If a Section 125 plan is established mid-year with medical reimburseme

[Felicia]

Assuming a Section 125 plan is established mid-year and that the plan has two components: medical reimbursement and dependent care

1. Are the maximum contribution limits prorated for the short plan year? I.E., is the $5,000 maximum dependent care contribution prorated or can the full $5,000 be put into the plan?

2. I believe there is a "use it or lose it" policy which has an element of risk for the employer and the employee. Does this element of risk apply to both components? Can the employer chose to accept the risk for only one portion, say the medical reimbursement portion, while mandating that the employee only submit dependent care bills up to the amount he has contributed?

Cites would be appreciated.

Thanks.

[Lisa Hand]

1. For short plan years, amounts can be prorated and it would depend on whether the plan documents were written that way. It is a prudent plan design for several reasons.

2. The "Use it or Lose it" rule of 125 is not a choice, it is a requirement for the entire plan. However, that said I think your question is combining two different rules. The "Use it or Lose it" is on employee elections and means that the employees must claim amounts pit of their benefit with valid expenses incurred during the plan year or they will forfeit the remaining funds.

The issue on the employer side is the level funding requirement of the Unreimbursed Medical FSA benefit. There is not a similar "risk" with the Dependent Care FSA because the funds are not received in advance.

Please feel free to email me if you have further questions.