5500 Preparer's Manual for 2012 Plan Years
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From Spencer's Benefits Reports: Following are several recent benefits questions that were submitted by subscribers and the answers from Spencer editors.
Q: We have an employer group that has a Sec. 125 FSA plan year of March 1 to February 28. There is a bargaining contract in place and part of the initial negotiations required the employer to provide a $25 per month subsidy for either a wellness benefit or the FSA to be used by the employee.
We would like to know the following:
1. Because the employer agreed to provide this $25 subsidy prior to the beginning of the plan year (no dollars have been contributed as of this date), is it possible to provide the $25 subsidy to those employees currently covered under the FSA who already have made elective contributions for the plan year and not be in violation of the FSA rules?
2. Is it possible for the employer to place the $25 subsidy in the FSA for those employees not currently enrolled in the FSA plan? We are not suggesting that the employees be permitted to place any elective contributions in the plan, but only placing the new employer contributions in the account.
3. If we cannot work around the current FSA plan, is it possible to implement another FSA for employer contributions only with a short plan year?
4. Can the employer place the $25 in employer contributions into FSA as a cash option (employer flex credits) for the employee to cover items such as health care or fitness club memberships, exercise classes, weight management programs, etc. I know that years ago some employers offered a cash option that became taxable to the employee.
A: Here are several concerns in this situation:
1. The Sec. 125 written plan needs to include the provisions for employer contributions. If the $25 FSA subsidy is not in the written plan, the plan must be amended to include the provision. This is important because if the operation of the plan does not comply with the provisions of the written plan, the entire Sec. 125 plan could be threatened.
2. If the employer makes nonelective employer contributions (in the regulations called “employer flex credits”), the employer must make the contribution for all eligible employees. In addition, the nonelective contributions should be available to employees for the election of benefits throughout the plan year.
3. The regulations permit plans to be amended and provide that if a plan amendment adds a new qualified benefit (such as employer flex credits), only expenses incurred after the later of the effective date or the adoption date are eligible for reimbursement.
Given these concerns and the facts as you have presented them, it appears that the employer can amend the FSA to include a $25 annual contribution for all FSA participants (including participants who join the plan midyear), and the contribution would be available from the effective date of the amendment through the end of the plan year.
4. I believe the answer is yes. The 2007 regulations note that employer contributions can be made for taxable benefits as long as the benefits become fully taxable when they are received:
Proposed Reg. Sec. 1.125-1(a)(2)(ii) notes that a “permitted taxable benefit” includes “benefits attributable to employer contributions that are currently taxable to the employee upon receipt by the employee.”
Q: If an employee had a limited Sec. 125 FSA (dental and vision coverage) with a previous employer due to health savings account (HSA) enrollment, and the employee leaves the company and goes to another employer and wants to enroll in a traditional FSA, does the money the employee set aside with his or her previous employer offset what can be contributed with the new employer’s FSA?
A: No. There is no maximum medical FSA contribution limit specified by law for a taxpayer. Medical FSA limits are set by plan sponsors, not by tax law, and because the two employers and plan sponsors in this situation are unrelated, the second plan cannot limit an employee’s contribution based on contributions to another employer’s medical FSA. In addition, while the individual may not contribute to the existing HSA while enrolled in a traditional FSA, the individual may continue to be reimbursed from the HSA.
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