Can an employer provide a smaller contribution under its medical FSA f

[Guest kurt johansen]

I apologize for reposting this question, but I am still struggling with this question. Can an employer provide a smaller contribution under its medical FSA for part-time employees? We have drafted several cafeteria plans with flexible spending accounts that provide for different levels of employer contributions depending on the number of hours the employee is regularly scheduled to work. Hours of research on my part suggest that this practice is discriminatory under both section 125 and 105(h). Has anyone considered this issue? Are we the only one drafting plans this way?

Any help would be greatly appreciated.

Kurt

[Guest Jae]

Kurt, I think you are right, I think this would be illegal discrimination under both Sections 125 and 105.

Jeff Ellis

[pjkoehler]

I assume you mean a medical FSA in which HCEs have a higher maximum annual participant contribution than NHCEs. Otherwise, I don't understand what you mean by a "smaller contribution" for the NHCEs. Technically, contributions to the FSA are treated as "employer contributions," but, as a practical matter, they are amounts withheld from the employee's paycheck in exchange for the right to make claims for reimbursement up to an annual maximum for specified benefits.

A medical FSA that provides a higher annual maximum contribution for HCEs than NHCEs will almost certainly result in "excess reimbursements" to HCEs in a particular taxable year. This doesn't make the plan "illegal." It merely means that the excess reimbursements are not excludable from the HCEs' gross income under section 105(B) for that year. Treas. Reg. Sec. 1.105-11(e)(1). The NHCEs and the HCEs who didn't receive excess reimbursements are unaffected. Similarly, to the extent the FSA is funded through a cafeteria plan that is discriminatory in a particular plan year, the "Key Employees'" salary redirections are not excludable from gross income under section 125(a) for the taxable year that ends with or within that plan year. Prop. Treas. Reg. Sec. 1.125-1, Q&A-10. While all of the "Key Employees" are affected, none of the NonKeys are affected. In any case, the plan goes on without any form of correction or employer penalty, other than the adverse tax consequences that befall the HCE/Key Employee group.

[Guest jlcowden]

Assuming the context is employer making contributions for employees such as $75.00 per month and permitting employees to use that money for purchase of benefits eg; medical, dental etc.; I believe making different contributions for part time employees is not only legal but makes a lot of sense. Obviously specific circumstances should be reviewed to assure discrimination is not an issue.

[Guest Ed F]

The reason it's a problem is that you'll have non-highly compensated individuals who, if they contributed every available employer dollar to the FSA, would have a maximum FSA benefit of "$x," and you'll have highly compensated individuals whose maximum possible contribution to the FSA would be "$x+y." Under the 105(h) rules, that's at least discrimination in employer contributions if not discrimination as to benefits as well. Then you'll have to wrestle with the tax issues that PJK articulated so well.

[Guest kurt johansen]

actually, the situation I was trying to describe was as assumed by jlcowden. the employer makes an annual contribution in addition to salary reduction contributions by the participants. the employer might decide to give full time employees $500 to spend on benefits at the beginning of the year while part-timers only get $100 or maybe no employer contribution.

(I am aware that technically salary reduction contributions are sometimes consdiered employer contributions but for the purpose of my postings I am calling salary reduction contributions employee contributions.)