Cafeteria Plan Flex Credits-Urgent!

[Guest wmcentee]

I am getting some very conflicting information regarding our flexible spending credits. The company gives employees who do not have health coverage a certain amount each pay period in a flexible spending account. The employee can then choose to use that money in a medical reimbursement account or a dependent care reimbursement account.

Last summer when we put this plan into place, we were told that the employee had the right to the full amount from the beginning of the plan year, just as if the money was coming out of the employee's paycheck. So, if the total of the flex credits for the entire year was equal to $1200, the employee could claim the $1200 whenever he or she had accumulated the medical expenses.

Now we are being told that we can set up our plan so that the employee is only entitled to the amount accured in the plan. So, if the same employee has $1200, which is $50 per pay period, he or she can only receive reimbursement for whatever was put into the plan. For example, if the plan year begins on January 1, that employee would have $650 in their account now.

Is this true? If so, has this always been true or put into effect recently? Help!!!

[MGB]

Yes, it is (always has been) true for dependent care accounts (accrual basis applies).

No, it is not (always been) true for health reimbursement accounts (full amount is available from beginning of year).

Your twisting this together with opting out of the health plan may invoke additional issues which would require more knowledge than I have on this.

[papogi]

Whether a HCFSA is funded by the employee or the employer, the uniform reimbursement requirement always applies. This is the rule that you stated concerning the entire balance being available at any point in the plan year (full amount available at the beginning of the plan year). What you are now hearing about is the IRS guidance issued last month for HRA's (Health Reimbursement Arrangements). HRA's are set up as Section 105 medical reimbursement accounts, and they have different provisions than FSA's. One big difference is that balances carry over to the next year with an HRA, not true with FSA's. Since many people are not aware that FSA's can be funded by the employer, they now immediately assume that an FSA funded by an employer must be an HRA. Not true. Staying with the employer-funded FSA can have some advantages (i.e., FSA's generally not subject to COBRA, simplifying COBRA procedures; balances revert to the employer, rather than carried over to the next year for the employee). Check this out for a decent comparison chart:

http://www.insure.com/health/hraworksheet.html

[papogi]

MGB is also correct. I didn't even mention that DCFSA's are not subject to the uniform reimbursement requirement. I completely glossed over that.

[Guest ConceptCorner]

My two cents:

There is a difference depending upon if you are talking about employee dollars or employer dollars going into the FSA accounts.

For contributions made to the FSA from employees, the total annual election is available from day one of the plan year.

With employer dollars, the employer has the choice to either fund the accounts in one lump sum making it immediately available or the employer can deposit the funds each pay period. If the employer chooses to fund pay to pay, only the amount that has accured is available for the employees use.

Also remember that FSA plans can have both employee dollars and employer dollars. If both are contributing, the rules above still apply.

[papogi]

If you give your employees credits to purchase benefits, and they end up with extra credits, and they have the option of using those credits to fund an FSA (meaning they had the option of taking cash instead) then the uniform reimbursement requirement applies, even though the HCFSA is technically funded by the employer. Since there is a cash option, the plan is operating under Section 125, so all provisions apply. If you have an employer-funded account where, for example, the employer gives each employee $200 dollars to be used only for dental expenses, this is not a true 125 account. These accounts can be funded with $200 up front, or by smaller chunks at each pay cycle. While most employers continue to apply the uniform reimbursement rule even in cases such as these, I suppose you wouldn't have to. Employees could get only that which has accrued in the account. Again, if there is a cash option, then 125 rules apply.

[Guest Beth N]

ConceptCorner - What's the authority for saying that the employer piece of the funding need not be available at all times during the period of coverage?

Also, I had always assumed that employer contributions under a 125 plan (including an FSA) had to be available for cash-out, so that if the employee declined a particular coverage, they were able to get cash back from the plan as regular wages. I've seen a lot of unoffical commentary saying the employer can establish a "contingent" or "matching" contribution, meaning that only employees who choose to participate will get the benefit of the employer $, and employees not participating do not have a cash back feature. How is this permissible?

papogi - Are you saying that because the only source of funds for the dental plan is the employer, it cannot be a 125 plan? If so, I agree with you. But if you have employer AND employee funds contributed to the dental reimbursement, then you could have a 125 / FSA, right?

[papogi]

Beth N, I agree with you that if an account is offered under 125 (meaning there is a cash option), then the uniform reimbursement rule applies whether you are talking about employee or employer money. If there is no cash option, then the monies are going through a 105 reimbursement plan, so 125 rules don't apply.

The account is a 125 plan if there was a cash option, even if the FSA is funded by extra employer credits (they become the employee's, and he/she makes an election to put them into an FSA). The account is not a 125 plan if there is no cash option to the employee, and in this case operates under 105. It is then possible to have an account made up of 125 amounts and 105 amounts.

As long as the plans do not discriminate in favor of HCE's, then the employer can give the 105 plan only to those people who participate in the FSA (in the form of an employer match).

I hope I'm making sense. Everyone, jump in here if I'm not.