Unreimbursed Medical Amount

[leevena]

A local 125 administrator is allowing members who choose unreimbursed medical to not include a certain dollar amount. Rather, the select to participate in the URM FSA and submit claims as they are incurred. This eliminates the at risk componenet.

[GBurns]

What do you mean by "not include a certain dollar amount"?

Where does the money for the reimbursement come from? How does it get there?

What is "URM"?

[leevena]

I'am sorry. URM is unreimbursed medical. The employee elects unreimbursed medical fsa but does not select an amount. During the plan year as that employee incurs an eligible expense, they simply submit it to the administrator who then books it in their FSA account. The idea is that everyone can enroll in an unreimbursed medical FSA without placing any dollars at risk.

[QDROphile]

What happens after the administrator books the claim in the FSA account? How does the claim get paid (where does the money come from)? What effect does payment of the claim have on the employee's pay?

The elements that you have described look like an arrangement that does not comply with section 125 requirements, but I do not wish to explain why it does not work based on speculation about some of the missing elements. Please supplement your description with the information requested.

[david rigby]

Is this a zebra?

http://benefitslink.com/boards/index.php?showtopic=8893

http://benefitslink.com/boards/index.php?showtopic=12577

http://benefitslink.com/boards/index.php?showtopic=19871

[leevena]

Employee submits a claim for unreimbursed medical. The employee pay is then reduced by that amount, with all the regular tax savings included, and the savings for the employer included. The point behind what they are doing is that no one who participates is required to identify a certain amount of dollars to put at risk. Rather, they just submit the claims when (and if) they are incurred. Then the administrator makes the adjustments to income and taxes.

[QDROphile]

The problem with the arrangement is that it violates the fundamental requirement under section 125 that an employee must elect before the beginning of the plan year to reduce pay for the coming year by a specified amount in order to get the benefit for the year. That is the whole point of section 125. If the administration firm is "offering" this arrangement, it is either totally incompetent or a scoundrel. This is not a subtle or technical issue where the matter is debatable or a mistake is understandable. It is at the heart of section 125.

What your employees really have is after-tax payroll deduction to cover their out-of-pocket medical expenses. Since it is an after tax deduction, the payments don't even have to be for qualified medical expenses, so the adminstration firm's review for eligibility of expenses is pointless. You will need to include all the reimbusements this year in compensation and report them on From W-2. Start working on the correction soon so you can ease the sting of withholding on the amounts that the employees thought were pre-tax reimbursement amounts.

If the employer has been participating in this snow job in past years, the emplyer has failed to report compensation properly and to withhold properly. Corrective action is advisable.

You should hire competent help to assist with fixing this mess.

[Guest b2kates]

I would go even further and say that it borders on payroll tax fraud. it is attempting by not complying with the 125 rules to evade the payroll tax liability and the employer will be underreporting their obligation for payroll and withholding taxes.

[david rigby]

Exactly right.

Leevena, make sure you read the discusions in the links above, and then heed Q's admonition to get advice from a competent attorney who has experience in ERISA matters.