Janet LeTourneau

Health care reform has brought many changes to insurance plans and flexible spending arrangements—and more are on the horizon. One change that employers found particularly worrisome was the $2,500 cap on employee contributions to health flexible spending accounts (FSAs) that will be in place for taxable year 2013.

Employers with plans that start January 1, 2013 didn’t have many questions, but for those with fiscal plan year starts, the numbers just didn’t make sense.

For instance, let’s say that a cafeteria plan started September 1, 2012, and had a $5,000 annual salary reduction limit. For the portion of the plan year from September 1, 2012 to December 31, 2012, participants would generally contribute $1,667. That leaves $3,333 to be salary deducted from January 1, 2013 through August 31, 2013, which could result in salary deductions in excess of the $2,500 limit for employees’ taxable years. And that’s not even considering the new plan year that would start again September 1, 2013.

In Notice 2012-40 (May 30, 2012), the Internal Revenue Service (IRS) cleared the confusion about how the limit applies and provided detailed information concerning everything from cafeteria plan grace periods to plans that cover controlled groups and affiliated service groups.

Background

Cafeteria plans, in general, have always required plan sponsors to indicate a plan maximum but have never imposed a statutory limit on what that maximum could be. In addition, cafeteria plans may include a “grace period” of up to 21/2 months after the end of a plan year for participants to incur expenses and use amounts remaining from previous plan years.

The Affordable Care Act of 2010 added Internal Revenue Code (IRC) Section 125(i) that imposed a limit of $2,500 for salary deductions by participants for any “taxable year” beginning after December 31, 2012. “Taxable year” to all accountants and benefit experts means calendar years starting January 1. And that’s when speculation and doubts concerning fiscal year plans began to create anxiety for plan sponsors.

Clearing the Way for Fiscal Plan Years

It’s all a matter of perception. The notion that statutory language referred to the usual meaning of a tax year that starts January 1 was quickly debunked by Notice 2012-40. Because employees make salary reduction elections based on a plan year, the term “taxable year” is defined in the notice as the plan year of the cafeteria plan, not a calendar year.

This means that plans starting on or after January 1, 2013 must adhere to a health FSA maximum benefit limit of $2,500. Plans with start dates after January 1 will begin the $2,500 limit with their first plan year that begins after January 1, 2013. Off-calendar plan years do not have to change health FSA limits for years starting in 2012.

Nuts and Bolts

 • The $2,500 limit applies only to employee salary deduction contributions to health FSAs. It does not take into consideration salary reductions to other benefits such as dependent care assistance, adoption benefits or insurance premium accounts.

 • The new limit does not apply to health savings accounts (HSAs) or health reimbursement arrangements (HRAs).

 • The $2,500 limit will be indexed for cost-of-living adjustments for plan years beginning after December 31, 2013.

 • Limit applies on an employee-by-employee basis. Married couples, dependents or adult children working for the same company may each elect the $2,500 maximum.

 • One person working for multiple companies, that are not members of a controlled group, may elect the $2,500 maximum for each employer’s health FSA benefit. Controlled groups are counted as one employer.

 • The limit is not based on underlying insurance coverage. For instance, participants with family insurance coverage may not elect more than those with single insurance coverage.

 •Applies to employee salary reduction contributions only and not to employer non-elective, or flex credit, contributions. For example, if employers fund all or a portion of employees’ health FSA benefits, employer flex credits available for only health FSAs do not count toward the statutory plan year limit. However, employer flex credits that participants may elect to receive as cash or a taxable benefit are treated as salary reduction contributions and count toward the plan year limit.

 • Cafeteria plans that provide for a “grace period” following the end of any plan year need not worry about exceeding the $2,500 statutory limit if leftover contributions are rolled forward into the following plan year. The funds carried forward into the grace period do not count against the $2,500 limit applicable for the subsequent plan year.

The Next Steps for Employers

Employers need to determine their current health FSA annual plan limits and verify if a plan amendment is needed. If the current plan document states a limit of $2,500 or less on salary reductions for the health FSA, then no plan amendment is necessary to conform to this notice. Some plans may want to include flexibility to include an employer contribution.

What if an employer wants to make employer flex credits available? If employer flex credits used by participants in their health FSA are also available in cash, the entire amount—both employee salary reductions and employer flex credits—cannot exceed $2,500 for the plan year.

The employee education process must be started prior to enrollment. Suggest ways for employees to maximize coverage and tax savings by considering spouses’, dependents’ and adult children’s opportunities to enroll in health FSA plans at their places of employment.

Amend the cafeteria plan, if applicable, by December 31, 2014. Although the plan must limit salary reductions for any plan that begins on or after January 1, 2013, the plan may be amended in arrears.

An IRS reminder to employers was also in the notice regarding short plan years. A plan year may be changed, but only for valid business purposes. If the principal purpose of changing from a calendar year to a fiscal year is to delay application of the $2,500 limit, the change is not a valid business purpose. The IRS could rule that the cafeteria plan year remains the same as it was prior to the attempted change.

If a cafeteria plan has a short plan year that begins after 2012, the $2,500 limit must be prorated based on the number of months in that short plan year.

What if an enrollment mistake occurs? To resolve an election mistakenly made for more than $2,500, first, ensure that the terms of the plan apply uniformly to all participants. If the error results from a reasonable mistake of the employer and not due to deliberate neglect, participants’ salary reductions in excess of $2,500 may be paid to the employee as taxable wages for the year in which the cafeteria plan ends.

Something Extra

Employers and employees alike have often wished that funds left over at the end of a plan year would not be forfeited to the plan. The new limit imposed by the Patient Protection and Affordable Care Act eliminates the original reasons the “use-it-or-lose-it” rule was established. Attached to Notice 2012-40 is a “bonus” section.

Because of the $2,500 limit that takes place for plan years beginning on or after January 1, 2013, the IRS is asking for comments on whether the proposed regulations now in place should be modified to provide additional flexibility to the use-it-or-lose-it rule for health FSAs and, if so, how would the modifications work and how would any such changes interact with the $2,500 limit.

WageWorks is working with industry groups such as the Employers Council on Flexible Compensation in preparing comments regarding modifications to the “use-it-or-lose-it” rule. I invite any interested reader to contact me with questions or to participate in the comment letter. 

No information contained herein is intended to be legal, accounting or other professional advice. We assume no liability whatsoever in connection with your use or reliance upon this information. This information does not address specific situations. If you have questions about your specific situation, we recommend that you obtain independent professional advice.

Self-help books are always runaway best sellers, it seems. Why not in the area of benefits, too? This article is devoted to helping your employer/clients help themselves. Many articles have been written about the need for employers auditing their insurance plans. The same holds true for audits on other plans employers maintain-from their 401(k) and pension plans to their flexible spending accounts.

Using a third party administrator (TPA) that has an audit process in place is essential and having an employer/client conduct an audit of accounts periodically is just “good business.” This article will focus on flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) and touch on health savings accounts (HSAs). The following list includes some discussion points you may have with your employer/clients.

1. Plan Documents. The first question to ask is, “Where are your plan documents?” Personnel and TPA changes, or even moving an office, can spell disaster for important papers like plan documents and employee summary plan descriptions (SPDs). Remind your clients to locate copies of all benefit plans. Be sure they are signed and adopted. Too often they may find a draft that was never finalized.

Determine if plan documents are current and accurately reflect how the plan is presently being administered. For instance, eligibility for the FSA plan may hinge on the eligibility for health insurance, but the two plans’ requirements may not match. Has the plan been updated to reflect recent prohibitions against reimbursing over-the-counter drugs and medicines without a prescription? Some plans were written in a manner that may not require amending, but some plans may not be in compliance.

One area of common non-compliance is how the Family and Medical Leave Act (FMLA) is administered. Generally speaking, an employer should have one procedure covering all plans for consistency and adherence to the law.

Combining or adding plans may mean updating existing plan documents. When adding an HSA option, health FSA documents should allow for a limited purpose or HSA-compatible health FSA. The language needs to address a participant automatically moving into a limited health FSA upon establishing an HSA plan. Also don’t forget about running the HSA contributions through the employer’s cafeteria plan. That amounts to more savings for both employees and employers.

And finally, ensure all employees receive an SPD for each plan sponsored by an employer. Employee education is the key to increased participation in the plans and satisfaction with benefit choices.

2. Enrollment and Contributions. An audit of payroll and TPA records for each participant’s election is a must. Employers should be encouraged to compare internal payroll Winston Salem records with the TPAs on a periodic basis to ensure accuracy and consistency.

Contributions for FSAs are chiefly payroll deductions and retained by the employer in their general assets. This makes for uniformity of payroll administration with each pay period being the same for the entire plan year. Changes occur when participants have changes in status, new employees come on board, or employees terminate throughout the year.

HRAs don’t necessarily have any type of account in which funds are placed. Rather, the money needs to be available as claims are turned in for reimbursement. Another issue is availability of employer funds. Some HRA plans allow the entire plan limit to be used at the beginning of the plan year, while other plan designs make the dollars available to correspond with employee payroll, monthly or even quarterly.

3. Claims. This is not so much an audit of the actual claims, but how the TPA handles claims submissions. Is each claim adjudicated? The TPA must know the name of the individual receiving the product or service, date of service, explanation of the product or service and amount being requested for reimbursement. This information should all be provided on a statement from an independent third party, the vendor, along with the vendor’s name preprinted or stamped on the receipt.

Even debit card swipes must be adjudicated. If TPAs don’t ask for receipts, they may not be doing their job according to Internal Revenue Service (IRS) regulations. Some debit card swipes are “auto adjudicated.” Purchases from large pharmacies or drug stores are automatically adjudicated at the point of sale through software programs. Debit card purchases can also be auto-adjudicated if the amount matches a participant’s insurance co-payment amount. However, debit card purchases at dental or vision care providers are typically not able to be auto-adjudicated and require the participant to submit a detailed receipt. The TPA may also receive a download from the insurance carrier.

4. Disbursements. Auditing employer plans is similar to taking a good look at bank statements every month. Are all the transactions in the correct amount and do they belong to the employer? An audit point for disbursements from the plan would be to look for recent disbursements to terminated employees or names of participants who are not your employees.

Another tip that some TPAs may not mention is to retrieve the health care debit card from terminating employees. The cafeteria plan Regulation 1.125-6 states: “The debit card is automatically cancelled when the employee ceases to participate in the health FSA.”

5. Eligibility Changes. Eligibility maintenance starts and ends with your employer/client. Employers must notify the TPA, just as for payroll, of participants’ additions, changes, election amounts or terminations. This will greatly reduce the risk of ineligible employees receiving benefits they are not entitled to collect.

Questions for TPAs

 • How does my employer/client audit his plan?

 • What reports will be sent automatically?

 • Is there a secure website for running reports and getting the information needed?

 • Will participants be informed that card swipes have taken place?

 • When will the TPA ask for receipts?

 • Is the latest technology being used? This could include apps to download claims and receipts from a phone or tablet or taking a picture of a receipt to send for debit card substantiation.

Setting ground rules and fully educating employees is the first step toward a successful plan. Auditing plans ensures success throughout the plan year.

No information contained herein is intended to be legal, accounting or other professional advice. We assume no liability whatsoever in connection with your use or reliance upon this information. This information does not address specific situations. If you have questions about your specific situation, we recommend that you obtain independent professional advice.

When the 2012 Internal Revenue Code book arrived on my desk, I must admit there was a feeling of job security that washed over me once again. This latest edition is almost three inches thick and printed on tissue paper with a font that requires a magnifying glass.

Although it seems as if Congress takes forever to act on even the simplest of matters, once they do, it’s up to the Internal Revenue Service to create tax guidance for all of us. This book outlines all pending legislation that will affect flexible benefits.

Two casualties of the Patient Protection and Affordable Care Act (as amended) (PPACA) affecting participants in flexible spending accounts (FSAs) are:

• The need for a doctor’s prescription in order to purchase over-the-counter (OTC) drugs and medicines through an FSA, health reimbursement arrangement (HRA) or health savings account (HSA), which began January 1, 2011.

• The $2,500 salary reduction contribution limit for FSAs scheduled for January 1, 2013.

Both casualties have a chance to “heal” in several pending bills in both the House of Representatives (HR) and the Senate (S).

This list, though certainly not comprehensive, contains a brief discussion of what’s going on in Congress related to FSAs, HRAs and HSAs, plus other pending legislation.

Health Savings and Affordability Act of 2011 (HR 369). This bill proposes to:

• Allow taxpayers a tax deduction from gross income for the cost of health insurance coverage for themselves, their spouses and dependents.

• Permit HSA contributors and their spouses who are age 55 or older to make additional catch-up contributions to a joint HSA.

• Increase the tax deductible limit for HSAs.

• Combine individual and family deductibles under high-deductible health plans (HDHPs).

• Allow for increased rollovers from FSAs or HRAs to HSAs.

• Introduce the payment of premiums from HSAs for HDHPs.

• Treat expenses such as exercise equipment and fees for gyms as deductible medical expenses.

Restoring Assistance for Families’ and Seniors’ Health Expenses (HR 450). The purpose of this bill is to repeal certain provisions of PPACA.

• Remove the increase from 7.5 percent to 10 percent of adjusted gross income limit for claiming the tax deduction of medical expenses on taxpayers’ Form 1040 filing.

• Repeal the requirement for a doctor’s prescription for OTC drugs.

• Reduce penalty for distributions from HSAs or medical savings accounts (MSAs) not used for medical expenses from 20 percent to 10 percent.

• Repeal the health FSA annual salary reduction contribution limit to $2,500.

Restoring Consumer-Driven Health Care Act of 2011 (HR 524), plus S 1368 and HR 2529 propose to repeal the requirement for prescriptions for OTC drugs and medicines and reduce penalty for distributions from HSAs or MSAs not used for medical expenses from 20 to 10 percent.

Patients’ Freedom to Choose Act (HR 605), with more than 110 cosponsors, calls for the repeal of the requirement for a doctor’s prescription for certain OTC drugs and of the health FSA annual salary reduction contribution limit of $2,500.

HR 682 would amend the Internal Revenue Code to increase the contribution limits of dependent care FSAs to $3,750 for an individual and $7,500 for joint tax return filers, plus a carryover of unused funds.

There is plenty of bi-partisan support for HR 791 and S 387, which would amend current tax code to provide FSAs to members of the uniformed services.

The Child and Dependent Care FSA Enhancement Act (S 435) would increase the dependent care annual limit to $7,500 and provide for inflation adjustments in the future.

Several transportation and parking bills are before Congress, including HR 1825, S 1034, HR 2412 and HR 1680. These provide for a range of improvements such as general improvement of the parking and transit benefits through a permanent parity of annual limits. Currently, the parking monthly limit is $240 and the transportation monthly limit is set at $125. Hoped-for legislation would make both benefits the same each year and provide for an annual cost-of-living adjustment.

Many of these house and senate bills have been in Congress for six months to a year. Many have been referred to the house ways and means committee or senate finance committee, and along the way they have picked up cosponsors that make them stronger.

I hope someday to find a few of these bills wedged into my great code book of “All the Income, Estate and Gift, Employment, Excise, Procedure and Administrative Provisions”—even if it becomes a four-inch thick book.

Hey, at least the prescription eyeglasses I need to read it are an eligible health care expense under my health FSA!

No information contained herein is intended to be legal, accounting or other professional advice. We assume no liability whatsoever in connection with your use or reliance upon this information. This information does not address specific situations. If you have questions about your specific situation, we recommend that you obtain independent professional advice.

Employers come in every shape and size. There are regular C corporations, S corporations, sole proprietors, limited liability corporations and partnerships. To some extent they all have, or could have, employees.

Providing benefits to employees is a very important role of employers. For the small business owner, the cost of providing health insurance coverage can be prohibitive. Offering tax savings on insurance and health care expenses is a way of boosting benefits to employees.

As much as business owners want to offer or perhaps help pay for insurance coverage, they too want to save on taxes—and there are several ways to do that. Yet which is best for each company entity? Let’s take a look at how different types of companies can provide non-taxable benefits to their employees and, at the same time, receive a tax write-off.

Delivering benefits to employees and employee-owners of a business can be accomplished in a variety of ways from a straight increase in taxable wages to non-taxable vehicles comparable to the cafeteria plan benefits of premium reimbursement accounts and health flexible spending accounts (FSAs), health reimbursement arrangements (HRAs) or health savings accounts (HSAs).

C corporations
C corporations can provide non-taxable benefits through cafeteria plans, HRAs or HSAs, and owners can generally participate right along with their employees. However, the plans cannot discriminate in favor of the owners or other highly compensated employees.

Group insurance premiums may be paid by employees through premium reimbursement accounts or HRAs established by the corporation.

Health care expenses may be paid by employees through an FSA or HRA established by the corporation or through an HSA plan. The corporation may make contributions to an HSA for all owners and employees covered by a qualifying high-deductible health plan.

S corporations
More than 2 percent shareholders of an S corporation cannot participate in premium reimbursement accounts, FSAs or HRAs. Neither can their spouse, children, parents or grandparents. However, S corporations may sponsor a plan for their other employees and benefit from the savings on payroll taxes.

Group insurance premiums may be paid by employees through premium reimbursement accounts or HRAs established by the corporation. Self-employed owners may deduct on their tax returns up to 100 percent of medical and qualified long term care insurance premiums that cover them, their spouse and dependents who are included in the shareholder’s gross income.

Health care expenses may be paid by employees through an FSA or HRA established by the corporation or through an HSA plan. The corporation may make contributions to an HSA for all owners and employees covered by a qualifying high-deductible health plan.

Partnerships
Partners of a partnership cannot participate in premium reimbursement accounts, FSAs or HRAs, but may sponsor a plan and benefit from the savings on payroll taxes. A partner’s spouse or other family members who are bona fide employees of the partnership may generally participate in premium reimbursement accounts, FSAs and HRAs. However, the plans cannot discriminate in favor of the owners or other highly compensated employees.

Group insurance premiums may be paid by employees through premium reimbursement accounts or HRAs established by the partnership. Self-employed owners may deduct on their tax returns up to 100 percent of medical and qualified long term care insurance premiums that cover them, their spouse and dependents that are included in the partner’s gross income.

Health care expenses may be paid by employees through an FSA or HRA established by the partnership or through an HSA plan. The partnership may make contributions to an HSA for all owners and employees covered by a qualifying high-deductible health plan.

Limited Liability Corporations
When a limited liability corporation (LLC) is taxed as a partnership, members of the LLC cannot participate in premium reimbursement accounts, FSAs or HRAs, but may sponsor a plan and benefit from the savings on payroll taxes. A member’s spouse of other family members who are bona fide employees of the LLC may generally participate in premium reimbursement accounts, FSAs and HRAs. However, the plans cannot discriminate in favor of members or other highly compensated employees.

Group insurance premiums may be paid by employees through premium reimbursement accounts or HRAs established by the corporation. Self-employed owners may deduct on their tax returns up to 100 percent of medical and qualified long term care insurance premiums that cover them, their spouse and dependents that are included in the member’s gross income.

Health care expenses may be paid by employees through an FSA or HRA established by the corporation or through an HSA plan. The corporation may make contributions to an HSA for all owners and employees covered by a qualifying high-deductible health plan.

Sole Proprietorships
While the sole proprietor cannot participate in premium reimbursement accounts, FSAs or HRAs, the spouse of the sole proprietor may be able to participate in an HRA sponsored by the company. The employee-spouse must be a bona fide employee and not considered self-employed. This means the owner’s spouse can be employed by the company and the company can pay the family’s medical, dental, and vision expenses plus family coverage health insurance and long term care premiums through the business.

The HRA option is an especially attractive benefit when the spouse is the only employee. The HRA can be established with a high limit to fit the family’s needs. If the sole proprietorship employs other employees, the owner may not wish to offer them such a high plan limit. If all employees are not offered the same limit in an HRA, the plan would generally be considered discriminatory.

A dependent or other family member who is an employee and has a business relationship with the sole proprietor also may be able to participate in the HRA. This usually means that the dependent or family member works in the business and receives a paycheck.

Self-employed owners who cannot employ a spouse may deduct on their tax returns up to 100 percent of medical insurance premiums and qualified long term care premiums that cover them, their spouse and dependents. Sole proprietors with no spouse or dependents as bona fide employees may take advantage of the lower premiums of a high-deductible health plan and make tax-deductible contributions to an HSA.

Although unrelated employees of all the entities listed in Chart 1 may participate in the benefits sponsored by the employer, the question often arises concerning owners and their family members.

Individual Health Insurance Premiums
Whether individual health insurance premiums may be paid through an FSA or HRA is another common question. Generally, premiums for individually owned policies may be paid through a premium reimbursement account or HRA. However, if an employer intends to begin such a practice, it is recommended that he notify the carrier of the individual health insurance plan and consult with legal counsel. It is unclear if HIPAA requirements are met by individual insurance plans or what COBRA obligations might be triggered.

If employers are not able to contribute to the actual premium of individually owned policies for their employees, employers can make non-taxable contributions to HSAs established by employees when employees purchase qualifying high-deductible health plans.

No information contained herein is intended to be legal, accounting or other professional advice. We assume no liability whatsoever in connection with your use or reliance upon this information. This information does not address specific situations. If you have questions about your specific situation, we recommend that you obtain independent professional advice.

With thousands of workers returning from active military duty, it’s a great time to review federal law regarding the treatment of benefits for employees who served our country. The Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) allows a worker on military leave of absence to receive certain rights while on leave and to return to work upon his homecoming. It also expands this right for up to five years. Working and serving in any of these areas is incredibly appreciated, no wonder coast guard flags and navy flags are flown outside homes and businesses to show support and connection to those who serve. That is why these services have rights under the law to help them with benefits, etc.

Whether enlisted in the Army, Navy, Marine Corps, Air Force, or Coast Guard, those called up for military duty are covered by USERRA. Coverage is also extended to the National Guard, Public Health Service Commissioned Corps, and all reservists. In fact any military duty-including commissioned or non-commissioned and both voluntary and involuntary obligation-is within the scope of USERRA.

What Steps Are Required
by the Employee?

While USERRA does not provide a model form or process of notification for employers, an employee or military representative should provide the employer with written or oral notice upon notice of military duty.

Employees as well as their covered dependents are entitled to COBRA-like continuation of health coverage. And, just like COBRA continuation coverage, an employee may be asked to pay up to 102 percent of the group rate. This includes the right to continued coverage in a health flexible spending account (FSA) portion of an employer’s Section 125 cafeteria plan. The right to continuous coverage must be extended until the end of an employee’s leave or for 18 months, whichever comes first.

USERRA doesn’t specifically address how health FSA benefits and elections should be treated during a covered leave. Thus, many employers turn to the Family and Medical Leave Act for guidance. Among other options, an employee may revoke election for the period of leave and immediately be reinstated in the health FSA upon returning from military service.

The Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008 gives military personnel expanded benefits and access to the money they have set aside for retirement or contributed to a health FSA plan. The Act ensures that the most generous interpretations are used so that plans can provide special advantages for military personnel. See my March 2011 article (HEART Act of 2008-Benefits for Military Personnel) for more information on the HEART Act.

What Steps Are Required
by the Employer?
Generally, USERRA applies to all public and private employers of any size and covers any full-time worker. Part-time workers are not covered.

The employer provides a COBRA-like form to all employees going on military leave. If the employee is gone less than 31 days, the employer must continue to pay its share of any health insurance benefit. If the leave is for more than 31 days, the covered employee, dependents and spouse may continue health coverage for up to 18 months by making required contributions.

Current benefits provided to employees who are on any type of leave of absence also must be provided to those on military leave and their dependents. Like COBRA, USERRA’s continuation requirements allow employees to continue health coverage for the lesser of 18 months from the day the uniformed service leave begins or for a period beginning on the day the leave begins and ending on the day after the employee fails to return to or reapply for employment. USERRA leave is a qualifying event under COBRA; therefore, COBRA extensions will apply.

Only public employers are required to continue paychecks for any part of military leave. Private employers may grant annual leave, with or without pay. Some employers continue the pay for an employee on military leave through all or part of the leave. In the case of active duty leave, many employers adopt a policy of paying the difference between civilian pay and military pay.

Employers may not deduct from an employee’s annual vacation leave while on military duty, unless the employee agrees to that type of arrangement. USERRA is in addition to other types of leaves or excused absences such as sickness or vacation leave and is intended to be additional time off.

Upon Return from Military Duty
Upon an honorable discharge or return from active duty, an employee must ask for his employment position back within a specified timeframe-ranging from 8 hours to 90 days after returning from duty, depending on the entire length of service. If the military leave involved an absence of more than five years, USERRA rights generally won’t apply.

After returning from duty, an employee must be reinstated to the health plan without waiting periods, limitations or other exclusions, even if such return is after an 18-month continuation coverage period. The reinstatement must be without exclusions for preexisting conditions or a waiting period. However, there may be exclusions for injuries or illnesses incurred during the covered service, barring any health care reform regulations to the contrary.

An employee must be reinstated to the same or similar employment position. Generally, the USERRA-designated leave won’t be considered a break in service for purposes of vesting and accrual of benefits in a qualified pension/retirement plan. Special provisions contained in the pension/retirement plan should allow individuals to make up contributions missed during the leave period.

Review of Section 125
Cafeteria Plan Requirements
The final Section 125 Family and  Medical Leave Act (FMLA) regulation provides three ways to handle employee premium obligations during leave:

• The prepay option allows employees to prepay contributions for the period of time they expect to be on leave. This option may not work in situations where an employee is called to active duty with very short notice.

• The pay-as-you-go option permits employees to elect to pay the cost of coverage during the leave. Contributions can be paid with after-tax dollars or pre-tax dollars to the extent that an employee receives compensation during the leave.

• The catch-up contribution option is when an employer pays both the employer share and employee share of the cost of coverage during the leave. Then, an employee repays the employer upon returning to work.

Employers may allow any of the above three methods to be used by employees on military leave. However, they cannot just provide for a prepay option, and other forms of employer-provided leave must be treated comparably.

Finally, to administer a health or 125 plan according to USERRA regulations, the employer needs to make sure they:

• Coordinate coverage with CHAMPUS (Civilian Health and Medical Program of the Uniformed Services).

• Review and update any leave-of-absence policies, including a review of procedures for handling 125 plan status changes and extension of benefits during leave.

• Ensure COBRA procedures comply with USERRA.

• Keep documentation of all employees’ benefits utilized under USERRA.

• Maintain information in writing that clearly states all employee benefits, rights and obligations.

Useful Websites
Many different agencies with website access have information about USERRA. Here are a few to check out:

• www.access.gpo.gov provides regulations about employment rights, restoration to duty and COBRA.

• www.dol.gov is a gateway to the Department of Labor site.

• www.esgr.org contains USERRA facts in a question-and-answer format for both employees and employers.

• www.tricare.osd.mil includes data about military health coverage.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

In 2005, the IRS gave health reimbursement arrangements (HRAs) a green light to draw on unused vacation and sick leave in order to boost funds at retirement through Revenue Ruling 2005-24.

There are two lessons in this ruling. First, that cash can never be offered to participants from an HRA, and second, that employers can now draft an HRA to include this type of subsidy for retiree health care.

What Is an HRA?
HRAs are employer-financed accounts that pay employees for eligible medical expenses. HRA plans do not have to physically set aside money for participant claims, but must pay eligible claims as they are presented. And employees cannot contribute to HRAs.

Sometimes HRAs are coupled with a higher-deductible health insurance product. The HRA pays for some or all of the deductible expenses formerly paid by insurance. This adds up to lower premiums, the same out-of-pocket costs for employees and, hopefully, health cost savings for everyone.

Flexible is an HRA’s middle name. An HRA can offer the full annual limit amount on the first day of the plan year like a health flexible spending account (FSA) or make funds available only on a periodic basis. Eligible medical expenses can stretch from covering a single type, such as dental or vision, to the entire list of eligible expenses allowed by the IRS including prescribed over-the-counter drugs and medications. At the end of the year, unused funds may be forfeited back to the plan like a health FSA or rolled forward for an employee to use the following year.

Even with all this flexibility, employers have tried new twists with their HRA plans. One popular twist involves attempting to get some of the HRA money to current participants or retirees in cash. The heart of Revenue Ruling 2005-24 deals with this issue by addressing HRA plans that do not stick to IRS rules and the harsh reality of non-compliance.

Revenue Ruling 2005-24
This ruling makes clear that HRA funds earmarked for health care can never be available in cash. The revenue ruling reiterates this by restating much of the same information previously handed down from the IRS—but with one new spin.

Typical of these types of revenue rulings, facts are spelled out through a variety of scenarios with reported findings on their legality.

Three scenarios deal with HRA plans that included cash options. One scenario considers a plan that provides cash payment from the HRA at the end of the plan year or upon termination of employment.

The second situation suggests a plan that would pay out all or a portion of the HRA to a beneficiary upon the death of the employee.

The last circumstance examines an “option plan” whereby, each year, employees have a choice of transferring all or a portion of their remaining funds to one of several retirement plans or to receive the amount as cash.

Verdict: The IRS ruled in every case that funds paid to an employee under an HRA reimbursement plan that provides the payment of unused amounts in cash are not excludable from gross income under Section 105(b).

Not only do those funds become taxable, but all medical expenses paid from the HRA plan become taxable. If one individual receives cash, then every employee participating in the plan—regardless if they chose cash or were paid for eligible medical expenses—would be taxed on all plan funds.

However, Revenue Ruling 2005-24 held an interesting slant for plans that provide retiree health care.

Retiree Health
With soaring health care costs, it’s no wonder that employers are trying to save health dollars wherever they can. Employers with existing retiree health plans also are trying to find ways to cut their retiree health care tab.

Some have tried dropping their retiree plans or reducing health coverage to retirees. In fact, the Equal Employment Opportunity Commission (EEOC) advocated allowing employers to reduce or eliminate retiree health benefits for those with Medicare coverage. The proposal was slapped down by a federal judge with a bolster from the AARP. The AARP claimed that providing different benefits to younger and older retirees was age discrimination.

So, how can employers cut their costs for retiree health benefits without cutting benefits? Revenue Ruling 2005-24 may hold the key to this dilemma for employers who offer an HRA and bankable vacation and sick leave.

Plan Design for Retirees
The IRS presented a scenario that contemplated an HRA plan design in which an employee’s accumulated vacation and sick time was incorporated into the employer’s  HRA.

In this scenario, when an employee retires, the employer automatically and on a mandatory basis contributes an amount to the HRA equal to the value of all or a portion of the retired employee’s accumulated unused vacation and sick leave. The funds are carried forward for the retiree to use for future HRA-eligible expenses. Under no circumstances may the retired employee, the retired employee’s spouse or dependents receive any of the designated amounts in cash.

Forgo Sick Leave or Vacation?
A novel approach to retirement planning may end up costing employees their vacation and sick time throughout their career. With a big carrot of retiree health coverage dangling at the end of a long stick, more employees could skip the beach time while working in order to relax after retirement. Hopefully, the hoarding of vacation and sick time will not become a retirement planning staple.

Here’s the Lesson
Even with the nugget of a new retiree funding mechanism, Revenue Ruling 2005-24 was about one thing. Regardless of the intent of an employer’s HRA, when cash is an option, every dollar in the HRA is taxable. This includes all those unreimbursed medical expenses that could have been paid in a non-taxable form.

No matter how hard an employer may try to circumvent the “no cash from HRAs” rule, the IRS has made clear that the rule stands. If an employee is offered a choice of cash or benefits outside those eligible for HRA medical expenses, the tax benefits are lost. And all employees suffer by experiencing a taxable event.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

The Internal Revenue Service (IRS) and Social Security Administration have released the cost-of-living adjustments (COLA) that apply to dollar limitations set forth in certain IRS code sections. The consumer price index rose enough since the third quarter of last year to warrant an increase in indexed figures for 2012.

Social Security and Medicare Wage Base
For 2012, the Social Security wage base increases to $110,100 from $106,800 in 2011. Unless Congress acts to extend the current reduction in the tax rate for employee withholdings, the increase will be 7.65 percent for 2012, up from the 5.65 percent in 2011. The Social Security rate of 6.2 percent is applied to wages up to the maximum taxable amount for the year; the Medicare portion of 1.45 percent applies to all wages.

Indexed Compensation Levels
The indexed compensation levels for determining who is considered highly compensated or a key employee increases for 2012 are shown in Table 1.

                                             Table 1
                         Indexed Compensation Levels

                                                                     2009              2010             2011              2012
Highly Compensated Employee      $110,000      $110,000      $110,000      $115,000

Top Paid Group of 20 Percent           $110,000      $110,000      $110,000      $115,000

Key Employee, Officer                        $160,000      $160,000      $160,000      $165,000

401(k) Plans
In 2012, the maximum for elective deferrals increases to $17,000. The catch-up contributions for those 50 and older remains at $5,500 for 2012—no change from 2011. That means if your client is age 50 or more during the 2012 taxable year, he may generally defer up to $22,500 into his 401(k) plan.

Adoption Credit
For 2012, unless Congress acts, this tax credit again becomes non-refundable and decreases from $13,360 to $12,650. The credit starts to phase out at $189,710 of modified adjusted gross income (AGI) levels, and is completely phased out when modified AGI reaches $229,710.

The exclusion from income provided through an employer or a Section 125 cafeteria plan for adoption assistance also has a $12,650 limit for the 2012 taxable year. And remember—a participant may take the exclusion from income and the tax credit if enough expenses are incurred to support both programs separately.

Health Savings Accounts (HSAs)
Minimum deductible amounts for a qualifying high-deductible health plan (HDHP) remain at $1,200 for self-only coverage and $2,400 for family coverage in 2012. Maximums for the HDHP out-of-pocket expenses increase to $6,050 for self-only coverage and $12,100 for family coverage.

Maximum contribution levels to an HSA also increased for 2012 to $3,100 for self-only coverage and $6,250 for family coverage. The catch-up contribution allowed for those 55 and over is set at $1,000 for 2012. Remember, qualifying HDHPs and no other impermissible coverage (such as coverage under another employer’s plan or from a health care flexible spending account that is not specifically compatible with an HSA) are required in order to fund an HSA.

Archer Medical Savings Accounts (MSAs)
For a high-deductible insurance plan that provides single coverage, the deductible amount must be between $2,100 and $3,150 for 2012. Total out-of-pocket expenses under a plan that provides single coverage cannot exceed $4,200. The deductible amount must be between $4,200 and $6,300 for a plan that provides family coverage in 2012, with out-of-pocket expenses that do not exceed $7,650.

Although new MSAs are not allowed, maximum contributions to an existing MSA, attributable to a single-coverage plan, are 65 percent of the deductible amount. Maximum contributions for family coverage plans are limited to 75 percent of the deductible amount. MSA contributions must be coordinated with any HSA contributions for the taxable year and cannot exceed the HSA maximums.

Dependent and/or
Child Daycare Expenses
Just a reminder that although the daycare expense limit associated with a cafeteria plan is not indexed, the credit available through a participant’s tax filing was raised in 2003. The daycare credit must be filed on Form 2441 and attached to the 1040 tax filing form.

The limits for the daycare credit expenses are $3,000 of expenses covering one child and $6,000 for two or more children. If one of the parents is going to school full time or is incapable of self care, the non-working spouse would be “deemed” as earning $250 per month for one qualifying child and $500 for two or more qualifying children. This “deemed” earned income is used whether a person is using the employer’s cafeteria plan or taking the daycare credit.

The current child and dependent care tax credit limits are scheduled to sunset on December 31, 2012. Without Congressional action, the limits for the daycare credit will revert to $2,400 of expenses covering one child and $4,800 for two or more children on January 1, 2013.

The cafeteria plan daycare contribution limit is $5,000 for a married couple filing a joint return or for a single parent filing as head of household. For a married couple filing separate returns, the limit is $2,500 each.

The daycare credit is reduced dollar-for-dollar by contributions to or benefits received from an employer’s cafeteria plan. Employees may participate in their employer’s cafeteria plan and take a portion of the daycare expenses through the credit if they have sufficient expenses in excess of their cafeteria plan annual election, but within the tax credit limits.

Parking and Transit Accounts
For 2012, the monthly parking amount increases from $230 in 2011 to $240. And, unless Congress acts to extend the transit parity that currently exists, the 2012 monthly limit for transit drops from $230 in 2011 to $125 in 2012.

Long Term Care Insurance
For a qualified long term care insurance policy, the maximum non-taxable payment is now $310 per day for 2012.

Finally, by participating in a cafeteria plan, participants will be lowering their income for the earned income tax credit (EITC). Check out the new limits in IRS Publication 596 “Earned Income Credit” and for more information about this tax credit.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

Most think of flexible benefit plans as some sort of a voluntary product or get it confused with a health FSA. But that’s not really what a flex plan is—rather it’s a tax-advantaged vehicle for paying for a number of benefits.

So how can employers get more employees to participate in flexible benefit plans? One way is through flex credit plans. These plans involve some employer-funding through a cafeteria plan, but can result in two things: greater employee satisfaction with their benefits package and greater savings for employers. In many cases, it simply redefines employer costs.

What Is a Flex Credit Plan?
A flex credit plan is a good vehicle for employers who are willing to pay a portion of their employees’ premium contributions. Flex credit plan dollars are available to employees to augment their flexible benefit plans.

Employers can choose to earmark flex credits for (1) a specific benefit such as medical coverage; (2) helping employees defray health care expenses or deductibles; (3) giving employees the option to convert the credits to cash (depending on plan design and state law).

Under a Section 125 plan, flex credits are tax deductible to the business and a non-taxable allowance to employees. However, if employers allow and employees choose to take the credit as cash, that amount is taxable to the employees.

A caution here: Plan sponsors should not make this option too tempting. After all, the credits are to encourage participation in benefit plans, and that’s where the dollars should stay.

Why Implement a Credit-Based System?
When was the last time you saw someone pass up free money? All kidding aside, flex credit plans increase employee awareness of their benefits. Naturally there will be a sudden interest in a plan where the employer “is giving money away.” Employees will be more likely to participate in greater numbers and for larger dollar amounts as well.

Flex credit plans mean increased tax savings for employers (when more money flows through the plan) as well as improved control of benefit dollars. For example, if an employer makes $1,000 available to each eligible employee and selects single coverage, the budgeted amount of employer credits every year limits liability for higher costs in the future. Generally, such a strategy moves an employer’s strategy from defining the benefits to defining the contributions to benefits—a more focused and total compensation approach.

Employees each have different needs; a diverse work force includes singles, families with children and older workers—all of whom have different health care issues. Flex credit plans allow employers to move from a “one-size-fits-all” design to a more customized approach that makes room for life cycle choices.

Finally, surveys prove that employers providing a menu of benefits not only empower current employees, but attract and retain new employees.

Taxable and Non-Taxable Flex Credits
Just because an employer is making flex credits available through a cafeteria plan does not mean dollars flowing through the plan have to be non-taxable. A very elaborate benefits package can be delivered through the cafeteria plan, ranging from employer dollars used for health insurance premiums to taxable dollars for incentive bonuses.

Flexible benefit plans with taxable employer dollars can deliver attractive incentives or life cycle extras that provide money for the purchase of a home or a reward for employment longevity.

Plan Designs
Determining the amount of flex credits is the first place to start. Employers can use this opportunity to think about their total rewards strategy and how the credits can be used. For example, credits may vary based on employee choice of health plans—more credits can be offered to those who choose family coverage versus those choosing single coverage. Employers can also restrict the use of credits to medical or dental coverage only. Employers may want to ensure a safety net of coverage for every employee, so that only those who have health insurance coverage elsewhere can turn credits into cash.

The purpose of flex credit plans is to efficiently deliver benefits and not to increase taxable cash flow for employers. Therefore, an employer may decide to reduce the value of cashable credits (e.g., every dollar of benefits may be worth just 25 cents if cashed out).

A 401(k) option within a cafeteria plan is another great choice with flex credits. For instance, not all employees will use the flex credits for benefits. By placing a 401(k) contribution option within a flex plan, employer credits could flow to a 401(k) plan. The 401(k) plan document does not need to be amended and most everyone could use the flex credits.

What’s the Down Side?
Flex credit plans can be complicated to understand unless communicated well. Employers may experience an increase in time spent on internal administration to track credits and employee education. Too much flexibility and choice may cause employee frustration, which is why timely employee education is important.

Adverse selection of benefits or cash can be cause for alarm. In fact, for that reason, many employers do not allow a cash-out option, which creates hard dollar costs in the form of taxable compensation for employees who are covered elsewhere.

During a plan year, employers must take time to evaluate and make a note for future year adjustments. These plans are a living, breathing entity and will experience adverse selection. Periodic reviews are necessary to determine whether the plan is meeting both employer and employee needs.

Review Current Benefits
The first planning session with an employer is a review of current benefits, employee demographics and a list of employer and employee needs. Ensure the ground rules are laid out and all decision-makers have answers to their questions.

The amount of money employers are willing to spend will depend on management philosophy and whether a company is small and emerging or an established institution with positive cash flow.

Here are a few bullet points to consider:

• What is the employer’s philosophy toward compensation and benefits?

• Does the employer currently differentiate costs by family coverage category?

• How many employees are currently waiving medical coverage?

• What credit types (benefit specific or for general use) and amounts will be included?

• Will the employer be increasing or decreasing the number of benefits being offered?

• Will taxable benefits be offered?

• What are the employer’s goals—to reduce benefit dollars or increase transparency of benefits?

Start Simple
An employer match plan is one of the simplest flex credit plans to install. Employees commit a certain dollar amount and employers match the figure, up to a certain dollar amount. It works much like a 401(k) plan. Not only do employees have more choice, but participation in a flexible benefit plan will soar. Moreover, remember the more salary redirection by employees, the bigger the payroll savings for employers.

The employer can also make a small amount of flex credits available as “seed” money for a health FSA. All eligible employees receive this “seed” money at the beginning of the flexible benefit plan year. As participants start to fill out claim forms in order to receive nontaxable payments, they realize how easy it is to participate in the plan.

When employer “seed” money is gone, they will see how their eligible expenses continue to pile up—expenses they could have paid with untaxed dollars. The key is to keep this experience in the forefront in the minds of employees so they make a different choice the next plan year.

Educate Employees
No use having a party if no one attends. Employee education is the second most important aspect of offering a flex credit plan—second only to the actual development and implementation of a plan. Adequate time must be set aside to inform and educate employees. Develop a timetable to include vendor selection, education and review of selections, and usage throughout the plan year.

A flexible benefit plan is a perfect choice for most employers. Employee approval ratings take off and benefit knowledge accelerates. Alternatively, when an employer takes flex plans to the next level with employer credits, both sides gain financially.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

As I write this, the Department of Justice has just blocked the merger of AT&T and T-Mobile and it’s all over the news. Of course, not every merger or acquisition receives so much publicity, but it does remind me that employer dynamics are constantly changing and questions can arise about the impact of merger and acquisition (M&A) activity on employee benefits and particularly, on participants in a flexible spending account (FSA) plan.

Fortunately, the IRS agrees that participants shouldn’t be punished just because their company has merged with another. The participants elected to fund FSA plan elections for unreimbursed medical and dependent care expenses through pre-tax salary redirection. It’s a great tax savings, but because the IRS is involved, there are lots of rules and regulations. Often overlooked in all the details of M&A deals is the proper handling of employees’ health FSAs.

Generally, FSAs will fall into two categories: employees who have money in their accounts, but not enough expenses incurred to draw on the funds, and participants who have received reimbursements in excess of their year-to-date contributions.

The IRS uses Revenue Ruling 2002-32 to explain exactly how to transfer the balance to the new employer. By using specific facts and circumstances within this revenue ruling, the IRS guides the buyer and the seller on how to continue a participant’s health FSA coverage once the company’s sale is complete.

The first of the following examples allows for continuation of coverage under the seller’s health FSA with salary redirections made under the buyer’s plan. The second example illustrates how coverage and salary redirection are handed off to the buyer.

Coverage Continues Under Seller’s Plan
The facts in this company merger are as follows: (1) The selling company maintains the health FSA plan; (2) during the plan year, a buyer acquires a portion of the seller’s assets; and (3) the seller’s employees become employees of the buyer.

The two parties agree that the seller will continue its health FSA plan and coverage for all transferred employees. The buyer must also have an existing health FSA plan or be prepared to adopt a new health FSA plan. Salary redirections take place from the buyer’s payroll—the transferred participants are now the buyer’s employees. Health FSA participants will continue to seek reimbursement from the seller for the remainder of the plan year.

Example: Joe works for Cellar Sales. He made a $1,200 annual election to his health FSA plan that started on January 1. On July 1, Joe’s division was sold and he became an employee of Buy Right. Joe has contributed $600 to his health FSA account, but has incurred no medical expenses to date. Prior to Revenue Ruling 2002-32, Joe would have been considered a terminated employee from Cellar Sales and would have either forfeited his $600 or been able to elect COBRA continuation coverage, if applicable.

With this new ruling, Joe’s new paycheck from Buy Right will continue to take his health FSA pre-tax deductions and deposit them into Joe’s Cellar Sales’ FSA account. He will continue to send future requests for reimbursement to Cellar Sales.

Coverage Is Transferred to Buyer’s Plan
The facts are the same as in scenario one, except the buyer agrees to provide coverage for the new employees. Again, the buyer must have an existing plan or will adopt a new plan with salary redirections started through the buyer’s payroll account.

All affected plan participants’ accounts consisting of contributions and earlier reimbursements are transferred to the new employer. Participants will request reimbursement for expenses incurred either before or after the acquisition from their new employer. The participants enjoy uninterrupted coverage.

Example: Let’s look at Joe again with a different set of facts and circumstances. Although Joe has contributed $600 to Cellar Sales’ FSA plan, his balance will be transferred to his new employer. Thus, instead of sending his request for reimbursements to Cellar Sales, he will turn in claims to his new employer, Buy Right.

Even if Joe incurred eligible expenses in March, his claim would be submitted to Buy Right and reimbursed from Buy Right’s FSA plan, because his account balance was transferred to the new company.

Just a Few Rules
Transferring the participant’s accounts means just that. Unless the participant has a valid change of status, no midyear election changes are allowed because of a merger or acquisition. However, keep in mind, both buyer and seller must maintain an FSA plan, and the FSA plans must also allow for the same period of coverage. In other words, both plans must provide coverage based on the same plan year.

Of course, in both scenarios, the seller and the buyer should document the arrangement outside the FSA plan and spell out appropriate financial terms. These arrangements would take into consideration contributions and reimbursements received before the merger.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.