Lisa Hand

One note, as indicated in the cite - reimbursement under 125 is for incurred expenses, which is defined as the service being provided to the participant or their eligible dependents, not when formally billed, charged or paid for (Prop. Treas. reg 1.125-4, Q/A-7). "expended" implies the expense has been paid, which is not accurate or a requirement of the regulations. The expense can be reimbursed once documentation of the actual service, less any insurance payments is provided along with the participant's formal request. Documentation of futute service is an estimate does not meet that requirement. The type of procedure needs to be considered as well. Since she is stating her provider is requiring up front payment, unless she does not have any insurance coverage or it is a procedure such as laser eye surgery, not normally covered by insurance, you need to evaluation carefully if the procedure is medically necessary as opposed to cosmetic.

The Benefits Link yellow pages under Cafeteria Plans.

I concur with Katherine and the section of Pub 502 quoted, these expense are not for general health. They are treating a specific medical condition, the employee's status as a quadriplegic and therefore would be eligible for reimbursement under a Medical FSA under the employer's Section 125 Plan or to be claimed by the employee on his individual taxes to the extent they exceed 7.5% of his gross adjusted income.

The sponsoring employer should make clear that their published policy on employee theft and misconduct extends to obvious fraud within these benefits. That is usually grounds for termination. Falsification of expenses is fraud and basically employee theft. The employer may not be able to recover the dollars, but can prevent further loss and obviously discourage the behavior in other employees in the future.

The only types of insurance permitted through a Cafeteria Plan are health related and group term life up to the limitation of section 79. While I am not familar with this type of insurance and would suggest extreme caution (if it sounds too good to be true, it probably is), no vehicle which deferes compensation is permitted in Cafeteria Plan.

Kirk, please note, this is not my opinion, it is the published guidelines from the IRS. The fact you are "... involved with an ABA project in which we attempted to get the IRS to reverse the position that kindergarten expenses are not reimbursable" supports the statement that it is the current position of the IRS that kindergarten is considered educational in nature and not reimburseable under a DCAP. Therefore EBIA's legal guide would also be currently correct on this issue. Please note, it is a resource I find to be prudent, extremely accurate and useful and I deeply appreciate the level of expertise on their staff. We may all have opinions on this issue and in a post that clearly indicates we are debating the merits of the IRS's position this would all be helpful; however, the point of Vickie's question was: is the knidercare part of the day allowable under a DCAP? And the answer would be "yes", as long as it is allocated specifically as care and work-related, it would be "no" if it was not allocated as care and considered part of the expense for kindergarten. Obviously, if the IRS changes their position on kindergarten, we will all update our records; however, until then, we need to comply with current regulations and publications.

One way for you to minimize the employer's exposure is to out-source the adminstration of the plan. While it does not eliminate the sponsoring employer's legal responsibilites, it does provide the resources of an organization which specializes in these benefits to insure proper day-to-day operations, claims adjudication, compliance and provides protection for the employer which self-administering does not , such as the legal exposure of the employer seeing health reimbursement claims and thus being open to legal action by former employees claiming they were dismissed because of a health condition, instead of performance. If the committee is going to administer the plan, not simply oversee the selection of an appropriate service provider, then you will need to have the proper resources, which are updated regularly to insure compliance. Start with Section 125 of the IRC, the governing regulations for 125 plans (Treas. Reg. 1-125-4, Prop. Treas. Reg 1-125-3, ect) and then subscribe to a good legal guide on Section 125 Plans.

Everyone might want to look at EBIAs article on this issue referencing their discussions with the IRS after the updated Publication 503 was issued which did not include the kindergarten example. http://www.ebia.com/weekly/articles/2000/C...1214Pub503.html Kindergarten is educational in nature and not eligible for reimbursement under a DCAP. Before and after school care is eligible for children 12 and younger, if properly attributed and documented by the provider. EBIA also addresses this well in their legal guide, which is updated quarterly.

We are not being mean. He is attacking this benefit and the professionals who provide it with his representations. If this is this man's profession, he should be doing more than repeating one US Representative's opinion (whose wife obviously put aside money without any plan to utilize it) and getting his facts correct. The keys to successful Section 125 Plans are proper education, good communications and responsible employees who do not put more aside than they are going to use. It is hard enough sometimes to even convince employees it is legal, without a media source as well known as Time publishing mis-information. Finally, this article invited opinions because it was posted on Benefit Buzz. When posted for benefits professionals to read, responses pointing out it is poorly written and researched should be no surprize.

I think the main point is that the article is, at best, extremely negative and an incomplete picture of a benefit we all know is very valuable, but does require good education and careful choices by the participants. Additionally, (and giving the author the benefit of the doubt that he simply did not understand the difference and that the appropriate term for valid expenses is "corrective surgery") specifically stating "cosmetic surgery" was valid, is an incorrect statement. It demonstrates a lack of knowledge of the subject and appropriate research, which could have been easily remedied with a quick look at Pub 502 or for that matter an online resource like BenefitsLink. As to "risk shifting", detailing how the benefit is level funded, giving employees access to their entire annual allocation when they incur valid expenses, thus rewarding them for their planning, would also have contributed to a more balanced article. Which, GBurns correctly states, was obviously not the intent of the article and that is why the author deserved feed back. The impression I got from the article was that the author was simply interested, for whatever reason, in presenting only the argument for eliminating the "use it or lose it" rule of 125, not in presenting a balanced account of an excellent employee benefit, which does require careful choices. With the new regulations defining HRAs (health reimbursement arrangements) and providing for an employee benefit which has the option to carry forward unused amounts, this agenda may lose steam. However, it does seem odd, given the numerous articles hailing consumer directed health choices and how encouraging employees to shop for their health care is the answer to all the cost concerns in that industry, that this article does not trust the same employees to make wise choices, if properly educated, on their Section 125 benefit.

Two clarifications - Given the nature of the question, both Sandra and my answers are presuming the question is about Medical FSA since no other category is level funded and that the plan year is a calendar year. 1. The employee's participation would not be limited, except by the regular limitations of the plan documents for the Medical FSA category as it applies to all eligible employees. 2. COBRA continuation is only available to the participant if the Medical FSA account has a positive balance at time of termination.

MSMA - Good for you. I strongly considered doing so as well. One of the biggest problems with this benefit can be mis-information and this "Time" article certainly did not help clarify anything. Lisa

Carolynn: We have had some experience with forgeries. However, unlike the employer in your example, the ones we work with consider fraud grounds for termination and publish it as such in their employee handbooks. We also work in a very conservative environment and strongly suggest that the employer publish in their enrollment information specifically how orthodonita is handled, which is usually dollars to service and documentation required from the orthodontist.

One more question you might want to ask, is it legal? If the treatment is not legal, in the US, Pub 502 specifically states " you cannot include in medial expenses amounts you pay for illegal operations, treatments, or controlled substances whether rendered or prescribed by licensed or unlicensed practioners."

Carman: You need to post this question on the Retirement Plan work group. Thanks

Kirk: Thanks for clarifying this issue, so promptly. No insurance premiums may go through a Medical FSA. Prop. Treas. Reg 1.125-2, Q/A-7(B)(4). Premiums reimbursed under a Section 125 plan are from a category for premiums only, never from an flexible spending account. EBIA's legal has a very good detail on this issue.

Sole proprietorships are special animals, spouses and other members of the sole proprietor's family may participate as long as they are bona fide employees. That said, special care should be taken to make sure those family members are 1) bona fide employees and 2)could not be considered self employee themselves (by virtue of investment ect), which would make them ineigible. As far as the LLP is concerned, the prudent approach is not to permit shareholders to participate since even if they qualify as W2 employees there is no guidance from the IRS and gray areas are alway risky.

Raising the deductible is only one way an HRA could help an employer contain costs. Others are as diverse as sponsoring employers themselves. For example, if the current vision plan does not meet the needs of the participants ie. coverage only every two years ect., it could be replaced with an HRA for vision expenses only. Now the employer dollars directly benefit the employees and since the amounts can carry forward, each employee could better manage their own vision costs and those of their families. Since the plans are employer funded and defined by the employer, there are a number of ways to utilize these plans so employers can take back some of the control over their benefit package. One of the keys is to review the whole benefit package and identify what your long term goals and abilities are.

Due to Code Section 318 ownership attribution rules (per Code Section 1372 which apply it to the definition of 2% shareholder), employed spouses, along with children, grandchildren and parents of greater than 2% shareholders of an S Corp cannot participate in that company's cafeteria plan.

Prop. Treas. Reg 1.125-2, Q/A-7(5), states, "A health FSA may reimburse a medical expense only if the participant provides a written statement from an independent third party stating that the medical expense has been incurred and the amount of such expense and the participant provide a written statement that the medical expense has not been reimbursed or is not reimbursable under, any other health plan coverage." And Prop. Treas. Reg 1.125-2, Q/A-7 (6), "Expenses are treated as having been incurred when the participant is provided with the medical care that gives rise to the medical expenses, and not when the participant is formally billed or charged for, or pays for the medical care." There is no requirement in the regulations for payment prior to reimbursement, so unless your plan documents state otherwise, it would seem, that the expense should be reimbursed once incurred and properly requested and documented by the participant

I think we would all be very interested in the specific regulations or notices you are refering to. My legal guide (last updated June 2002) still says greater than 2% shareholders of S corp are not permitted to participate.

Just one more note, writing your senator or congressperson is still a good idea and one to pass on to your employees. So many people view this as "tossing something into the abyss", that each letter, email and call congress actually does receive is weighted, counted as representing sometimes thousands of voters depending on the size of the district. The only way our elected officals know what we are thinking and what we believe is important, is to tell them and hold them accountable for their actions.

Please note the 1997 IRS letter referenced at the end of those informal comments, says it is at the employer's discretion whether they choose to reimburse up front or over the course of the treatment. Each plan sponsor should evaluate how they wish to approach this issue and clearly state in their SPD and other educational materials how this specific expense is addressed. Obviously, the risk is lower to the plan sponsor if reimbursed over the course of treatment. Additionally, it is often more benefical to the participant, since orthodontia is often more than the annual Medical FSA maximum permitted by their plan for one plan year. Bottom line is either choice should be well documented and educated to participants and uniformly applied to all eligible employees.

David: Could you be a bit more specific with your question? Why are you asking? What guidance are you refering to?

The last post hit the main issue, the medical FSA, which unlike the premiums, can not be changed under the cost and coverage change of status rule. That should be the major point to consider and plan components such as deductibles, co-pays, co-insurance and over-all coverage should assist in determining whether to match the health plan year or calendar year. This is to insure participants have the opportunity to make good choices to make their medical FSA work with their health plan.