Flexible Spending Account

[mcknigal]

What is the name of your state?What is the name of your state? PA

I have discovered a major (stupid) error on my part, and wanted to get some advice on how to proceed. I hired on to a company in July of 2005 and enrolled in the benefits program shortly thereafter. One of the things I wanted to do was put away money for the LASIK surgery which my wife was going to have in September. Unfortunately, I chose the *wrong type* of FSA... a Dependent Care Acct. I only now realize, after submitting a claim to my FSA administrator, that a dependent's medical bills are not covered under the DC FSA.. it IS allowed under a HC FSA, which is what I should have chosen.

I am initiating an appeal process to my company's H.R. department, in the hopes that they will allow the transfer from DC to HC FSA. My reading of the IRS rules indicate that FSAs are fairly strictly regulated b/c they are tax shelters. But in my case, I'm not looking to "work the system" by changing my contribution amount... I just want to correct a monumental error... if this were a $200 error, I wouldn't bother, but I'm looking at a $4600 shortfall.

Do I have any hope?
This is completely stressing me out, and I need to know what my options (if any) are.

--A

 

[Beth3]

If your employer decides to play completely by the rules, then I'm sorry to say you are SOL. IRS regulations make it clear that an employee may not change his or her FSA deferral during the course of the Plan year unless there is a qualifying event and an employee totally screwing up his or her deferral does not count as a qualifying event.

That said, I have run into this with employees a time or two and have rectified the situation by claiming an "administrative error" with the Plan Administrator. It may not be completely Kosher and I'm not sure that it would have survived a DOL audit but I just couldn't in all good conscience let any employee be out a substantial amount of money because they goofed filling out the form or just didn't understand the Plan. Whether your employer is willing to do this is up to them and if they are, their ability to do it will be limited by the amount of time that has passed between open enrollment and when the problem was noticed.

The downside of this is if the Plan is audited and this is caught, the IRS could shut down the Plan, fine the employer, and kick every employee out of the Plan.

Cross your fingers.

 

[mcknigal]

Fsa

Beth,

Thanks for the reply.... I hope that my HR managers are as conscientious as you.

I was wondering if in this situation there is some way to get a 'waiver' from the IRS, which indemnifies my company! Of course, that is overly optimistic but it seems like the law was written to prevent abuse, not to prevent errors from being corrected.

--A

 

[Beth3]

I was wondering if in this situation there is some way to get a 'waiver' from the IRS, which indemnifies my company! The IRS doesn't issue waivers to employers to violate tax laws and ERISA reg's, although it's a nice thought.

Of course, that is overly optimistic but it seems like the law was written to prevent abuse, not to prevent errors from being corrected. 125B reg's were written with stringent compliance requirements including very restrictive reasons why employees could change their tax-exempt salary deferral mid-Plan year. Unfortunately, Congress didn't make any provision in the law for an "oops."

If it's been a short amount of time since your company held Flex open enrollment, the possibility of correcting this as an administrative error is pretty good IF your employer wishes to do that. If you just caught this error now and open enrollment was last December and the Plan Year started 1/1/05, then in all likelihood you are screwed as it just won't look plausible for your employer to claim it took 10 months to discover a clerical error.

 

[mcknigal]

Fsa

I hired in mid-year (7/11) and enrolled in benefits shortly before 8/12. Now we're at 10/11, which is two months from time of enrollment.... is that considered a short time period? Not sure.

While I certainly do bear the responsbility for this, overall this brings up a bigger gripe that I've had with FSAs. I've used them for myself before (and my error occurred when I tried to set it for a dependent -- my wife) and I've always wondered WHY is the system set up like it is? What is the difference between predicting your pre-tax savings amount ahead of time vs. simply claiming it at tax time? If medical bills are essentially tax deductable (in the current form of an FSA) why doesn't the IRS evolve toward a line-item deduction the April AFTER the medical expenses were incurred????????? This would certainly have obviated my error!!!

--A

 

[Beth3]

I hired in mid-year (7/11) and enrolled in benefits shortly before 8/12. Now we're at 10/11, which is two months from time of enrollment.... is that considered a short time period? That's something only your employer can decide. Please remember that the law does not allow you to change your deferral because you messed it up or allow for a time frame to do so. What I'm talking about is whether your employer is willing to and comforable with telling ther Plan administrator that there was a clerical error (wink wink) and try and fix this for you. What I can tell you is that you need to tell your employer RIGHT NOW about your goof and see if they can help you out.

While I certainly do bear the responsbility for this, overall this brings up a bigger gripe that I've had with FSAs. I've used them for myself before (and my error occurred when I tried to set it for a dependent -- my wife) and I've always wondered WHY is the system set up like it is? What is the difference between predicting your pre-tax savings amount ahead of time vs. simply claiming it at tax time? If medical bills are essentially tax deductable (in the current form of an FSA) why doesn't the IRS evolve toward a line-item deduction the April AFTER the medical expenses were incurred????????? You're asking me to speak to Congress' intent when drafting these reg's and related tax laws. That's not my thing but I can tell you that in writing these reg's, they clearly wanted FSA plans to function in a manner similar to insurance, which means both the employer and the employee are taking some risk. The employee in accurately predicting their eligible expenses and the employer by "floating loans" to employees who submit eligible expenses in excess of their actual YTD deferrals. If an employee quits before their Flex account is made whole, the employer is SOL.

 

[Job_Hunting]

If an employee quits before their Flex account is made whole, the employer is SOL.


***Does anyone have any idea if this specifically applies to a sec 125 cafeteria plan? I have searched high and low on DOL and other gov sites, and connot find the answer to this specific question--

 

[Beth3]

Could you define precisely what you mean by "cafeteria plan"? There are a number of design possibilities plus that term is used/misused in the vernacular to describe a whole variety of things.

 

[Job_Hunting]

Hmmmm, I consulted our HR person to be sure we actually had an FSA, she did not know what an FSA was, and said our flexible medical account was part of the "sec 125 cafeteria plan", The only information I could find was on www.ebri.org and it indicated that there are two types of accounts, FSA's and cafeteria plans? It also stated :

"The requirement for HEALTH CARE SPENDING ACCOUNTS to provide uniform coverage throughout the plan year could expose and employer to additional liability if employees incur large claims early in the year and terminate employment before fully funding their accounts....."

The way I read this article seemed to cover both the FSA and "cafeteria plan", if indeed they are two different animals, but I wanted to find something in writing to back me up should I inquire with my employer about this. I'm wondering if there's a certain "plan" that would protect the employer from losing funds due to early termination, because if there is one, this employer would be first in line to get it!!!!!

 

[Beth3]

A flexible spending account plan IS part of a 125B "cafeteria" plan. You're splitting hairs over nothing or perhaps overthinking the issue.

"The requirement for HEALTH CARE SPENDING ACCOUNTS to provide uniform coverage throughout the plan year could expose and employer to additional liability if employees incur large claims early in the year and terminate employment before fully funding their accounts....." This only applies to the flexible spending account portion of 125B reg's.

The way I read this article seemed to cover both the FSA and "cafeteria plan", if indeed they are two different animals, but I wanted to find something in writing to back me up should I inquire with my employer about this. Yes, this does get confusing. If an employer is going to offer 125B options (pre-tax premium payments, flexible spending accounts, etc.) as part of their group health design, then they need an "umbrella" Plan Document with the appropriate verbiage so that the entire Plan complies with 125B regulations. The Plan Documents that then describe the rules of the road for the individual benefits (life, disability, medical, dental, and so on) are second tier plans (so to speak) under the umbrella of the 125B cafeteria Plan Document. It's referred to as a cafeteria plan because of the variety of different options are are possible in such an arrangement.

I'm wondering if there's a certain "plan" that would protect the employer from losing funds due to early termination, because if there is one, this employer would be first in line to get it!!!!! Nope. If you're going to offer flexible spending accounts, the risk is built in to the design and required by Congress. There's no way around it.

Of course there are newer options these days than just Flexible Spending Accounts. If you are an employer, you should look into HRA's (Health Reimbursement Accounts) and HSA's (Health Savings Accounts.) Like FSA's, there are pro's and con's but they provide the employer and the employee with options they don't have with FSA's. For one thing, HSA's are "spend it or keep it" rather than "spend it or lose it" as are FSA's.

 

[Job_Hunting]

Thank you--You have really clarified this for me...I know if I ever get into HR I have a LOT to learn!!!!