Flexible Spending Accounts 101 The Basics of Flexible Spending Accounts September 2010
Agenda What are Flexible Spending Accounts (Section 125, Cafeteria Plans) Types of Flexible Benefits offered under Flexible Spending Accounts Premium Only Plan (POP) Flexible Spending Account (Medical) Flexible Spending Account (Dependent Care) Flexible Spending Account (Transportation) Benefits of offering Flexible Spending Accounts Who is eligible to participate under these accounts How do these plans work? Administrative Procedures and Implementation of the Plan Qualified Expenses that can be covered under these accounts Flex Debit Cards Internet Access Election Changes New Proposed Regulations
Types of plans that can be offered through a Cafeteria Plan Premium Only Plan (POP) Flexible Spending Account (Medical) Flexible Spending Account (Dependent Care) Flexible Spending Account (Transportation)
Premium Only Plans Premium Only Plan (POP) allow employees to elect to withhold a portion of their pre-tax salary to pay for their premium contribution for most employer-sponsored health and welfare benefit plans. The plan offers a simple way to obtain favorable tax treatment for benefits already offered. Medical Dental Vision Flexible Spending
Flexible Spending Accounts (Medical) A medical flexible spending account (FSA) allows an employee to fund certain medical expenses on a pre-taxed basis through salary reduction to pay for out of pocket expenses that aren t covered by insurance for employees, spouses, and dependents. The average working employee in the U.S. spends more than $1,000 annually on these types of benefits
Flexible Spending Accounts (Dependent Care) The dependent care FSA is an attractive benefit for employees who pay for child-care or long-term care for their parents, etc. Many employees don t take advantage of this benefit and may be unaware of the significant tax savings. Employees may hold back as much as $5,000 annually of their pre-tax salary for dependent care expenses. Qualified dependent care expenses may include the care of a child under the age of 13, long-term care for parents, care for a disabled spouse or a dependent incapable of caring for himself, and summer day camps.
Flexible Spending Accounts (Transportation) The transportation FSA is appealing for employees who rely on commuter transit for work. The plan offers a simple way to obtain favorable tax treatment for these costs: Parking Van Pool Transit Passes Transportation benefit maximum are set forth by the IRS. The benefits must be used by commuting to and from work for the Employer.
Benefits for Employees Most employees are already paying for these expenses out of their own pockets with after-tax dollars. Participating in a cafeteria plan reduces an employee s taxable salary and increases the percentage of their take-home pay, thus increasing their spendable income. They receive a greater deduction on dependent care expenses than what s offered by a traditional tax credit at the end of a year.
Benefits to the Employer Every dollar run through the Section 125 Plan reduces an employer s payroll. In many cases, this savings can add up to as much as 20 percent of every dollar being passed through the plan. Implementing a cafeteria plan can soften the blow of premium increases to employees. Employees can use tax savings to invest in their retirement plans.
Who is eligible to participate? Virtually any company can sponsor a cafeteria plan for its employees. S or C Corporations Partnerships Non-Profit Organizations Government Entities Limited Liability Companies (LLC) Sole Proprietorships
Who is ineligible to participate? Partners A More-Than-2% Shareholder in an S Corporation Owners of C Corporation, unless they elect no more than 25% of total plan contributions Members of an LLC Self-employed individuals
Getting Started How do they work? Prior to the beginning of each plan year, employees estimate how much they will spend in out of pocket medical expenses and/or dependent care expenses during the course of the plan year. It is important for employees not to overestimate their annual election amounts, as the FSA is a use it or lose it benefit. So any unused balances remaining at the end of each plan year are forfeited. There is a grace period for which an employee can file claims for each plan year, as well as the employer can elect to do a Plan Extension (2 ½ months). If there is a FSA surplus at the end of the plan year, the remaining balance shall be retained by the employer to offset administrative expenses or future employee benefit costs.
Getting Started How do they work? The amount that is elected then deducted over the course of the plan year from the employee s paycheck prior to being taxed and is deposited into their flexible spending account. On or after the first day of the plan year, an employee is restricted from changing or revoking the Section 125 agreement with respect to the pre-tax premiums until the plan year has ended unless a family status occurs. Employees can be reimbursed either by using a Flex Debit Card or by submitting a claim for reimbursement.
Administrative Procedures & Implementation of the Plan A Plan Document must be established. The document outlines specific details. A description of the employee benefits that are covered through the plan Participation rules and eligibility Annual limits and any employer contributions Election procedures The plan year
Administrative Procedures & Implementation of the Plan A summary plan description (SPD) must be distributed to all participants. ERISA requires that the SPD be distributed to all plan participants no more than 90 days after an employee becomes a participant or within 120 days of the plan becoming subject to ERISA. The SPD summarizes specific details of the plan, claim filing procedures and information regarding plan sponsorship and administration.
Administrative Procedures & Implementation of the Plan Ongoing compliance that must be attended to. Nondiscrimination requirements Plans can t discriminate as to eligibility and benefits provided. Failure to meet the nondiscrimination requirements would eliminate the tax-free status of the benefits provided to the highly compensated and/or the key employees. Discrimination Testing Needs to be performed at the beginning of each plan year as well as at the end of each plan year.
Qualified Expenses Eligible Medical Expenses (this is a sampling of eligible items only) Accommodations made for disabling medical conditions Ambulance fees Chemotherapy Contact lenses, solutions and cleaners Plan deductibles Diagnostic testing fees Hearing aids and batteries Insulin and diabetic supplies Obstetrical expenses Orthodontia Physician fees Psychologist fees Smoking cessation prescriptions Wheelchairs & mobility devices Acupuncture Braille books & magazines Coinsurance Crutches Dentures Eyeglasses, including exam fees Hospital bills Nurse fees Operations Prescribed drugs (including contraceptives) Routine physicals Transplants X-rays
Flex Debit Cards Today there is an even more convenient and beneficial way to provide flexible spending accounts. The Flex Debit Card System automates the process of paying for eligible pre-tax account expenses. Enables employees to use the Debit Card at eligible FSA locations wherever MasterCard is accepted from physician and dental offices to pharmacies and vision service locations. Approved expenses are automatically deducted from their FSA/DCA/TRN accounts. Employees can check their available account balance 24 hours a day via secure Internet access.
Flex Debit Cards: Benefits Employers Drives FICA tax savings by increasing Flex Account participation and contributions On Average, employers realize a better than 60% increase in overall dollars contributed to their Flex Account plans Adds value to Employee Benefits at no additional net cost Employees Instant access to Flex Account funds no need to use out-of-pocket dollars No more waiting for reimbursement checks Eliminates claim forms and receipts in most cases Access to real-time account balance information via Internet
Internet Access: Benefits Employers Access to real-time account balance information for employees Access to reports that will help you manage your Flexible Spending checking account Employees Access to real-time account balance information Access to real-time POS transactions Print statement from previous plan years www.benefitspaymentsystem.com
Election Changes New employees have 30 days after hire to make an election. Changes through out the course of the plan year are limited to the qualified events below: Marriage Birth of a baby Divorce Death Termination of Employment by Employee, Spouse or Dependent that causes loss of eligibility Medicare or Medicaid eligibility FMLA leaves of absence
New Regulations IRS Notice 2007-2 in Internal Revenue Bulletin Number 2007-2 restricts the types of merchants where tax-advantaged benefit cards can be used. On January 1, 2008, non-healthcare merchants were required to have an Inventory Information Approval System (IIAS) in place in order for healthcare benefits cards to be used at their locations An IIAS allows a merchant to identify which purchase items qualify as eligible healthcare expenses, as defined by the Internal Revenue Code. Beginning January 1, 2009, pharmacy merchants must also support an IIAS in order to accept healthcare benefit cards.
New Regulations Patient Protection & Affordable Care Act (PPACA) enacted on March 23, 2010, has two main impacts on Flexible Spending. These regulations go into effect regardless of plan renewal date. Beginning January 1, 2011, no over-the-counter (OTC) medicines or drugs will be recognized as eligible expense through your FSA Beginning January 1, 2013, the IRS has placed a limit on the contribution amount of $2,500.00
New Regulations Notice 2010-59 revises the definition of medical expenses as it relates to OTC drugs Medicines or drugs shall be treated as a medical expense only if such medicine or drug is prescribed, with the exception of insulin Does not apply to items that are not medicines or drugs, including equipment such as crutches, supplies such as ace bandages, and diagnostic such as blood sugar test kits Individuals may be reimbursed for OTC medicines or drugs, so long as the individual obtains a prescription for the medicines or drugs Prescription means a written or electronic order for a medicine or drug that meets the legal requirements of a prescription and is issued by an individual who is legally authorized to issue a prescription
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J.W. Terrill Flexible Spending Contacts Joy Luetkenhaus Flexible Account Administrator 314-594-2757 Traci Anderson Flex Account Administrator 314-594-2733