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Flexible Spending Accounts 101


What are Flexible Spending Accounts (Section 125, Cafeteria Plans) ... Who is eligible to participate under these accounts. How do these plans work? ... – PowerPoint PPT presentation

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Title: Flexible Spending Accounts 101

Flexible Spending Accounts 101
  • The Basics of Flexible Spending Accounts
  • September 2009

Flexible Spending Contacts
  • Cindy Whiting
  • Sr. Flex Account Administrator
  • 314-594-2733
  • Joy Luetkenhaus
  • Flex Account Administrator
  • 314-594-2757

  • What are Flexible Spending Accounts (Section
    125, Cafeteria Plans)
  • Types of Flexible Benefits offered under Flexible
    Spending Accounts
  • Premium Only Plan (POP)
  • Flexible Spending Account (Medical)
  • Flexible Spending Account (Dependent Care)
  • Flexible Spending Account (Transportation)
  • Benefits of offering Flexible Spending Accounts
  • Who is eligible to participate under these
  • How do these plans work?
  • Administrative Procedures and Implementation of
    the Plan
  • Qualified Expenses that can be covered under
    these accounts
  • Flex Debit Cards
  • Election Changes
  • New Proposed Regulations

Types of plans that can beoffered through a
Cafeteria Plan.
  • Premium Only Plan (POP)
  • Flexible Spending Account (Medical)
  • Flexible Spending Account (Dependent Care)
  • Flexible Spending Account (Transportation)

Premium Only Plans
  • Premium Only Plan (POP)-POP plans allow employees
    to elect to withhold a portion of their pre-tax
    salary to pay for their premium contribution for
    most employer-sponsored health and welfare
    benefit plans.
  • The plan offers a simple way to obtain favorable
    tax treatment for benefits already offered.
  • Medical
  • Dental
  • Vision
  • Flexible Spending

Flexible Spending Accounts(Medical)
  • A medical flexible spending account (FSA) allows
    an employee to fund certain medical expenses on a
    pre-taxed basis through salary reduction to pay
    for out of pocket expenses that arent covered by
    insurance for employees, spouses, and dependents.
  • The average working employee in the U.S. spends
    more than 1,000 annually on these types of

Flexible Spending Accounts(Dependent Care)
  • The dependent care FSA is an attractive benefit
    for employees who pay for child-care or long-term
    care for their parents, etc. Many employees
    dont take advantage of this benefit and may be
    unaware of the significant tax savings.
  • Employees may hold back as much as 5,000
    annually of their pre-tax salary for dependent
    care expenses.

Flexible Spending Accounts(Dependent Care)
  • Qualified dependent care expenses may include the
    care of a child under the age of 13, long-term
    care for parents, care for a disabled spouse or a
    dependent incapable of caring for himself, and
    summer day camps.

Flexible Spending Accounts (Transportation)
  • The transportation FSA is appealing for employees
    who rely on commuter transit for work.
  • The plan offers a simple way to obtain favorable
    tax treatment for these costs
  • Parking
  • Van Pool
  • Transit Passes
  • Transportation benefit maximum are set forth by
    the IRS.
  • The benefits must be used for commuting to and
    from work for the Employer.

Benefits for Employees
  • Most employees are already paying for these
    expenses out of their own pockets with after-tax
  • Participating in a cafeteria plan reduces an
    employees taxable salary and increases the
    percentage of their take-home pay, thus
    increasing their spendable income.
  • They receive a greater deduction on dependent
    care expenses than whats offered by a
    traditional tax credit at the end of a year.

Benefits to the Employer
  • Every dollar run through the Section 125 Plan
    reduces an employers payroll.
  • In many cases, this savings can add up to as much
    as 20 percent of every dollar being passed
    through the plan.

Benefits to the Employer
  • Implementing a cafeteria plan can soften the
    blow of premium increases to employees.
  • Employees can use tax savings to invest in their
    retirement plans.

Who is eligible to participate?
  • Virtually any company can sponsor a cafeteria
    plan for its employees.
  • S or C Corporations
  • Partnerships
  • Non-Profit Organizations
  • Government Entities
  • Limited Liability Companies (LLC)
  • Sole Proprietorships

Who is not eligible to participate?
  • Partners
  • A More-Than-2 Shareholder in an S
  • Owners of C Corporation, unless they elect no
    more than 25 of total plan contributions
  • Members of an LLC
  • Self-employed individuals

Qualified Expenses
  • Eligible Medical Expenses (this is a sampling of
    eligible items only)

Election Changes
  • New employees have 30 days after hire date to
    make an election.
  • Changes through out the course of the plan year
    are limited to the qualified events below
  • Marriage
  • Birth of a baby
  • Divorce
  • Death
  • Termination of Employment by Employee, Spouse or
    Dependent that causes loss of eligibility
  • Medicare or Medicaid eligibility
  • FMLA leaves of absence

Getting Started-How do they work
  • Prior to the beginning of each plan year,
    employees estimate how much theyll spend in out
    of pocket medical expenses and/or dependent care
    expenses during the course of the plan year.
  • It is important for employees not to overestimate
    their annual election amounts, as the FSA is a
    use it or lose it benefit. So any unused
    balances remaining at the end of each plan year
    are forfeited.
  • There is a grace period for which an employee can
    file claims for each plan year, as well as the
    employer can elect to do a Plan Extension (2 ½
  • If there is a FSA surplus at the end of a plan
    year, the remaining balance shall be retained by
    the employer to offset administrative expenses or
    future employee benefit costs.

Getting Started-How do they work
  • The amount that is elected is then deducted over
    the course of the plan year from the employees
    paycheck prior to being taxed and is deposited
    into their flexible spending account.
  • On or after the first day of the plan year, an
    employee is restricted from changing or revoking
    the Section 125 agreement with respect to the
    pre-tax premiums until the plan year has ended
    unless a change in family status occurs.
  • Employees can be reimbursed either by using a
    Flex debit card or by submitting a claim for

Administrative procedures and implementation of
the Plan.
  • A plan document must be established.
  • The document outlines specific details.
  • A description of the employee benefits that are
    covered through the plan
  • Participation rules and eligibility
  • Annual limits and any employer contributions
  • Election procedures
  • The plan year

Administrative procedures and implementation of
the Plan.
  • A summary plan description (SPD) must be
    distributed to all participants.
  • ERISA requires that the SPD be distributed to all
    plan participants no more than 90 days after an
    employee becomes a participant or within 120 days
    of the plan becoming subject to ERISA.
  • The SPD summarizes specific details of the plan,
    claim filing procedures and information regarding
    plan sponsorship and administration.

Administrative procedures and implementation of
the Plan.
  • Ongoing compliance that must be attended to.
  • Nondiscrimination requirements
  • Plans cant discriminate as to eligibility and
    benefits provided. Failure to meet the
    nondiscrimination requirements would eliminate
    the tax-free status of the benefits provided to
    the highly compensated and/or the key employees.
  • Discrimination Testing
  • Needs to be performed at the beginning of each
    plan year as well as at the end of each plan year.

Flex Debit Cards
  • Today there is an even more convenient and
    beneficial way to provide flexible spending
    accounts. The Flex Debit Card system automates
    the process of paying for eligible pre-tax
    account expenses.
  • It enables employees to use the debit card at
    eligible FSA locations wherever MasterCard? is
    accepted from physician and dental offices to
    pharmacies and vision service locations.
  • Approved expenses are automatically deducted from
    their FSA/DCA/TRN accounts.
  • Employees can check their available account
    balance 24 hours a day via secure Internet

Flex Debit CardsBenefits of the Flex Debit Card
  • Employers
  • Drives FICA tax savings by increasing Flex
    account participation and contributions
  • On average, employers realize a better than 60
    increase in overall dollars contributed to their
    Flex account plans
  • Adds value to employee benefits at no additional
    net cost
  • Employees
  • Instant access to Flex account funds no need to
    use out-of-pocket dollars
  • No more waiting for reimbursement checks
  • Eliminates claim forms and receipts in most cases
  • Access to real-time account balance information
    via the Internet

New Regulations
  • IRS Notice 2007-2 in Internal Revenue Bulletin
    Number 2007-2 restricts the types of merchants
    where tax-advantaged benefit cards can be used.
    On January 1, 2008, non-healthcare merchants were
    required to have an Inventory Information
    Approval System (IIAS) in place in order for
    healthcare benefits cards to be used at their
  • An IIAS allows a merchant to identify which
    purchase items qualify as eligible healthcare
    expenses, as defined by the Internal Revenue
  • Beginning January 1, 2009, pharmacy merchants
    must also support an IIAS in order to accept
    healthcare benefits cards.

New Proposed Regulations
  • New rules providing additional guidance on the
    cafeteria plan nondiscrimination rules, including
    definitions of key terms, guidance on the
    eligibility test and the contributions and
    benefits test, descriptions of employees allowed
    to be excluded from testing and safe harbor
    nondiscrimination test for premium-only-plans.
  • All benefits and contributions must be used by
    the end of the plan year (or grace period, if
    applicable), or are forfeited.
  • The required period of coverage for all FSAs
    continues to be twelve months, with an exception
    for short plan years that satisfy the conditions
    in the new proposed regulations.

New Proposed Regulations C
  • A cafeteria plan is permitted, but is not
    required to, reimburse employees for orthodontia
    services before the services are provided but
    only to the extent that the employee has actually
    made the payments in advance of the orthodontia
    services in order to receive the services. These
    orthodontia services are deemed to be incurred
    when the employee makes the advance payment.
    Reimbursing advance payments does not violate the
    prohibition against deferring compensation.
  • It has been determined that expenses under the
    medical FSA for domestic partners are not
    eligible. However, dependent care FSA is
    available for the domestic partners children.
    The same dependent care rules apply.

  • Questions?
  • Next Steps.
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