Uniform Coverage Rule not being applied?

[Guest maribeau]

My husband is enrolled in an FSA at work, and has pre-tax dollars being withheld from his paycheck each pay period. The employer forwards the funds to a local Insurance agent to hold, and then we have to submit receipts to the Insurance Agent for reimbursement. In June of 2009, we submitted one receipt that was more than enough to account for his plan election for the entire year, but the agent continued to send us monthly checks through January of 2010, only after he had received the funds from my husband's employer.

The forms we were given for enrollment are clearly for a section 125 FSA plan, and carry the name "FlexSystems" from TASC, but that company has no record of the employer or our flex account.

I have asked both the employer and the insurance agent to clarify this, but the employer depends on the answers given by the agent, and the agent won't return my calls or emails.

Am I correct in thinking that since these were pre-tax dollars, that this FSA is subject to section 125 of the IRS code, and the full amount of the plan election should be available on day one of the plan year?

[oriecat]

Is it for a medical spending account or a dependent care account?

[Guest maribeau]

Is it for a medical spending account or a dependent care account?

Medical. Not dependent care.

[LRDG]

Medical FSAs under Sec. 125 are subject to the Uniforme Coverage Rule that require medical claims to be reimbursed up to the EEs annual elected amount.

Keep in mind if the MFSA is in a spouse's name through spouse's ER, that might explain some of the problems responding to someone other than the EE, owner of the MFSA. That wouldn't explain why the company has no record of the employer or flex account, or the questionable handling of uniforme coverage.

FlexSystems/TASC has a decent web presence and web site with a customer service line that you should try to use if you haven't already done so, vs continuing to communicate through an unresponsive individual agent.

[oriecat]

If a local insurance agent is holding the funds, it kinda sounds like they may have just "borrowed" TASC's forms.

[Guest maribeau]

Good Advice, LRDG. We spoke with TASC today, and they were going to contact the local agent and investigate further. Amazingly, shortly after that phone call, we started to receive communication from the agent. He "does not know" if the FSA he is managing is subject to section 125, and is unfamiliar with the term "uniform coverage rule". He's supposed to "look into it" and get back to us.

Yup, oriecat, it seems like they "borrowed" the forms.

My thinking is that since it is pre-tax dollars, section 125 and uniform coverage absolutely apply. I'm really frightened by the agent's lack of knowledge, and want to just get out of the plan at this point, but of course we're locked in until the end of the year.

The lack of responsiveness to this point isn't a spouse issue, as all employees are having the same difficulty getting information. No one ever receives an accounting of their funds, and when we pushed for one, the document we received was an Excel spreadsheet with "claims" that we did not submit, and with contributions totalling more than the plan election for the year. It was(is) a mess.

If the agent refuses to apply uniform coverage, is there an agency that we should report this to?

[LRDG]

Sec. 125, the section of the IRS code that includes provisions for MFSAs, has been around for some time now, about 20+yrs, but still considered reletively new. It wasn't uncommon to see situations similar to your's, an agent setting up a couple of bank accounts, charging monthly admin fees, selling products and wa-la.

IRS has since hired auditors who specialize in Sec. 125 plans. IRS is assessing penalties, fines and back taxes against organizations who's plans are out of compliance. These penalties, fines and back taxes are not insignificient. Uniform coverage is one of the cardnial rules of Sec. 125.

There are many other possible violations; Sec. 125 plans must include a plan document that describes all the benefits under the plan, and how the plan is funded. The Plan Doc must be available to all participants within 15? business days of written request from the ER and failing to provide it within the period of time is subject to penalty, reportable to DOL=Department Of Labor(?) There are special rules for plans funded with EE contributions that involve particularly severe penalties if violated or if fraud is involved.

Individual states have special rules for agents who handle plan assets. That information is available from your state insurance commission.

I'm not aware of IRS hot lines to report violations, they are not particularlly interested in encouraging disgruntled employees. The steps usually involve hiring an attorney and filing suit.

In defense of those involved, it's possible the plan administarator the ER/agent planned to use had minimum participation requirments that your organization did not meet once enrollment was completed, leaving your ER and the agent with what they viewed at the time as their only option.

Curious about response of TASC.

If it's possible to get the plan into compliance and avoid IRS involvement, that's probably how I'd choose to proceed. Keep us posted on your progress, the outcome and good luck.

[Mary C]

Was it a true medical expense or braces under dental? Old government guidance stated that expenses for braces should be reimbursed periodically as the visits are incurred, not in one lump sum that may have been paid up front.

[Ron Snyder]

What the agent is doing in acting as a third party administrator of the 125 plan may or may not be legal, depending on which state he is operating in and the documentation for the plan and the bank account from which the claims are paid. My guess is that he is violating state laws and could be put out of business by the state insurance department.

[LRDG]

Q. If the agent refuses to apply uniform coverage, is there an agency that we should report this to?

A. Problems involving insurance or a licensed insurance agent should be reported to the Insurance Commissioner in your state. Most states have special rules for agents who handle plan assets. That information is available from your state insurance commission.

I believe you should start with DOL for reporting the kinds of violations involving Sec. 125 plan assets. If additional agencies also require reporting, DOL will usually assume responsibility for distribution, or they will refer you to proper agency if needed.

If the scenerio play out with the worst possible outcome, with the agent acting as TPA; using copyrighted(?) material, property belonging to another firm; accepting plan assets; multiple IRS Sec. 125 complience violations; risking the ER's reputation and putting the organization at risk with the IRS, the agent could lose his license and without question should be prohibited from practicing. Hopefully the plan assets are available to be returned to the plan=your employer.

IRS penalties, all EE back taxes and legal fees associated with the violations can be exorbitant, possibly putting a small business at great financial risk, not to mention the livelihood of EEs also possibly at stake.

If it's possible to protect the organization/ER and EEs contributions in the process, first and formost that should be done, IMO. Terminating the plan is an option, but it's unlikely that alone will resolve all IRS problems. Turning the plan over to an administrator willing to correct past compliance issues and correcting the existing plan might be the best option. Considering the irreocable elections involved and deciding what to do with remaining assets; what about participants who made contributions but presented no claims thus far? There isn't a simple answer.