Flexible Spending Accounts 101

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Flexible Spending Accounts 101

• The Basics of Flexible Spending Accounts
• September 2009

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Flexible Spending Contacts

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

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Agenda

• 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
  accounts
• 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

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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)

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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

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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
  benefits.

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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.

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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.

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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.

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Benefits for Employees

• Most employees are already paying for these
  expenses out of their own pockets with after-tax
  dollars.
• 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.

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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.

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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.

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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

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Who is not eligible to participate?

• Partners
• A More-Than-2 Shareholder in an S
  Corporation
• Owners of C Corporation, unless they elect no
  more than 25 of total plan contributions
• Members of an LLC
• Self-employed individuals

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Qualified Expenses

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

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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

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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
  months).
• 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.

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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
  reimbursement.

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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

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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.

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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.

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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
  access.

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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

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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
  locations.
• An IIAS allows a merchant to identify which
  purchase items qualify as eligible healthcare
  expenses, as defined by the Internal Revenue
  Code.
• Beginning January 1, 2009, pharmacy merchants
  must also support an IIAS in order to accept
  healthcare benefits cards.

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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.

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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.

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Summary

• Questions?
• Next Steps.