Mid-year Flex Credit

[Guest Taxman]

Let's say there's a 125 plan with an FSA and DCSA, funded by employee pre-tax contributions with a November plan year end. In the middle of the year (plan year), the employer decides it wants to put "flex credits" into the plan. Is there anyway to get some of these into the FSA and DCSA for the current plan year?

My biggest concern is the 12 mo coverage req. in Prop. Reg. 1.125-2, A-7 (B)(3), "Election changes to increase or decrease the level of coverage under a health FSA during the 12-month period of coverage are not permitted with respect to health FSAs."

However, to me it appears that the original election still holds (re/employee contribs), and now there's this "bonus" amount in the 125 plan, and conceptually it seems like it is basically like a separate "new" election for that portion.

Any comments?

[Guest lschaab]

My first answer is to amend the document to allow for a 'new employer funded benefit' option, the HFSA or DCB account, much like you might do for the addition of a new insured option. Record keep this account separately and decide the order in which employees access their account (ee funded 1st, er funded 2nd). I don't think the ee funded only approach would work (where the ee's current payroll deduction is offset by the er's contribution) because there is no basis for the change in deduction amount of the ee.

If no separate employer account is set up who gets the money? What if an employee doesn't already have an FSA, do they get cash, or offset another option? That creates problems.

Just a couple 'first thoughts'.

[Kirk Maldonado]

Had you considered terminating the current plan year and starting a new plan year? (I realize that there are some complications with this approach.)

[Guest Taxman]

Thank you for the responses. I'm really just interesting if this is a feasible concept year after year. EEs put their salary reduction elections in at beginning of year. Employer doesn't know whether it is going to be profitable, as it has a different fiscal year. Therefore, what if ER decided in mid-year, hey, I want to do a flex credit. Could the employees then make a separate election with respect to that and roll it into the FSA?

lschaab -

It appears you are agreeing with me? You say set up two cafeteria plans? Am I reading you right?

[Guest lschaab]

No, I'm suggesting that you establish a new er funded FSA and manage it completely separate from the ee funded FSA. I don't think terminating mid-year and starting over with the er funded FSA is a good idea, the exposure under the old plan is too great, and you still have to work side by side with those employees who may get hurt.

[Guest Taxman]

lschaab

Baby step me here. So you are suggesting two health FSAs in one cafeteria plan?

I think I may have let the facts or suggestions get ahead of the situation here. There's no plan (or would I ever consider one) to terminate any plan. The scenario is simple. 125 plan with health FSA option is churning along solely funded by EE contribs as it has for umpteen years. Employer inquires as to whether it can occasionally (if profits are good) decided in the middle of the plan year to dump a bunch of flex credits in the plan. If EEs want them in cash, they can take them. But real reason for offer is to help those EEs who have burned through their FSA account in no time.

So my real issue is somehow getting it into an FSA (either this plans FSA or an additional plan's FSA)....Am I reading what you said right? I didn't know you could have 2 health FSAs in a 125 plan, but then again, I guess there's no prohibition anywhere.

Thanks again for your help.