Flexible Spending Account Plans ECFC s 22 nd Annual Administrators Symposium Session: Thursday July 30, 2009, 11:15 am Ron Jerzak, CFCI Paychex, Inc. Introduction Section 125 Plans Overview of key components of Section 125 Plans Plan options available under Section 125/Cafeteria Plans Written Plan Requirements Non Discrimination Requirements Other Requirements FSA Plan Options Types of FSA plans available General Purpose Health FSA Dependent Care Assistance Plans Other reimbursement plan options including: Limited Purpose FSA, Premium Reimbursement Plans and Post HSA Deductible Plan FSA Plan Elections Initial and annual plan elections Qualifying events for mid year election changes Supporting qualifying event documentation Election Reminders FSA Claims Basic requirements Written requirements (including request for reimbursement and supporting documentation) Eligible Claims Ineligible Claims Over the counter items Dual purpose expenses Closing Key Regulations Contact Information Session: Thursday, July 30, 2009 11:15 am 1
Flexible Spending Accounts (FSA) Flexible Spending Accounts (FSA) 2 22 nd Annual ECFC Flexible Benefit Administrators Symposium Staying Alive Through Change Crowne Plaza Hotel St. Paul, Minnesota July 30, 2009 Presenter: Ron Jerzak, CFCI Paychex, Inc. Section 125 Plans 3 Allows employees (former employees) to receive a tax favored status on certain employer sponsored benefits Benefits may cover the employee s spouse and eligible dependent (as defined under Code Section 152), however only the employee can enroll in these benefits Requirements are outlined under various sections of the Internal Revenue Code ( Code ) Additional requirements may apply to the benefits offered under the plan (i.e. health insurance, group term life insurance, disability benefits and FSAs) ERISA requirements may apply DOL Claims Regulations HIPAA Privacy Rules (health FSA) COBRA applies to certain underlying benefits 1
Section 125 Plans 4 Primarily governed by Code section 125 and Proposed Treasury Regulations sections 1.125-1 through 1.125-7 Pretax Health Insurance Premiums or Premium Only Plans (POP) Health Flexible Spending Accounts (Health FSAs) have some additional requirements under Code sections 105 and 106 Dependent Care Assistance Plans (DCAPs) have requirements under Code Section 129 Pretax contributions can be made to a Health Savings Account (HSA) under these plans. Additional requirements are outlined under Code Section 223 Other benefits can fall under the Cafeteria Plan rules (Prop. Treasury Reg. 1.125-1(a)(3), Adoption Assistance (Code Section 137)) 5 The following are the general requirements under Code Section 125 and the Proposed Treasury Regulations A Section 125 plan must be in writing and must be formally adopted by the Employer (Prop. Treas. Regs. 1.125-1(a)(1) and (c)) The Plan Document is the written plan that defines the plan provisions in legal terms. The Summary Plan Description (SPD) summarizes these provisions in an easily understood format for participants The written plan outlines eligibility requirements, enrollment periods and requirements, plan year/period of coverage, FSA rules (if applicable) and contributions (employer, employee elected contributions) The plan cannot favor the Owners, Key and/or Highly Compensated Employees (HCEs) of the company. (Code Section 125(b),(e) and (g), Prop. Treas. Reg. 1.125-7) 6 Non-Discrimination Requirements Plan cannot be established to favor the Owners, Key or Highly Compensated Employees (HCEs) of the Company. Non-discrimination testing must be performed Plans must be in compliance by the end of the Plan Year (December 31 for calendar year plans.) 2
7 Non-Discrimination Requirements Who is considered Key/HCE? Key Employees (Prop. Treas. Reg. 1.125-7(10) as defined under Code section 416(i)) 5% Stockholder Owner 1% Stockholder/Owner earning greater than $150,000 Officer of the Company earning greater than $160,000 (indexed annually). (Note: Officers can be determined by taking the lesser of 10 percent of the total number of employees or 3, not to exceed 50) Family Members (as identified under Code Section 318) 8 Non-Discrimination Requirements Who is considered a Highly Compensated Individual (Code Sections 125(e), Prop. Treas. Reg. 1.125-7(a)(3)) 5% Stockholder/Owner Highly Compensated Officer Spouse or Dependent 9 Non-Discrimination Requirements Who is considered a Highly Compensated Employee (HCE) (Prop. Treas. Reg. 1.125-7(a)(9) and Code Section 414(q)) 5% Stockholder/Owner Employee in the top paid 20% of the company earning greater than $105,000 (based on the prior year, indexed annually) 3
10 Non-Discrimination Requirements Under the IRS regulations, the following individuals are ineligible to participate in a Section 125 Plan, including FSAs (Prop. Treas. Reg. 1.125-1(g): Partners in a Partnership Sole Proprietor/Self Employed Individuals Greater than 2% Owner of a Subchapter S-Corporation Family Members of the Above (Family members of partners who meet the definition of a bona fide employee of the company may be eligible to participate. This does not apply to greater than 2% owners of an S-Corp.) Note: The individual s mentioned above are ineligible based on the IRS Regulations. Other individuals may be excluded based on plan design. Some examples include part-time employees, seasonal employees, employees at certain locations, union employees and certain classes of employees. However caution must be taken to ensure that excluding these employees does not create discrimination issues for the plan 11 Non-Discrimination Requirements The following tests must be performed to ensure the plan is not discriminatory: Contributions and Benefits Tests (All benefits) Eligibility Test (All benefits) 25% Key Employee Test (Includes all benefits under the Section 125 Plan such as health and Dependent Care FSA) 55% Average Benefits Test (Dependent Care Only) 25% Owners Test (Dependent Care Only) 12 Non-Discrimination Requirements Underlying benefit plans may have additional testing requirements (i.e. Group Term Life Insurance) New Proposed Regulations include additional testing provisions such as a Safe Harbor for Premium Only Plans Controlled Ownership rules apply- Companies may need to combine plans for testing Method of Correction: Key employees and Highly Compensated participants must include in gross income the value of the benefit with the greatest value they could have elected to receive (Prop. Treas. Reg. 1.125-7(m)(2)) 4
FSA Plan Options 13 There are two primary types of plans that can be included under a FSA Plan 1. Health (or Medical Reimbursement) FSA (Code Section 105 and Prop. Treas. Reg. 1.125-5) 125 5) 2. Dependent Care Assistance Plans (DCAP) (Code Section 129) (Prop. Treas. Reg. 1.125-5(i)) Health FSA Plan Options 14 General Purpose Health FSAs Employer/Plan Administrator establishes the maximum amount that can be contributed to the plan for the Plan Year. Employer/Plan Administrator determines eligibility requirements and enrollment periods (For example: A Plan may state that employees can enroll the first of the month following completion of 90 days of service) (Note: Code Section 125(g) states that plans may not have a waiting period for eligibility that exceeds 3 years). Health FSA Plan Options 15 General Purpose Health FSAs (cont.) Employer/Plan Administrator determines whether or not to allow mid year election changes based on a qualifying event. (Must follow IRS guidelines and should require supporting documentation.) Employer/Plan Administrator monitors claim reimbursement procedures (including method of submission, claim review and processing, method of payment, etc.) Employer/Plan Administrator may offer a grace period for the plan These items should be outlined in the Plan Documentation and written materials provided to employees. 5
Health FSA Plan Options 16 General Purpose Health FSAs Key points regarding Health FSAs 1. Uniform Coverage: Maximum annual election (minus any claims paid) is available to participants throughout the plan year regardless of the amount they have contributed. 2. Claims can be submitted for out of pocket expenses that are not covered by the individual s insurance or other medical reimbursement plan. (No double-dipping) di i 3. Items or services submitted for reimbursement under the plan must be medically necessary as defined under Code Section 213(d). (Cosmetic, illegal items and procedures, or items used for general health are not eligible for reimbursement.) 4. Use or lose rule applies. Participant will forfeit unused amounts at the end of the plan year Health FSA Plan Options 17 General Purpose Health FSAs Key points continued 5. Closeout period- Timeframe to submit eligible expenses from the previous plan year as outlined in the plan 6. Grace Period (if applicable)- Plan may allow expenses incurred up to 2 ½ months after the end of the plan year to be reimbursed from the prior year balance (employee/participant must be active in the plan on the last day of the plan year, including those who are covered under COBRA.) 7. Forfeiture/gains options- May be used to offset cost of plan administration- options for participants (Employer contribution to their FSA or return of contributions in accordance with the regulations. (See Prop. Treas. Reg. 1.125-5(o)). Health FSA Plan Options 18 General Purpose Health FSAs Key points continued 8. Excess funds cannot be used for other expenses (i.e. Dependent Care) 9. ERISA may apply ppy 10. Limited COBRA- In general, if participant has a positive account balance, they can continue coverage under COBRA for the remainder of the plan year. These items should be outlined in the Plan Documentation and written materials provided to employees. 6
DCAP Plan Options 19 Dependent Care Assistance Plan (DCAP) Key points regarding DCAPs (Code Section 129) Uniform Coverage does not apply. Participants are only reimbursed up to the amount of their contributions. IRS established maximum. Plan could specify lower maximum. Employer/Plan Administrator determines eligibility requirements and enrollment periods (For example: Plan may state that employees can enroll the first of the month following completion of 90 days of service) Employer/Plan Administrator determines whether or not to allow mid year election changes based on eligible qualifying events. (Must follow IRS guidelines and should require supporting documentation.) DCAP Plan Options 20 Dependent Care Assistance Plan (DCAP) Key points regarding DCAPs Employer/Plan Administrator monitors claim reimbursement procedures and determinations (including method of submission, claim review and processing, method of payment, etc.) Expenses are reimbursable only if they allow the employee and their spouse (if applicable) to be gainfully employed. Qualifying Individual: Children under age 13 and eligible dependents (as defined under Code section 152). In the case of children of divorced parents, only custodial parent can claim dependent care regardless of Code Section 152 status. Excess funds cannot be used for other expenses (i.e. health FSA expenses) ERISA and COBRA do not apply. DCAP Plan Options 21 What happens if an employee has 2 qualifying individuals and a Dependent Care expense of $11,000? What are the options? 7
DCAP Plan Options 22 OPTIONS Possible for employee to run $5,000 through DCAP under Section 125 Plan. Take $1,000 as a Federal Child Care Tax Credit* calculation on their federal tax return at the end of the year. Federal Child Care Tax Credit permits up to $6,000 in Dependent Care expense for 2 or more qualifying individuals. If both employee and spouse have access to a DCAP, the maximum they can do combined is a total of $5,000 in a calendar year. OR Take entire $6,000 as a Federal Child Care Tax Credit and do $0 in DCAP. FSA Plan Options 23 Other Options Premium Reimbursement Plan Adoption Assistance Plan Post HSA Reimbursement Plan Limited Purpose Health FSA Used in conjunction with a HSA and HDHP Covers dental, vision and preventive care Allows employee to remain eligible for a HSA, as it is permitted coverage FSA Plan Elections 24 Plan Elections (Prop. Treas. Reg. 1.125-2): Must be made prior to the beginning of the Plan Year. Generally must be made prospectively (No retroactive enrollments) (Prop. Treas. Reg. 1.125-2(d) provides exception for new hires). Election remains in effect for the entire plan year unless participant experiences a qualifying event (if allowed under the Plan). Election amount cannot exceed the maximum allowable under the Plan (or IRS maximum for Dependent Care in the calendar year). Plan may allow employer contributions. Mid-year election changes must be consistent with the qualifying event. 8
FSA Plan Elections 25 Qualifying Events The following are eligible qualifying events which allow an employee to change their plan election mid-year (Treasury Regulation 1.125-4) Change in number of dependents (birth/adoption) Change in marital status (marriage/divorce) Change in employment status (hiring/termination) (employee/spouse/dependent, must affect eligibility) Change in cost or coverage (applicable only to POP and DCAP) Change in dependent status affecting eligibility (attains a certain age or student status) FSA Plan Elections 26 Qualifying Events Entitlement to Medicare/Medicaid Change of residence (POP only) Judgment, decree, court order (divorce, QMCSO) Death of a spouse/dependent* * Note: In the event the employee dies leaving a balance in a Health FSA, claims incurred for the deceased employee and eligible family members, that occurred before death can be submitted after the death of the employee. If deceased employees family members elect COBRA they can submit qualified expenses incurred for family members after the death of the employee. Funeral expenses will not be eligible under any circumstances. FSA Plan Elections 27 Examples of Qualifying Event Documentation Birth certificate or Adoption paperwork Death certificate Marriage certificate Proof of eligibility for such things as Medicare, spouses insurance, etc. Proof showing loss of coverage Copy of judgment or court order 9
FSA Plan Elections 28 Election Reminders Special Enrollment Rules (Treas. Reg. 1.125-4(b)) Allows election due to birth/adoption of a child to be retroactive to the date of the event. This may apply to health FSA Rehires Terminated employees rehired within 30 days of termination may step back into original election if allowed by the plan Leaves of Absence FMLA Military Leave Requirements Plan Requirements Consistency Rule Election change must be consistent with the event (For example, the death of a spouse/dependent would not allow you to increase your health FSA election.) Health FSA Claims 29 Basic Requirements Participant cannot seek reimbursement under another insurance or benefit plan Cannot submit same expense for reimbursement under the health FSA and their health insurance, HSA, HRA,etc. Insurance Premiums are not reimbursable under the health FSA. Expenses must be for medical care as defined in Code section 213(d) Expenses must be for the employee, spouse and eligible dependents (as defined under Code section 152) Requirements are found under Prop. Treas. Reg. 1.125-6 Health FSA Claims 30 Basic Requirements Written request for reimbursement Third party substantiation required Certain over the counter items may be eligible Certain dual purpose items may be eligible Debit Card rules IIAS Auto Substantiation Additional supporting documentation may be required in some instances DOL Claims Regulations Identify time frames for adjudicating claims Notification to participants regarding held or denied items Claim appeal process 10
FSA Claims 31 Written Requirements Written request for reimbursement Request should contain: Employee (participant s) information (name, address, other identifiable information) Name of the individual who incurred the expense and their relationship to the employee/participant Description of expense Date the service was incurred Amount of expense Certification that these are eligible expenses and are not reimbursable under another plan Employee/participant signature FSA Claims 32 Written Requirements Under the regulations, expenses must have third party substantiation (documentation) to support the request for reimbursement. This documentation ti must include: Name of the service provider Date of the service Amount of the service Eligible Health FSA Claims 33 Examples of eligible expenses include: Office visits/co-pays Prescriptions Orthodontia Dental/vision expenses Out of pocket hospitalization costs Over-the-counter Medications (i.e. aspirin) Contact Lens solution 11
Eligible DCAP Claims 34 Examples of eligible expenses include: Childcare/Daycare (under age 13) Day camp Elder dependent care (if individual is an eligible dependent as defined under Code section 152) Preschool Ineligible Health FSA Claims 35 Examples of ineligible expenses include: Cosmetic surgery Teeth whitening Illegal procedure/medications Marijuana Clip-on sunglasses/warranties Hygiene/Personal Care items (toothpaste/soap) Insurance premiums Ineligible DCAP Claims 36 Examples of Ineligible DCAP Claims: Transportation expense if separate from dependent care (i.e. kids taxi) Field Trips Meals Overnight Camp Kindergarten and post Kindergarten Parochial or Private School Tuition Paying your spouse or dependent child to watch your other dependent children 12
Dual Purpose Summary Health of FSAs FSA Claims 37 Examples of Dual Purpose* items include: *Doctors statement required describing medical condition that is being treated. Massage Therapy Health club memberships Weight Loss Programs (obesity not general health) Vitamins/Supplements Capital expenditures Air Conditioners Automobile enhancements Key Regulations 38 Code Section 125 Requirements for cafeteria plans Proposed Treasury Regulations 1.125-1 Cafeteria plans- general rules Proposed Treasury Regulations 1.125-2 Cafeteria plan elections Treasury Regulation 1.125-3 FMLA requirements for Cafeteria Plans Treasury Regulation 1.125-4 Permitted election changes (qualifying events) Proposed Treasury Regulation 1.125-5 Flexible Spending Account arrangements Key Regulations 39 Proposed Treasury Regulation 1.125-6 Substantiation for expenses- all cafeteria plans Proposed Treasury Regulation 1.125-7 Cafeteria plan nondiscrimination rules Code Section 318 Family Members/Ownership attribution rules Code Section 105 Amounts received under accident/health plans Code Section 106 Employer contributions to accident/health plans Code Section 129 Dependent Care Assistance Plans (Code section 21 outlines expenses) 13
Key Regulations 40 Code Section 137 Adoption Assistance Plans Code Section 152 Definition of dependent Code Section 223 Health Savings Accounts Code Section 213(d) Medical, dental, etc. expenses Code Section 1372 S-Corporation rules Code Section 1563 Controlled Ownership rules Thank you 41 If you have any questions, please feel free to contact me: Ron Jerzak, CFCI Senior Compliance Analyst Paychex, Inc. 585-336-7545 rjerzak@paychex.com The information contained in these materials is general information regarding Section 125 Plans and Flexible Spending Accounts (FSAs). Any verbal or written information provided is not intended to be used as legal or tax advice. You should consult with a qualified attorney or tax advisor relating to specific questions or provisions regarding these plans. 14