly if you wish.

Did your TPA needs provide you with specific documentation on that? Was your plan document updated to reflect the change?

No. This is part of the risk the employer has when sponsoring on of these plans. That is why most plans have a cap on the unreimbursed medical benefit.

Prop. Treas. Reg 1.125-1, Q/A-17 Prop. Treas. Reg 1.125-2, Q/A-7

A Section 125 Plan must give the choice between pre-tax and cash (after tax), so the answer is yes.

jnoel: The definition of a cafeteria plan is a written plan under which all participants are employees and the participants may choose among 2 or more benefits consisting of cash and qualified benefits. Are you asking if someone can for whatever reason waive participation in the Cafeteria Plan and take their premium after tax?

From a TPAs view, there are a number of reasons to outsource a cafeteria plan especially those which include flexible spending accounts. Compliance, testing, proper education of employees and minimizing the administrative impact on the employer are some of them. One of the most important reasons to outsource if your plan includes a medical FSA is that the employer really does not want the possible liability of reviewing medical claims. The review must be done to insure proper processing of the account, but most employers simply do not want to be in the position to see this type of imformation for legal reasons. Additionally having the employer reviewing claims could have a chilling effect on employee usage of the account for the same reason. There are a number of TPAs listed in the BenefitsLink yellow pages.

CM - what section of 1.125-2 are you refering to?

So you are currently in open enrollment for the new plan year which begins, March 1, 2000?

According to recent updates we received: the IRS indicated that further guidance on change of status should be expected soon. When issued the rules would not become effective until the first plan year that begins 120 days after the new rules are published.

What is the plan year for your Cafeteria Plan?

Which state?

inslady: Gburns was requesting clarification not dictating rules to you. This work group is open to all regardless of their experience and often we can help each other locate sources and regulations. Please email me directly if you have any other questions.

When was the baby born?

You might want to post this on the Cafeteria Plan work group.

No.

Carole: You need to contact the dentist office and explain the it is not when the payment is made but when the service is incurred and that you simply want to know if any pre-payments were included in the information they sent you. And you are correct if you reimburse an item that is not in the period of participation the plan has a problem. This is one of the reasons many employers out-source these services so a TPA does the reviews and research for them.

That is why the expenses must be processed through any available insurance prior to being claimed in the 125 plan, why there is a close-out period after the end of the plan year in most plans to allow that to happen and why the regulations require written request for reimbursement from the participant AND independent third-party verification of the expense. If this is followed the participant can not get reimbursed for amounts paid by other sources.