Lisa Hand

Guy: could you please give us some more detail on your question.

Greater than 2% shareholders of S corporations are not permitted to participate in Section 125 Plans.

How does the plan document define the Plan Year?

Does it specifically state the dental premium is a two year election?

Melissa: There is no Medical FSA limit set in the IRC or regulations. You might want to look into getting a good legal guide for cafeteria plans, such as the excellent one offered by the employee Benefits Institute of America. Answers to these types of questions would be detailed in one.

Are you inquiring about the Change of status regs issued in March 2000?

Your plan documents should have wording that permits you to make adjustments to insure compliance with the Internal Revenue Code, in this case Section 129.

Kirk: Sorry for the delay in response, I have been out of town. My answer to your question would be yes. Data Path already has a windows version and you purchase the level of support you need. So if it is just your company, you purchase the lower end capasity and if you have 20,000 or more you purchase that level of capasity. Dick, you might want to call them and ask for references of clients the size you are working with.

Individual Health Insurance premiums can be run through a Section 125 plan as a separate reimbursement category for just individually owned insurance premiums. They may NOT be run through the Medical FSA.

Melissa: Are you asking about MSAs (Medical Savings Accounts)? Because a Medical Flexible Spending account(FSA) and a medical reimbursement under section 125 are basically the same thing.

Without addressing the rest of the question, retroactive establishment of a plan would violate the regualtions and disallow the plan.

What do your plan documents say about change of status events and the time period in which they must be submitted?

DataPath in Arkansas.

I take it the employer likes the pre-tax treatment for himself and the employees?

A Section 125 Plan which would permit the employees to pre-tax their health insurance premiums, day care costs,and out-of-pocket medical expenses depending on which options are offered. These deducaitons are done before state, federal and FICA taxes for the employees and the employer saves the matching FICA, so it is usually a plan which pays for itself with employer tax savings.

You also might want to check with AT&T Translation Services. For subscribers, they provide both verbal and written translation services in over 120 languages based onteh actual time or number of pages.

For the Medical FSA, if the expenses were valid and incurred during the "period of participation" and it is still during the plan close-out period, then the claims must be reimbursed up to the annual allocation. It is just like health insurance, if the treatment was given during the time the participant was covered by the plan, the insurance will pay for the treatment. The DCA benefit does not run that way of course. These rules are why a specific close-out for terminated employees should be in the plan documents and the plan should set a prudent cap on the medical FSA benefit. Submission of claims for a deceased participant should be detailed in the plan documents. Prop. Tres. Reg. 1.125-1 Q/A-7 is a good place to start reviewing the governing regulations. The varied responses you received from the IRS may be based on how you asked the questions and whether you called the specific section in Atlanta, GA that deals with Section 125 Plans. Finally, the real issue may be your use of the term "tax defered income", the reimbursements from a Section 125 Plan are NOT income, but rather benefits. That is why the employee does not get the allocations back unless they incur valid expenses and utilize their benefit and also why both employee and employer do not pay taxes on these dollars. [Edited by Lisa Hand on 09-02-2000 at 01:09 PM]

Based on the previous postings and other information on BenefitsLink, the main problem seems to be the PEO claim that they can run separate testing and sometimes benefit options for each employer and still basically have one plan. As mentioned above, there are a number of good articles on this subject. However, we need to be careful to not paint all PEOs with the same brush, careful questions and research can identify those prudently running their organizations and those who are not.

Is it simply the enrollment form or a separate form the employees sign? If it is the enrollment form for the benefit, as long as it details everything it should as far as disclosure and plan elements for clarity, then naming it something for employee comprehension seems wise to me. You could simply call it, Section 125 Cafeteria Plan Enrollment.

If Company A is subject to COBRA then all terminated employees with positive balances should receive COBRA notifications for their medical FSA. There should also be a close-out period for claims incurred while employed detailed in the plan documents.

Dick: It doesn't matter when the claim is submitted (June 15 or July 3), it matters when the expenses are incurred. So you should check your plan document and make sure it states that the close-out period for terminating employees is from their date of termination, not the end of the plan year. This limits some exposure, but as long as it is a valid claim, incurred during the period of participation, then it has to be paid up to the annual allocation. For the Medical FSA, if they continue under COBRA then they are still active participants in the plan and expenses can be submitted throughout the plan year. Please note the final COBRA regulations address the issue of who does and does not need to be offered COBRA for their health FSA.

The participants would not be allowed to adjust their allocations since a change in cost or coverage does not open the door for changes in the health FSA (Tres.Reg.1.125-4(f)). This would mean that terminating the plan mid-year would have possible negative results on both employer and employees. The employer would have to absorb any negatives at plan year termination and the employee would not be able to claim expenses during that final month which in some cases would result in forfeitures.

Based on your description, it should be a change in cost or coverage. You also might want to review the enrollment forms and plan documents to see if they include langauge to automatically accommodate mid-year changes.

It appears this approach would have problems with discrimination with the different requirements for the new employees at this new location and then future new employees under the other rules. You can set up different requirements and benefits for different categories of employees and even different plans for different categories of employees, but as long as the employees are all in the same category, you must apply the same rules and waiting period to all eligible employees. Setting up a separate plan and then changing it would certainly have the appearance of trying to circumvent the regulations.

An inquiry to the makers of the software should be able to answer your questions.