Lisa Hand

The Internal Revenue Code and the governing regualtions are pretty specific about who is considered an employee for pruposes of a Section 125 Plan

There are no regulations on who administers a Section 125. However, they may want to think twice about self-administration of a plan with FSAs, especially the medical reimbursement. Would be happy to discuss the concerns- 1-888-264-2717.

How is the company structured? Is it a corporation or a S corporation?

Regardless of whether it is offered by the employer, the test as to whether it can be pre-taxed under Section 125 is whether they are a dependent as defined by the Internal Revenue Code.

A premium payment portion of a cafeteria plan which would either function like the group health benefit or be processed through a TPA can offer coverage under individual health insurance policies, provided that coverage is excludable under Code 106. The Preliminary Draft IRS Examination Guidelines recognize that individual policies amy be offered through a cafeteria plan. It is the sponsoring employer's choice whether or not to offer this option, since it may present additional compliance issues.

In addition to the prohibition on reimbursing premiums thru an FSA, it is my understanding that a group health insurance premium must go through the sponsoring employer's cafeteria plan. Therefore, the spouse's group premium at her employer could got through that employer's Section 125 Plan, but since it is not an individual policy it is not eligible to go through a Section 125 Plan where she is not an employee. The discussion of reimbursing individual premiums through a non-FSA premium payment plan option is a different matter.

Is this the spouse's group health insurance premium at another employer?

HIPAAdrome: as was stated above ALL Cafeteria Plans must file a Form 5500 - no exceptions.

The penalties you need to be concerned about are those from the Internal Revenue Service, $25.00 per day up to a maximum of $15,000 per return for failure to file or filing late without an extension.

Kip: We are not talking about running individually owned insurance through a FSA, that is not permitted. However, JPCMPLS is talking about running the premiums through the Section 125 Plan as a separate non-FSA option.

Can the aquired company produce Form 5500's for the years the plan has been in place? If not, that is another large (larger) problem. Was a plan service provider used by the aquired company and if so has an inquiry gone to them for document copies. Plan service providers should maintain file copies of all documents and may have other helpful records. If not, an inquiry to their CPA, lawyer, ect might be helpful. Does any corporate resolution exist in the corporate records? Sometimes docs are missplaced, these are some ideas for finding them.

Unlike the Dependent Care Assistance benefit, the Internal Revenue Service does not set a maximum for medical flexible spending accounts, that is set by the employer's plan document.

With a Cafeteria Plan, the employees save state, federal and FICA on every dollar and the employer saves FICA. As to the second portion of your question, it is hard to answer without more informaiton about your organization and its demographics.

The best place to start is to talk to someone who specilizes in these plans. They should be able to discuss your options at no cost. The Yellow Pages on BenefitsLink lists a number of cafeteria plan service providers. Especially for a small non-profit, there is no sense in recreating the wheel.

Sathi: If this is informational on 125 Plans, please elaborate. If this is an advertisement, please remove and post on the commercial message board jekiert: please elaborate on your question

Is this planning for the installation of a Section 125 plan or unification of all benefits through your 125 Plan or just benefits in general?

Quickbooks is not a good fix for Cafeteria Plans. A program specifically designed to perform all the necessary tasks is a much better choice or you might want to out-source to a company that specializes in the administration of Section 125 Plans, several are listed in the BenefitsLink Yellow pages

Why was no deduction taken from the first check? Not eligible? Administrative error?

The Employee Benefits Survey conducted by the Department of Labor may provide some useful information. However, since the keys to employee participation are education and customer service, statistics do not address these issues. Would be happy to discuss our experiences, please call 1-888-264-2717.

KP - no joy in finding Dependent Care topic under Misc.

We do not use a voice response system, but do know that our software provider, Datapath, has one available. They can be reached at 1-800-633-3841, ask for Baker or at www.dpath.com. You also might want to check the BenefitsLink yellow pages.

You do not seem to have any event which qualifies as a change of status, thus must wait until the next open enrollment to make any changes.

Kip is correct, this is not a situation which involves change of status. The deducations should be adjusted to comply with the IRC in any situation which is discovered not in complaiance and it should be clearly documented and any excess contributions run through payroll and taxed. While the employer (administrator) should make sure that enrollment documentation clearly states the Plan and IRC limits, it is the employee's responsibility to disclose the earlier participation. One other way to address this issue is to detail in the Plan Documents that any participation for periods of less than 12 months is pro-rated, thus the maximum any participant (who is married filing jointly or head of household) can take is for the DCA is $5,000 annually or $416.66 per month.

Clarification - Is the question concerning the Dependent Care Assistance FSA?

1.125-1 Q/A-17 starting the second paragraph under A-17: "First, in order fo medical care reimbursements paid to a particiapnt under a cafeteria plan to be treated as nontaxable under section 105(B), the reimbursements must be paid pursuant to an employer-funded "accident or health plan", as definded in section 105(e) and scetion 1.105-5. This means that, although the reimbursements need not be provided under a commercial insurance contract, the reimbursments must be provided under a benefit that exhibits the risk-shifting and risk-distribution characteristics of insurance. A benefit will not exhibit the required risk-shifting and risk-distribution characteristics, even though the benefit is provided under a commerical insurnace contract, if the ordinary actuarial risk of the insurer is negated either under the terms of the benefit or by any related benefit or arrangement (including arrangments formally outside of the cafeteria plan)." Basically, this means you can not shift the "risk" of the medical reimbursement benefit back onto the employee, since the employer is the "insurer"even in an agreement outside of the cafeteria plan. While some plans may be written to collect all unpaid "premiums" from a final pay check with it being applied on a uniform and nondiscriminartory basis(all employees. There are serious questions, which even the IRS raises, as to whether doing so violates COBRA and state labor laws. However,if the plan is only collecting negative amounts, it would seem to be clearly in violation of the section reference above. Given that the IRS could disallow the plan, fines can be assessed and all back taxes, plus penalties and interest would be due, it seem better to be extremely conservative in this area. The "risk" to the employer of losses to advance claims can be off-set by limitations on the amount that can be put into the medical reimbursemtn account, forfitures of unused allications as well as the employer FICA savings.