Med. Exp. Reimbursement Plan Eligibility Question

[chris]

Plan provides for eligibility in accordance with IRC 105(h)(3)(B)....ie can exclude part-time e/ee's defined as customarily not more than 35 hours per week. E/er wants to amend plan and provide that e/ee must work at least 35 hours each week in order to remain eligible. IN other words e/er wants to track actual hours worked instead of relying on the "customarily works" language in the Regs. under IRC 105 (1.105-11©(2)(iii)©). Seems to me this isn't doable b/c you'd have to wait until year end to see if anyone was/was not eligible. For example, you could have an employee who works 36 hours every week except for the last week in December who was reimbursed for med. exp's during the year who now becomes ineligible......... Any comments or suggestions??? Thanks in advance.

[GBurns]

I would advise against this employer interpreting the Regs other than they are actually written. It probably was written that way because adoption and election to participate are prospective not retroactive. This would apply wherther or not this MERP is employer or employee funded and even more so if there is any employee pre-tax salary reduction. The employee salary reduction is done in advance and as per the Regs not subject to change except for a QE. A temporary reduction in hrs worked should not qualify as a QE.

Even if it could be done, I see no economic benefit to the employer, but I see administrative headaches and increased cost. Why bother?

[Guest llerner]

If they handle their group insurance that way, then it could make sense. Theoretically, you could terminate an employee when they fell under a min. of amount of hours on group insurance but if it fluctuates on weekly basis, it would be cumbersome. The employer cannot exclude an employee that dropped below their criteria the last week of December for the whole plan year, only for that week. If this happened in the middle of the plan year, they would have to re-enroll the employee the following week and thereafter each time there was a "change of status" They can't wait until the end of the year to track it, they would have to monitor on a weekly basis. It would make more sense to monitor on a quarterly basis if they wanted to go ahead. They could check the hours on the quarterly worker's comp statement (California) like many of the health Plans do to monitor enrollees and have an average amount of hours worked. However this would also be after the fact. If they really wanted to do it, they could say "continuation of eligbility is contingent upon average amount of hours per quarter" say 420 total assuming 4 weeks in a month.

Does this coincide with their group insurance?

Eligibility coinciding with the group insurance keeps it simple.

Many group plans use 30 hours a week as starting point for full time and the spending accounts coincide with these plans since they are somewhat married to each other because elections will depend on the group benefits and coverage under the employer group plan. Employers can change to min. 20 hours and max 40 hours. Employees with under 20 hours are not eligible for fully funded benefits and therefore are excluded from flex participation. Over 40 hours would make no sense, customarily 35 but my employer uses 37.75. It does make sense for the eligibility to coincide with health insurance and other benefits that marry with the flex. Employees receive packets, COBRA notice about their right to COBRA "in the event of...", HIPAA all at the same time and enroll at the same time. 401(k) may or may not coincide, since they have up to a year wait while insurance carriers requires the latest 6 months max waiting.

What are the circumstances and what is your employer's intention?

Are these hours worked a reduction in hours employer initiated or employee initiated after all leave is exhausted? Is it because they are making a substantial contribution to those employees and have a financial incentive? Is the employer rewarding those employees who consistently show up? There may be other ways that are easier to accomplish the same goals. Do they want to do the same with all the other group benefits (except 401(k) that has set amount of hours in the regs).

[Kirk Maldonado]

Did you research to see if the IRS has addresed this point in the private letter ruling?