Pre-paid debit cards

[J Simmons]

DoL Tech Release #92-01 exempts cafeteria plans that do not voluntarily create a trust from the ERISA requirement to have a trust. If the sole source out of which benefit claims are paid is the general assets of the employer, then the cafeteria plan has not voluntarily created a trust as to which the ERISA trust rules apply.

If such an employer chooses to pre-pay debit cards in the amount of the medical flex accounts elected by employees, by transferring funds of the employer at the beginning of the year to the issuer of the debit card, has the employer voluntarily created a trust (i.e., the pre-paid debt cards) that is subject to ERISA trust rules?

Any citations to applicable DoL authority would be appreciated. Thank you.

[Jacmo]

Once the money leaves the control of the employer, ERISA requires a trust.

[Don Levit]

John:

I am not sure if I can help, but I have come across recently cases (including a Supreme Court case), in which a fiduciary relationship was not established when the employer chose not to contribute to a trust, and used its funds for other business purposes.

The relationship was one of debtor-creditor, rather than fiduciary.

Would that be helpful?

Don Levit

[GBurns]

jacmo

What funds would be in this trust?

[J Simmons]

GBurns: I think what Jacmo might be referring to (and what I was) is if the cards are pre-paid, then a part of the sponsoring employer's general assets have been transferred to the card issuer before any medical expense has been incurred, pending the possibility of such. The moneys so paid to the issuer for crediting to the card would be funds that would no longer be under the employer's control and perhaps not part of its general assets, but eartagged (via the card) only for payment of benefits.

If instead of using a card, the employer simply set up a separate bank account eartagged for paying of health benefits (and then processed employee claims in the traditional fashion without a card), that segregation of funds could be the voluntary creation of a trust (with all the compliance duties) that would not apply if claims were simply paid after expenses were claimed out of the employer's general assets.

Does doing so by use of a pre-paid card alleviate that trust concern?

[LRDG]

This may be unchartered territory.

Out of an abundance of caution, I'd assume once a transfer from the general assets takes place, a trust is created, but I'm not familiar with pre-paid debit card/creditor side to add anything to that part of the discussion.

[Guest TXCafe]

JSimmons-It seems to me that your logic is sound in drawing the parallel between the bank account set aside (or eartagged as you phrased it) for Plan funds and the card "eartagging" the funds in the same manner. I think the arrangement you described would create a Trust and all the accompanying responsibilities.

I would be careful in establishing something of a loan/debtor situation as Don Levit referred to. ERISA prohibits a loan between the plan and plan sponsor. EBIA's Cafeteria Plan Manual refers to a DOL issued class exemption (PTE 80-26) under which such an arrangement could be structured in order to allow a "loan" (unsecured interest free) between the plan and plan sponsor for the purpose of funding plan beneftis.

It would seem the safest bet (in order to avoid creating a trust) would be to do a repayment situation in which the amount of the FSA debit transaction is repaid to the financial institution after the fact rather than prefunding the card. There may even be the possibility of establishing a trust by using a "zero balance" account. I've always heard (and operated on the basis of) that if the account is "zero balance" and is not named for and thus designated for the sole purpose of plan benefits, a trust is not created. I would think this would be a case by case issue though.

Unfortunately, no IRS guidance thus far on electronic payment card programs for Medical FSA's addresses ERISA compliance.

[Jacmo]

Why wouldn't the employer simply set up a separate checking account (at the same bank as their general assets fund) and let the debit cards pull from that account? No trust requirement there.

Pretty good deal for the bank to get all the assets up front, one time.

[masteff]

Why wouldn't the employer simply set up a separate checking account (at the same bank as their general assets fund) and let the debit cards pull from that account? No trust requirement there.

Or to be doubly sure to not create an account that's eartagged... a separate zero-balance account that the debit cards clear from w/ the sweep being from the general asset fund. Segregated accounting w/out segregated funds.