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Frequently Asked
Questions
FlexChoice125
Employee Questions
Who is an eligible participant in FlexChoice125?
What do I save in taxes by participating in this plan?
Does this affect my future Social Security retirement?
What if I terminate employment and am subsequently rehired?
How do I know what my Flexible Spending Account balance is?
What is use-it-or-lose-it?
I have a domestic partner. May their expenses qualify in this Plan?
How do
I file a claim?
I am
an owner ("C" corporation), key employee, or highly compensated
employee (certain eligible owners or employees earning over $90,000)
and have been advised I cannot participate to the extent I enrolled
for. Why did this happen?
How do I file a claim?
Who or what determines if an Out-Of-Pocket Health Care Expense is eligible for the Cafeteria Plan?
Can I use money in my Dependent Care Account to pay for Out-Of-Pocket Health Care Expenses?
May I submit expenses for my child's tuition through the Dependent Care Account?
If I am maximizing my Dependent Care Account($5,000), may my spouse also contribute to their Cafeteria Plan?
May I participate in the Dependent Care Account if my spouse does not work, or go to school full time?
If I am maximizing my Out-Of-Pocket Health Care Account, may my spouse also contribute to their Cafeteria Plan?
Can expenses actually incurred (service performed) in one plan year be reimbursed in another plan year?
Can I make changes in my FlexChoice125 deductions at any time during the plan year?
What happens to my FlexChoice125 contributions if I go on a leave of absence? Must I still make them?
What happens to balances left in my Flexible Spending Accounts upon termination? Can I still spend them?
What is the IRS
"grace period" and how does it work?
Employer Questions
Is my company required to file a Tax Return for this benefit plan?
Are there a minimum number of participants or participation rate in order to
implement a Cafeteria Plan?
What are the employer tax savings?
Are there other benefits to the employer?
Can we use this to reduce our medical insurance costs?
Are these plans subject to an employer IRS Audit?
Does my Health Flexible Spending Account (FSA) have to comply with HIPAA's privacy rules?
QUESTION
Who is an eligible participant in FlexChoice125?
ANSWER
Only bona fide employees may participate in a Cafeteria Plan. Sole proprietors, partners, owners of an LLC or LLP, and 2% or more owners of "S" corporations may not participate in a plan. Top
QUESTION
What do I save in taxes by participating in this plan?
ANSWER
You save Federal taxes (15%-38.6%), Medicare (1.45%) Social Security (6.2% of the first $90,000) and State tax, if any (4%-11%, depending on bracket and state). Top
QUESTION
Does this affect my future Social Security retirement?
ANSWER
It can in a few instances. Your Social Security retirement
amount is based upon your earnings and is weighed more as you get closer to retirement. Because of this, most find it does not affect them at all. If an employee is in their 50's with a low income with high salary reductions, they could see a significant change. Normally, the savings from the Cafeteria Plan greatly exceeds any retirement income loss. One suggestion may be to take part of your savings and put that into an employer or individual retirement savings program. Top
QUESTION
What if I terminate employment and am subsequently rehired?
ANSWER
A termination of employment does not contemplate a return to work, at least in the near future. If you were to be rehired in the same plan year within 30 days, you would be able to make a new election only if the facts and circumstances justified the change, e.g., an implicit termination/rehire merely to change the employee’s election would not be permitted. After the 30 days you would be able to make new elections in the Plan with no strings attached. Top
QUESTION
How do I know what my Flexible Spending Account balance is?
ANSWER
Your Flex Account balances are always
at your fingertips. You may access your account balance either on
line at www.myrsc.com or by phone by dialing Flex-Voice at (916)
366-6955 or (800) 838-4511. Top
QUESTION
What is use-it-or-lose-it?
ANSWER
In exchange for allowing you to get
pre-tax treatment of eligible expenses, your expenses must meet or
exceed the original election. In other words, unused amounts are
forfeited after the end of the Plan Year. These forfeited amounts
revert to your employer and can be used to offset their expenses or
losses in the plan You are provided a 60-90 (depending upon
employer) day period after the end of the Plan Year to submit
expenses incurred prior to that date.. The good news is in recent
years the IRS has softened the rule by allowing you to spend down
your account on over-the-counter drugs and medicines—prior to year
end. Also your plan may contain the IRS “grace period” (see grace
period question for a full explanation) and your monies will not
forfeit at year end. The point is this plan saves you money. Just be
conservative in your estimate and only salary reduce amounts for
expenses you know you are going to incur. Top
QUESTION
I have a domestic partner. May their expenses qualify in this Plan?
ANSWER
Generally no. In fact, no pre-tax
benefits may be provided to a domestic partner under Federal law.
Under long-standing IRS rule and reaffirmed by the Defense of
Marriage Act, only dependents that qualify under IRC Section 152 may
receive pre-tax treatment. The only instance when expenses for
Domestic Partners may be treated on a pre-tax basis is if they
qualify as a dependent under IRC Section 152. In other words, they
must qualify as a dependent on your tax return. This extends to
premiums an employer may pay on behalf of a domestic partner. Those
premiums must be added to imputed income to the employee. Top
QUESTION
I am an owner ("C" corporation), key employee, or highly compensated employee (certain eligible owners or employees earning over $105,000) and have been advised I cannot participate to the extent I enrolled for. Why did this happen?
ANSWER
FlexChoice125 as all Cafeteria Plans is subject to discrimination testing required by the IRS. In general, these tests are designed to ensure that plans do not discriminate in favor of owners, key employees or highly compensated employees. While there are several tests we conduct, the two that generally create the most problems are the Key Person Test (owners/key employees are limited to 25% of the overall benefit of the plan) and the Dependent Care Average Benefits Test (highly compensated employees are limited to 55% of the average benefit provided to non-highly compensated employees). We look at all methods to conduct these tests to ensure that you can participate to the maximum extent allowable; however, we must make certain the plan complies with IRS regulations. Top
QUESTION
How do I file a claim?
ANSWER
You will find a claim voucher in your
enrollment packet as well as on this website. For daycare expenses,
we have a block to identify who the claim is for as well as a spot
for the provider to sign. You can submit a voucher for the entire
month of daycare and will be reimbursed as it is incurred (normally
each pay period). When it comes to unreimbursed medical expenses,
attach a receipt, copy of orthodontia coupon, statement from a
provider indicating that you incurred the expense and the amount you
are responsible for, or an Explanation of Benefits (EOB) from the
insurance company. There is a spot in the form for you to provide
your round trip medical mileage. That is currently reimbursed at
$.15 per mile. Individually owned insurance can be substantiated
from a payment coupon or a statement showing the amount was
automatically deducted from a checking account. Top
QUESTION
Who or what determines if an Out-Of-Pocket Health Care Expense is eligible for the Cafeteria Plan?
ANSWER
Section 213 of the Internal Revenue Code. This is the same rule that would allow a deduction on your personal tax return except for the 7.5% limitation. If in doubt, your tax accountant is your best source of advice as there are many gray areas. Top
QUESTION
Can I use money in my Dependent Care Account to pay for Out-Of-Pocket Health Care Expenses?
ANSWER
No. Each Flexible Spending Account (FSA) is a separate account and money cannot be used for other than the designated purpose.Top
QUESTION
May I submit expenses for my child's tuition through the Dependent Care Account?
ANSWER
Prior to kindergarten, tuition expenses for pre-school are eligible expenses. Once in kindergarten, only eligible before and after-school expenses may be
reimbursed. Top
QUESTION
If I am maximizing my Dependent Care Account($5,000), may my spouse also contribute to their Cafeteria Plan?
ANSWER
The IRS annual limit is based upon a calendar year and limited to $5,000
per family. Therefore, if your spouse salary reduced $3,000 for the calendar year, you would be limited to $2,000. Top
QUESTION
May I participate in the Dependent Care Account if my spouse does not work, or go to school full time?
ANSWER
No. The Dependent Care Account, whether through the Cafeteria Plan or through the Day Care Tax Credit, is available so you and your spouse can work. Your expenses are eligible if your spouse works full-time, part-time (could limit the available amount if your spouse earns less than $5,000), incapable of self-care or be a full-time student (deemed to earn $250 per month with one child or $500 with more than one). Top
QUESTION
If I am maximizing my Out-Of-Pocket Health Care Account, may my spouse also contribute to their Cafeteria Plan?
ANSWER
Yes. There is no limitation on the Health Care Account as there is with Dependent Care. If your spouse has a $4,000 limit and you have a $3,000 limit, you could elect up to $7,000 between the two plans. Of course, you cannot submit the same expense to both plans. Top
QUESTION
Can expenses actually incurred (service performed) in one plan year be reimbursed in another plan year?
ANSWER
No. The IRS rule is that reimbursements have to be made in the plan year the service is actually performed. Possible exception: Orthodontia services paid under contract stretching over several years (See your Pacific Benefits representative). Top
QUESTION
Can I make changes in my FlexChoice125 deductions at any time during the plan year?
ANSWER
No. However, changes are allowed for approved “status changes”. Please refer to your Summary Plan Description or www.ChangeofStatus.com for a detailed description of allowable changes. Top
QUESTION
What happens to my FlexChoice125 contributions if I go on a leave of absence? Must I still make them?
ANSWER
You will not be required to make your contributions if you are on an approved leave of absence. There are special rules for a leave under FMLA. You may revoke your elections for this period and make new elections upon your return to work. Alternately, you may be able to continue participation during this period. The particular policy of your employer will determine if and how benefits may be continued. In some cases, it is even possible to continue to participate on a pre-tax basis. Top
QUESTION
What happens to balances left in my Flexible Spending Accounts upon termination? Can I still spend them?
ANSWER
If you have money remaining in your Out-Of-Pocket Health Care Account upon termination, this account is subject to COBRA continuation provisions. Generally, you can still submit claims against this balance for expenses incurred
prior to your date of termination. However, you may still participate in this account
past the date of termination by electing COBRA and sending in your contributions to your employer on at least a monthly basis or, alternatively (with Employer permission) you may prepay the balance of your yearly election with pre-tax dollars before leaving. The Dependent Care Account is not subject to COBRA and claims may be submitted for eligible Day Care expenses incurred prior to the Plan Year end, without any further contributions. Top
QUESTION
What is the IRS "grace period" and how
does it work?
ANSWER
The IRS has established the
grace period rule to help offset some of the risk of the “use it or
lose it” rule. If your plan contains the grace period provision
(many plans do not) then monies left in your Flex Accounts at
year-end do not forfeit immediately. Instead, this provision
provides an additional time period (grace period) to actually spend
down your account balance at year-end. The time frame may be up to
2.5 months after plan year-end. Top
QUESTION
Is my company required to file a Tax Return for this benefit plan?
ANSWER
Maybe. Prior to 2002, all Cafeteria Plans were required to file the IRS Form 5500 along with a Schedule F. This requirement was established under Section 6039D. IRS Notice 2002-24 suspended this requirement therefore there are no filing requirements for a Cafeteria Plan per se. While this suspended the fringe benefit filing, there may be ERISA filings for the underlying plans. The plans generally subject to ERISA filing requirements are certain group insurance plans and the Health Flexible Spending Account (FSA). Your insurance company provides you the information for you, your accountant, or broker to complete the IRS Form 5500 with Schedule A. Similarly, we prepare the IRS Form 5500 along with Schedule C (in some cases) for the Health FSA. A plan is exempt from an ERISA filing if there are fewer than 100 participants. Top
QUESTION
Are there a minimum number of participants or participation rate in order to implement a Cafeteria Plan?
ANSWER
No. You could have one participant.
The key consideration is cost for a small plan No. You could
possibly have one participant. The key consideration is cost for a
small plan but over 95% of our plans save more in payroll tax
savings than they incur in administrative fees. Top
QUESTION
What are the employer tax savings?
ANSWER
Employers save the matching Social Security and Medicare tax (generally 7.65% combined) on amounts passed through the plan. In California, they also save Worker's Compensation premiums. The Worker's Compensation savings does not apply in most states. Check with the carrier to determine if other states provide similar savings. Top
QUESTION
Are there other benefits to the employer?
ANSWER
Yes, while you are saving enough to cover your cost, you are also providing an average 32% tax savings to your employees. If they had $100,000 in expenses, they save $32,000 in taxes. It is a painless way to provide a pay raise. It further eases some of the increases in premiums and cost sharing. Finally, it makes your benefits more competitive thereby increasing retention. Top
QUESTION
Can we use this to reduce our medical insurance costs?
ANSWER
Some employers have. They have contributed through a spending credit (sometimes matching) to help offset a higher deductible plan. Top
QUESTION
Are these plans subject to an employer IRS Audit?
ANSWER
While the IRS does not specifically target Cafeteria Plans for audit, they have included several pages to their audit checklist so they can review plans during the course of a business audit. Top
QUESTION
Does my Health Flexible Spending Account (FSA) have to comply with HIPAA's privacy rules?
ANSWER
Yes. A Health FSA is considered to be a "health plan" under the privacy rules. While some small self-administered plans with fewer than 50 participants are generally excluded from the HIPAA privacy regulations, most Health FSA's are subject to the privacy requirements. Plans with $5 million dollars or more in annual receipts must comply by April 14, 2003 while other plans must comply be April 14, 2004. This does not make plans more difficult to administer. In fact, it has few effects on administration. Medical information has always been confidential with us. This is why employees send their claims directly to us by mail or fax. Information is only released to the participant or others (if due to a court order). An added element is if the participant is requesting information regarding a dependent. In this case, we will ask for an information request form unless we have one on file. The regulations also require a Business Associate Agreement between our clients and us. We have one available if you do not have your own. Top
PLEASE REFER TO YOUR SUMMARY PLAN DESCRIPTION (SPD) AND THE FLEXCHOICE125 DOCUMENT FOR A MORE COMPLETE EXPLANATION OF FLEXCHOICE125.
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