Grace period

[Guest janmin]

Our plan has both a health care reimbursement account and a dependent care account - can we just elect the grace period for the health care portion.

[papogi]

You'll have to check with your administrator to make sure they are offering the choice (depending on their system limitations), but I know that most are allowing you to elect the grace period for one and not the other.

[Guest nobletorch]

Hi There

An FSA (Flexible Spending Accounts) is comprised of two options. A HCRA (Healthcare Reimbursement Account) and a ChECRA (Child and Elder Care Account). The rules for these were establish by the federal government. The allow an employee to make contributions (normally through payroll deductions) on a pretax basis. A HCRA account is treated like an insurance amount - the employee has access to the entire amount prior to his making a contribution. The ChECRA account is like a savings plan. You put money in and it is retained until you provide proof of making an eleigible expense, for which you are then reimbursed. If there is no money in the account, there is no reimbursement.

A grace peroid refers to the time peroid where an individual policy remains inforce past it's premium due date. It is designed to allow individuals to make payments that fit their cash flow and account for delays in mailing. This is establish by a combination of the policy type, the insurance company and STATE regulations.

I am not sure that this provide you the answer you want. It would be helpful if you could be more specfic about the term grace peroid and provide an example of the the type of issues you are experiencing.

Have a great day

[papogi]

I assumed janmin is talking about the new grace period allowed by the IRS through the recently released Notice 2005-42.

[E as in ERISA]

There could be some risk. That notice indicates "all participants" in the plan must be allowed the grace period. So what does that mean if you have certain participants that are only using the dependent care? Could you claim that they are allowed the grace period with respect to health care -- just aren't using it? Or do the ones providing the grace period only on health have two separate cafeteria plans?

[papogi]

True. I don't think that this interpretation was intended by the IRS, but that is one way to read it. I think the intent was not to lump HC and DC into one thing, especially since rules are already in place under Section 125 to prevent discrimination. Either way, I agree that there is some risk. Very small in my view, but risk none-the-less.

[E as in ERISA]

My basic rule of thumb for the 125 plan is to provide "universal availability" to the cafeteria feature and prescribe limitations on eligibility only at the level of the underlying benefits. (I know that's not specifically required. But the main exclusion that I've seen employers to want to apply is to exclude "part time" from the 125 plan altogether. I'm not sure that 125(g)(3) allows that because you can't use full time as an employment classification under 410. I think that it's easier to technically say that the cafeteria plan is available to everyone, but then keep them out of each of the underlying benefits. E.g., it's much easier to exclude part-timers from the health plan under 105(h)(3)(b)(iii). The effect may be exactly same, but there seems to be clearer authority to exclude them at the benefit level).

So I've tended to think that you should be pretty broad at the plan level and you should attach the conditions and limitations at the benefit level. But now that Rev. Proc. suggests that the grace period applies at the plan level. It does suggest that you can only use the money set aside for a specific benefit to pay grace period claims for that benefit. But that's not really a change in rules.