Section 125 Overview. A Little Flex Humor. Mary Nash Section 125 Compliance Manager American Fidelity Assurance Company

Transcription

1 Section 125 Overview Mary Nash Section 125 Compliance Manager American Fidelity Assurance Company A Little Flex Humor I need my money immediately. Can you fax my check to me today? Can I make copies of my receipts before I fax them to you or do I need to fax the originals? Why don t you notify people when you don t get their faxes? I would like to sign up for the flex plan. I usually set aside $1,000 but I missed the day when the representative was at my school because I was having lasik surgery. Historically, I do this every year. 1

2 Section 125 Basics Section 125 is: A statutory program, offered by Employer Allows Employees to pay for qualified benefits with pre-tax dollars All participants are Employees Must be able to choose between taxable benefit (cash/compensation) and at least one non-taxable benefit (insurance/flex account) Elections must be made before plan year begins Tax Savings Employee contribution exempt from: FICA Taxes Federal Income Taxes State and Local Taxes (varies by state) Employer experiences savings on FICA Taxes (7.65% of contributions) FUTA Taxes Menu of Benefits Health Insurance (HMO, PPO, HDHP, Traditional) Cancer Insurance Disability Insurance (Short and Long Term) Dental & Vision Insurance Group Term Life Insurance (Section 79) Flexible Spending Accounts (Dependent Care and ) Health Savings Accounts (not covered in this session - special rules apply) 2

3 Plan Documents Plan Year Cycle Cannot exceed 12 months but can be shorter for legitimate business reason (short plan year) No consecutive short plan years unless for a bona fide business reason Watch for underlying benefit (usually health) with different open enrollment period Plan Documents Eligibility Requirements To participate in 125 Plan Usually stated as class of Employee covered, service requirements, age, entry date for new hires Be careful not to run afoul of Health Care Reform Law requirements such as waiting periods in excess of 90 days or excepted benefits status Funding Elective Contributions/Non-Elective Contributions Maximum Benefit Condition requirement for Qualified Benefits Possible taxation issues with qualified benefits: Medical Indemnity Policies Disability Insurance Group Term Life in excess of $50,000 3

4 Who Can Participate? Present and former (retired) Employees of the Employer can participate in the Plan Employee can pre-tax benefits on eligible ibl spouse and dependent(s), including legal same-sex spouse and dependent(s) gained through legal same-sex marriage Employee can pre-tax benefits on domestic partner as long as he/she meets Code 152 definition of tax dependent Election Changes Elections stay in place for duration of plan year unless the participant experiences a qualified election change event Change must be on account of and consistent with qualifying event Not all events allow for dropping coverage Not all events apply to Dependent Care and Section 125 Guidance Internal Revenue Code Legislative History Court Decisions i IRS Revenue Rulings and Notices Informational Letters IRS Private Letter Rulings Informal Guidance Treasury Regulations 4

5 New Proposed Regulations On August 6, 2007, the IRS issued new Proposed Regulations pertaining to Section 125 Plans. The new Regulations withdrew the previously issued Regulations and replaced them with more detailed guidance. Although Proposed, the Regulations have the force of law and indicate the position of IRS. Regulations Prior to August : Tax Treatment of Benefits Under 125 (Proposed) : Eligible Benefits Under 125 (Proposed) : FMLA Effects on 125 (Finalized) : Allowable Election Changes Under 125 (Finalized) Regulations After August : General Rules of 125 (Proposed) : Elections Under 125 (Proposed) : FMLA Effects on 125 (Finalized) : Allowable Election Changes Under 125 (Finalized) : Flexible Spending Accounts (Proposed) : Substantiation of Flex Claims (Proposed) : Non-Discrimination Rules (Proposed) 5

6 Outlines When Plan Could Fail ( ) - Failing to have plan in writing / failing to operate according to written terms; - Offering ineligible benefits; - Not offering benefit choice between at least one taxable and one qualified benefit; - Offering benefits (other than excepted benefits) that defer compensation; - Not following uniform coverage rule / use or lose rule; - Not following uniform coverage rule / use or lose rule; - Allowing ineligible mid-year election changes / allowing new elections mid-year; - Reimbursing ineligible expenses through the flexible spending accounts / failing to properly substantiate bt tit expenses; - Reimbursing expenses incurred prior to the effective date of coverage; - Using FSA forfeitures other than as expressly allowed in the Regulations; - Failing to comply with grace period rules; and - Failing to comply with qualified HSA distribution rules. IRS Audits Not a lot of audit activity for Section 125 Plans specifically Expect more in future (403b s?) Should have all pertinent documents available Cooperation, cooperation, cooperation! Review Proposed Regulations to be sure your plan is not in violation 6

7 Flexible Spending Accounts Contributions are subject to Use-Or-Lose IRS specific about use of forfeitures Offset administrative cost Reduce required premiums Returned as taxable cash Grace Period can apply to both accounts Extends no further than the 15 th day of the 3 rd month after the plan year ends Runoff Period vs. Grace Period Dependent Care Expense incurred during period of coverage Must be incurred to allow Employee (and spouse) to work, look for work, go to school full-time, or if spouse is incapable of self-care Expense must be for qualifying child under age 13 or other qualifying dependent IRS maximum of $5,000 per tax year ($2,500 each if filing separately) Provider can be individual or care center Expenses incurred during period of coverage Expenses for Employee, eligible dependents, and eligible adult children Adjudication is required Full election must be made available to participant Expense must be for medical care Account is subject to COBRA Termination of employment 7

8 Carryover Provision Participants can carryover up to $ of unused contributions from previous plan year Does not apply towards $2, max Cannot have Carryover Provision and Grace Period Determine impact to participants before adopting! Health Care Reform and the Effective 1/1/2010, participants can claim eligible medical expenses on their adult children (through the tax year that they turn 26) under the account. Effective 1/1/2011, over-the-counter drugs and medicines may be reimbursed only if the drug or medicine is prescribed by a medical practitioner. Effective 1/1/2013, employee contributions to a will be limited to $2,500. If both spouses employers offer a, each may elect $2,500. OTC Drugs and Dietary Supplements Over the counter items eligible (drugs/meds require prescription) No Stockpiling Dietary Supplements vs. Drugs/ Medicines May require doctor s statement Difference between supplement and drug 8

9 Questions? Thank you! 9