Cafeteria Plans

[Guest rwest]

Terminated ee had eligible medical expense incurred before termination but did not submit for reimbursement prior to termination. The expense exceeds terminated ee's contributions. Must the plan reimburse up to the annual coverage amount, or may the plan limit reimbursement to account balance (or not reimburse at all if plan terms permit).

[Guest JerseyGirl]

First things first: When in doubt, always check the plan document for specific details regarding this plan.

In general, plan documents usually spelll out specific time-lines for the submission of claims. Most allow the full 12 months of the plan year, plus a 60 to 90 day run-out after the end of the plan year. Unless this plan has specific language addressing terminated employees, the same rules apply to them as to any other participant. You stated in your post that the expense was incurred prior to termination, so there is no issue there.

Second: One of the single most fundamental aspects of Section 125 is the concept of *shared risk* between the employer and the employee. The employee runs the risk of having unspent funds at the end of the plan year, and the employer runs the risk of having this exact situation happen. The terminated employee must be reimbursed up to the full amount of his/her annual election ( less any prior reimbursements), NOT just how much they contributed prior to termination. Any other tactic will place the entire plan and everyone in it, into a state of non-compliance.

Now, should there be some language in the plan docs that states something like * terminated employees must submit all claims within 14 days of termination to qualify for reimbursement...* and this claim didn't arrive until day 25, you'd have an out.

Otherwise, approve the claim, and chalk it up to the sharing of risk. I found a rather interesting synopsis of Cafeteria Plans put out by the IRS that is very good (and a quick read). It even shows you were to go to find more detail, if you need it. You may want to check it out at:

http://www.irs.gov/pub/irs-utl/intro_to_ca...a_plans_doc.pdf

[billfgrady]

Doesn't the above answer presuppose that the plan document provides for participation in the plan to cease upon termination of employment? What of the situation where participation in the plan terminates on the last day of the plan year regardless of an employee's termination date? For instance, assume that an employee in such a plan has been completely reimbursed for the amount of his election as of August 1, and then terminates employment and makes a new election such that he won't have to contribute any further funds for the year. Does the plan language or the election control? In other words, can the employer dink the employee's last check for the overage?

[papogi]

My interpretation of the regs are such that the plan that billfgrady describes is out of compliance. I have certainly heard of plans like this, but, in my view, they only exist due to the rarity of 125 audits, and the “Proposed” nature of much of the 125 regs. I think a plan like this would not match the intentions of the IRS in drafting 125, and operating this type of plan would be very risky. I’m sure JerseyGirl did not address this type of plan in her response because it is a fringe interpretation of the regs at best.

[billfgrady]

Perhaps I wasn't clear or I'm not reading your post correctly. My understanding has always been that participation in a Cafteria Plan does not always end as of the employee's termination date. In fact, we rely on Sungard Corbel's Cafeteria Plan V.10 language, which permits the following with respect to termination of employment: "With regard to the Health Care Reimbursement Plan, the Participant's participation in the Plan shall continue for the remainder of the Plan year in which such termination occurs. The Participant may continue to seek reimbursement from the Health Care Reimbursement Fund and shall be required to make contributions to the fund based on the elections made prior to the beginning of the Plan Year. However, such contributions after termination of employment shall be with after-tax dollars instead of Salary Redirections." Does anyone know how this will work in a situation where the termination employee changes his election pursuant to Reg. s. 1.125-4© and elects "0" as the amount of salary redirections? Reading the above Plan language, is the employee required to continue to contribute with after-tax dollars?

[papogi]

Actually, now that you write that referencing to Corbel, I remember this coming up some other time on the boards in regard to Corbel. This is one way around dealing with flex COBRA, and whether or not to offer it based on the claims history (for most health FSA’s, if the employee has gotten out more than was put in, flex COBRA need not be offered). I can’t see that an employer could force terminated employees to continue in the plan. You still have the “cessation of required contributions” language which would then terminate the account. If they term and do not make contributions, that is terminating participation in the plan. If they term and continue the account and elect $1, there had better be some reason which satisfies the consistency rules which would allow such a change. Incidentally, any decrease in an account such as this means that the initial election is available prior to the change, and the second, lower election is available for dates of service after the change. If an employee decreases a $2000 account down to $1 on 7/1, they can only get the $2000 with DOS’s prior to 7/1. They can’t elect $1 with the hopes of getting the $2000 with DOS’s after 7/1.

Do they force employees to continue buying regular medical coverage, as well? I’m sure they allow that to be dropped. Forcing an employee to continue an FSA is clearly against the risk shifting rules (they’re not forcing people to stay on the regular medical coverage, and are treating the FSA differently), and its purpose is only to eliminate the employer’s risk. I’m sure the lawyer would cite the “proposed” nature of much of 125.

I can see your valid question billfgrady, but it’s a question that shouldn’t exist. It’s being entertained only because Corbel takes a severely unconventional view of 125.