Calendar Year vs. Plan Year

[Guest MarcieMcA]

I am a little confused as to what the best way to set up a section 125 for a company who renews their medical plan midyear as opposed to January 1.

If a company renews their medical plan as of July 1st, should I set up their section 125 July 1st to June 30th (since the premiums will most likely increase yearly) or should I set it up on a calendar year?

I also realize that I could set up the premium conversion based on their medical insurance plan year (july 1st to june 30th) and set up their flex spending (for medical and dependent) on a calendar year (jan 1st to dec 31st)...are their any drawbacks to that?

I seem to be running into this issue a lot. thanks!

[mroberts]

you posted on this topic a few weeks back. as indicated, it makes more sense to set up the section 125 on the same cycle as the medical plan. otherwise you're going to run into problems when medical insurance rates go up 20% or you start changing deductibles and co-insurance percentages mid-year and employees have to wait until january to make a change.

i know section 125 regs allow for changes due to "significant" cost increases, however, this needs to be looked at by a case by case basis. if an employee is paying 30% of the cost for his medical insurance, i don't think a 20% increase would be considered significant since it's really only a 6% increase to the employee. every one has a different opinion on what significant means, but my opinion is that it is TRULY significant, not $12 per month.

[Guest MarcieMcA]

a few weeks back I actually asked if it can be done (at that time, i was unaware that you can implement a section 125 mid-year as opposed to calendar year). In this post I am furthering exploring the different scenarios that I can run into in actually implementing the plan beginning in July. Since I am fairly new at this, I am looking for advice on any other alternatives.

After doing some research, I think it's probably best for me to implement the plan (premium conversion and flex spending accounts) July 1st to June 30th since changes (due to cost) do not apply to flexible spending arrangements.

Thanks for your post. This is a very helpful site.

[papogi]

Good point concerning the 20% safe harbor threshold that I usually use, mroberts. The 20% increase has to be to the employee. Whatever the total premium (EE and ER contribution), the EE portion should increase at least 20% to be safely labelled significant.

[Guest AHayhow]

From an administrative perspective, I think matching the section 125 plan year with the medical renewal works best. However, if the medical plan has calendar year deductibles, you may find that the employees have difficulty planning their health care FSA amounts.

[Lisa Hand]

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.

[Guest MarcieMcA]

Thank you...these are very helpful points.