FSA discrimination - Healthcare Reimbursement

[Guest ojs000]

We would like to implement a company match to our Healthcare FSA for one location only. We have no HCEs in this location. Does anyone see any issues here?

[GBurns]

I see a waste of good money.

One of the main reasons for poor participation in FSAs is the "use it or lose it" rule.

Poor participation as in few employees (avg seems to be around 30%) and low contributions (avg seems around $300).

I do not have at hand the avg forfeiture rate and amount but I recall that it is over 25%, but one of our TPA members should be able to give you better figures.

So if this location has 100 employees only 30 would participate for $ 9,000 per year. With a match the total would be $ 18,000. At a 25% forfeiture rate the plan would "lose" $ 4,500 per year of which $ 2,250 would be from the employer.

It would be of very little help except to the forfeiture account.

What are you trying to accomplish that could not be done with a plain old 106 MERP ?

[J Simmons]

The issue I see pertains to the definition of highly compensated. For FSA testing purposes under IRC section 105(h)(5), it is 'highly compensated individuals' with a definition that captures the company's highest paid 25% of employees.

[Guest ojs000]

I see a waste of good money.

One of the main reasons for poor participation in FSAs is the "use it or lose it" rule.

Poor participation as in few employees (avg seems to be around 30%) and low contributions (avg seems around $300).

I do not have at hand the avg forfeiture rate and amount but I recall that it is over 25%, but one of our TPA members should be able to give you better figures.

So if this location has 100 employees only 30 would participate for $ 9,000 per year. With a match the total would be $ 18,000. At a 25% forfeiture rate the plan would "lose" $ 4,500 per year of which $ 2,250 would be from the employer.

It would be of very little help except to the forfeiture account.

What are you trying to accomplish that could not be done with a plain old 106 MERP ?

Thanks for the feedback. We are planning to eliminate a popular (and richer) medical plan. The remaining plan will generate additional out of pocket costs for employees. We wanted to help transition employees to the new plan by helping them pay for these additonal expenses they will incur. This is intended to be a temporary measure and not an ongoing provision. We don't have a high deductible plan so we can't use an HRA. I am not familar with a 106 MERP, how would that work? I don't want to adminster another plan.

I agree that the participation rates are low for our FSA. However, I don't believe the forfeiture rate is that high, now with the grace period and debit cards. And, when you say the plan "loses" if employees forefeit, I see that as a win for the employer because we get to keep the $$.

I think even using the top 25% paid HCE definition, we would still have most employees below that threshold.

[J Simmons]

Not having a high deductible insurance plan can disqualify you from health savings account (HSA) contributions, but you are yet eligible for employer-only funded health reimbursement arrangements (HRAs).

A medical expense reimbursement plan (MERP) is also employer-only funded. No employee contributions--employee contributions requires a cafeteria plan.

The prime difference between what are typically referred to a MERP and an HRA is that the benefits accrued to an employee but not used by the end of the plan year carry forward to be available in future plan years by that employee if it is an HRA, not if it is a MERP.

Employees that accrue benefits in a MERP or an HRA submit claims for reimbursement, quite similar to how that is handled for a cafeteria's FSA. However, the MERP or HRA reimbursement may be for health insurance premiums as well as out-of-pocket health expenses, to which the cafeteria FSA is limited.

A plan document is required, and if you are subject to ERISA, a MERP or HRA documents must meet all those requirements applicable to an employee welfare benefit plan.

[J Simmons]

We would like to implement a company match to our Healthcare FSA for one location only. We have no HCEs in this location. Does anyone see any issues here?

Also check out Prop Treas Reg § 1.125-5(a)(2); don't match more than 4:1.

[Jacmo]

OJS--I don't see a problem with what you want to do, as long as you amend your 125 plan to spell out a match for that location.

[GBurns]

ojs000

The forfietures do not revert or enure to the employer. They belong to the plan and plan participants. The employer is the plan sponsor, the employer is not the plan.

I noted that you said that you "do not want to administer another plan", I hope that you are not now self-administering your FSA.

In simple terms, the difference between a MERP and an HRA is that the HRA can allow rollover of unused money. Otherwise it is just an agreement to reimburse the employee for eligible medical expense up to a prescribed limit. The limit is usually the amount of new out of pocket risk (increase in deductible etc) that the employee faces. If the employee has no expense the employer has no cost. It operates just like an FSA but with no employee contribution.

[LRDG]

Plans that promote FSAs' with annual presentations, employee newsletters, election worksheets with itemized list of medical procedures and dependent care expenses for employees to estimate the respective amount they will incur, IRS list of eligible expenses, explination of the payroll reduction, tax savings and funding of the FSA and procedures for filing a claim, typically those plan experience 50%-60% of employee population participating in FSAs, forfeitures typically represent pennies on the dollar.

Before employees will participate, allow a reduction in their pay, and possible forfeiture of those funds, there must be a level of understanding. Communicating the plan and IRS requirements of the plan contributes to how confortable employees will be participating. Without annual enrollment and communication of the Sec. 125/FSA plan, participation will be low, annual election amounts will be low and forfeitures may be high as well.

[GBurns]

LRDG

In the thousands of plans whose enrollment and communication material that I have seen over the years, very very few, if any, have what you propose to any meaningful extent. As a result, very few have 50-60% participation.

I also have not seen much of what you list available in the material from the providers of section 125 employer "packages" of suggested material. This means that for most employers not only does such material not be available, but since such is not even being suggested for use, most employers are not even aware of it. Hence, another reason why there are very few with 50-60% FSA participation.

Here is a claim by a reasonable size TPA to "significantly above average" participation rates of 25-30%.

http://www.benefitresource.com/Employers/f...ng-accounts.htm

I hope that some of our FSA TPAs will chime in regarding what they are seeing and have heard.

[Guest Sieve]

I'm not a TPA, George, but I think that enrollment education for FSAs generally is terrible--and that's probably because there isn't much money in it for administrators. 401(k) education is important--after all, the educator is trying to convince participants to permanently put money into the plan so that the educator's employer can recover more asset-based fees. It's a classic conflict of interest scenario, but it's also why efforts at 401(k) enrollment far outstrip effots at FSA enrollment.

I'm convinced that if as much energy were put into MERP/FSA/125 enrollment education as is put into 401(k) enrollment education then, over time, we'd see participation in the ranges that we now see for 401(k) plans (which took decades to get where it is). 401(k) enrollment has gone up as 401(k) plans have replaced other plans as employers' retirement vehicle of choice, while FSAs still compete with HRAs, HSAs, and other creations of Congress, and employees will remain sceptical & confused (as they were with 401(k) plans for a very long time) until the marketplace settles down and decides on a true direction.

But I agree with you that there are many more FSAs with enrollment in the 25% range than in the 60% range--and those with DECAP seem to be more popular.

[LRDG]

ojs, I agree with Jacmo. I don't see a discrimination problem based on the employee population described in your post. However, I don't recommend that you assume the burden of non-discrimination is met because that are other possible issues of which I'm unaware. I avoid commenting on non-discrimination for that reason.

I'll add that in addition to amending the Plan Document to include the new benefit, a copy of the non-discrimination test, including the new benefit in the test results, must be maintained and available in the event of a plan audit, and should be standard protocal.

Industry wide, Sec. 125 participation in the 25%-30% range is probably representative of average participation levels. Participation should be much higher with more attention to inadequate employee education, minimizing risk of forfeiture to participant, burden of meeting non-discrimination requirements, and cost of administration, to mention a few of the issues attributable to FSAs.

Considering the cost involved in sponsoring most benefits plans, employers recognize the value of offering FSA plans. Sponsoring a benefit plan that generates savings to an organization, even minimal savings in some if not most cases, is never the less attractive to plan sponsors, versus the cost plan sponsors are accustomed to assuming.

TPAs and other service providers who recognize and seize the marketing opportunity a FSA plan stands to represent, realize that the value is not necessarily in the fees billed, but in the investment funds generated via tax savings for participants. This is particularly true when employee education is adequately addressed.

Looking back over a couple of decades, there are parralles in legislative history, employee education needs, and participation levels, with respect to 401ks and FSAs.

Plans with low participation are of limited value to plan sponsors, and to service providers. Plans with low participation often evolve to represent a burden. In my opinion, when implemented correctly it's hard to dispute the potential value FSAs represent to participants, plan sponsors and service providers.

[GBurns]

Larry

Sections 125 and 401(k) are both from TRA 1978.

Also their Treas Regs are dated fairly close to each other.

So both started at roughly the same time.

As someone who started marketing them early 1985, the difference in success has to with the benefit promoted to the employer along with the drive to control the investment dollars. 401(k)s were a "new' pool of money, whereas section 125 just split the source of the same $ amount.

401(k) plans for many years were promoted as a wealth transfer strategy. Give the employees a little so that the HCEs (and owners) can get more of the company assets. After a while the "save the company the pension liability, let them save on their own" was an added mantra.

Section 125 cafeteria plans were sold as a way to pass premium cost sharing to the employee. Since FSAs did not save the employer anything and took work time for adequate employee commuication and enrollment etc, they were discouraged.