Lisa Hand

As a plan service provider, we require independent third-party verification of expenses and VISA receipts do not normally meet that requirement. Additionally, it is when the service is incurred, not when it is charged, billed or paid for, which determine the date of service. Finally, most expenses are eligible for at least some insurance coverage and the actual amount paid by insurance is usually not clear until the expense is processed through the insurance and an explaination of benefits is issued. Finally, a better way to control administrative costs is to out-source the benefit to an organization which specializes in its administration.

Is this a premium only plan? Was there a corporate resolution done adopting the plan in 1994? The revision in 1997? Were there significant changes in the plan in 1997 or was there simply a change in insurance companies?

Prop. Treas./ Reg 1.125-1, Q/A-17, "... a cafeteria plan benefit under which a participant will receive reimbursements of medical expenses is a benefit within sections 106 and 105(B) only, if under the benefit, reimbursements are paid specifically to reimburse the participant for medical expenses incurred during the period of coverage." ".. The medical expenses that are reimbursed under an accident or health plan must have been incurred during the period for which the participant is actually covered by the accident or health plan in order for reimbursements to be excluded from gross income under section 105(B). For purposes of this rule, expenses are treated as having been incurred when the participant is provided with the medical care that gives rise to the medical expense, and not when the participant is formally billed, charged for, or pays for the medical care. Also, for purposes of this rule, medical expenses that are incurred before the later of the date the plan is in existence and the date the participant is enrolled in the plan will not be treated as having been incurred during the the period for which the participant is covered by the plan." Additionally, your summary plan description should clearly state that only expenses incurred during the Plan Year or a shorter period of participation within the Plan Year for those participating less than a full Plan Year, are eligible. ------------------

Publication 502 lists acupuncture and Christian Science practitioners as valid expenses and FDA approval is not required because these services are not regulated by the FDA. However, the publication also clearly states that illegal operations or treatments are not eligible "...whether rendered by licensed or unlicensed practioners." That was the reference I was looking at for my earlier comment, since surgical procedures are regulated by the FDA.

An additional comment, before reimbursing make sure the procedure is FDA approved in the US. For example, Intacs (corneal rings) were approved in Canada in 1998 and Europe in 1996, however, were not approved in the U.S. until this last Friday (April 9, 1999).

Key employees (shareholders/owners) may not account for more than 25% of the plan - Section 125(B)(2)

Medical FSAs are for unreimbursed medical expenses. Your claim forms should have some type of statement on them that the participant signs which includes a statement that they have submitted it to their health insurance and been denied in part or in full. If it is eligible to be paid by the insurance, it must go throught his coverage first. Otherwise, there is nothing stopping the participant from claiming it through the FSA and then turning around and submitting it to the insurance and being double reimbursed. Since your plan documents clearly state the requirement and the IRC and governing regulations and publications clearly state you can not claim items for which you are eligible for reimbursement from other sources, I think your participant is either confused or has had some experience with a plan that is not administer in full compliance with the IRC.

As a married couple, they can not exceed the $5,000 annual per family maximum for DCA and as employees they are able to participate in the Medical FSA at the same level any other employee can.

That 500% is part of the complete definition of a flexible spending arrangement and how they function. The more important numbers are the over-all plan maximum and the cap on the Medical FSA,if any, defined in the plan documents.

There is no federal limit on Medical FSAs. The limit is detailed in the plan documents and is set by the employer/plan sponsor.

Data Path in Arkansas, 1-800-633-3841, has Windows 95 based software. However, SLuskin is right in suggesting out-sourcing if this is just for your organization. The BenefitsLink yellow pages lists several plan service providers.

The Proposed Regulations on the effect of the FMLA on operation of Cafeteria Plans (http://www.benefitslink.com/taxregs/1.125-3.htm) detail the three choices available for funding Section 125 contirbutions while on FMLA. They are 1) Pre-pay, 2) Pay-as-you-go ("generally made by the employee on an after-tax basis") and 3) Catch-up. The employer may offer one or more of these options.

Treas. Reg 1.125-4T (3)(1) & (2)(B) found at 62 Fed. Reg. 60165 (Nov. 7, 1997) addresses this issue.

Turtle: You also might find it more cost effective to out-source your administration. A number of fine companies that perform this service are listed in the Benefitslink yellow pages.

Your Plan documents will detail who is eligible to participate in your plan. If it does not state retirees, then the docs would have to be changed to accomidate this request and all retires would then be eligible. However, Preliminary Draft IRS Examiniation Guidelines (Spring 1998) note pension reductions cannot fund coverage on a pre-tax basis. So if his payout is from a qualified plan then it seems the IRS has prohibited the use of those funds in a 125 Plan.

An additonal issue as it relates to dependent care is how is the company structured. If it is an S corporation or partnership, the client(if he is the owner) could not participate in the plan even if they have qualifying expnese (greater than 2% shareholder rule). If it is a corporation, then non-HCE employees would also have to participate and account for more than 55% of the DCA benefit or the owner again could not participate. Section 125 plans are primary for the benefit of employees and owner/shareholder/HCE are limited in their participation.

Cosmetic procedures are prohibited unless "...it is necessary to improve a deformity arising from, or directly related to, a congentital abnormality, personal injury resulting from an accident or trauma, or a disfiguring disease." (IRS Publication 502) Depending on the situation, it may be allowable, detailed documentation would be required to prove the procedure is treatment as decribed above.

RB- Not only is there one set of temporary regulations but also there are five sets of proposed regulations which govern Section 125 Plans. The IRS will follow all of them in auditing a plan, this means that employers must follow such regualtions, even though they are not issued in final form.

There is no requirement for the employer to level fund the Dependent Care Assistance benefit. Additionally, since you are supposed to be reimbursed only for expenses you have incurred, documentation would not support advanced claims for DCA. Finally, from the employer's perspective there is absolutely no reason to risk possible loss in this benefit.

The breast pump would be medically if the infant was unable to breast feed or failing to thrive. Then its use would be "primarily to prevent or alleivate a physical or medical defect or illness." and can be documented as such by their provider.

There is no federal limitation set for Medical FSAs. That limit, if one is put on the benefit, is set by the employer in their plan documents. While the employer has full ability to make changes, it is best to make any changes prior to the start of the next plan year, so information on it can be communicated during open enrollment.

Are you talking about Medical FSA? flexible Spendign Account or Arrangment. An MSA is a different type of benefit.

Please provide more detail on why the plan year is being changed. The employer does have the ability to change the plan year, however, there are specific circumstances and some concerns depending upon the type of plan.

Get the Form 5500s done and filed ASAP. Ask the Service for mercy when they are filed, include an explaination of why the 5500s were not filed and if there is no reason, be prepared for a serious fine. Would not do anything else until the plan is clean as far as the 5500s are concerned.

Ray: I can only give you input as it relates to my company. We are plan service providers. We perform all required testing on EVERY client with a Section 125 Plan. Regardless of how often the IRS is auditing these plans, it is required for the plan to be in compliance. By the way, the IRS issued audit guidelines for Section 125 Plans last year, so the assumption would be they are looking at this type of plan.