Section 125 Flexible Benefit Plans Benefit Solutions, Inc.* 8/29/201807/16/96 Section 125 Flexible Benefit Plans Linda Meyerhoffer, CPA Benefit Solutions, Inc. linda@yourflex.com 804-379-0909 Linda A. Meyerhoffer, CPA*

Flexible Benefit Plan An annual program that allows employees to put aside money out of each paycheck pre-tax to pay for medical and dependent care expenses they would normally pay for out-of-pocket anyway. NET EFFECT=MORE TAKE HOME PAY

What’s Are The Advantages? To Employees: Reduction of Federal, State & FICA Taxes Opportunity to choose benefits they really want

What Are The Advantages? To the Employer: Matching FICA & FUTA Tax Savings An inexpensive way to add another benefit A way to increase employee pay without giving a raise Higher employee awareness of benefit costs

Benefits Allowed Health Related Insurance - Health, Dental, Vision, AD&D, STD & LTD, Group Term Life Medical Reimbursement Account Dependent Care Assistance Program Private Health Premiums

Benefits That Can Not Be Offered Qualified Scholarships Educational Assistance Programs Dependent Group Term Life Insurance Medical Savings Accounts Long-Term Care Insurance

What To Offer? POP Plan - Premium Only Typical Flexible Benefit Plan Full Flexible Benefit Plan with Benefit Credits

Medical Reimbursement Account Maximum and Minimum Annual Amounts are Determined by Company Employees Can Use to Pay Medical Expenses not Covered By Insurance Benefits Employees and their Dependents

How Does Medical Reimbursement Work? Employee makes election before beginning of year Employer takes same amount out of check pre-tax each payday When services are provided, employee must submit reimbursement form along with proof services were received Uniform Coverage Rule Required - Employee gets reimbursed from his account up to the amount of his election - regardless of whether he has enough money in his acct

What Medical Expenses Can be Reimbursed? Doctor & Prescription Co-pays Eye Care – Glasses, Contacts, Lasik Dental Care – Check-ups, Crowns, Bridges, Dentures, Orthodontics Anything medication you would normally take for a sickness or illness including OTC Much More

How Does Dependent Care Reimbursement Work? Employee makes election before beginning of year Employer takes same amount out of check pre-tax each payday When services are provided and paid, employee must submit reimbursement form along with proof services were received and paid Employee gets reimbursed from his account up to the amount of money in his acct

Use-It or Loose-It Rule New 2 ½ month Rule (Optional): Allows employees to make purchases or receive medical or dependent care services 2 ½ months into next plan year (14 ½ months to receive services) Will probably require extension of run-out period Requires more work on administrator’s part Provides more flexibility for employees

Use-It or Loose-It Rule Ways to Compensate: Take time to estimate accurately & be conservative Periodic Reminder Letters Re-enrollment Sessions Include Balances on check stubs 24-hour Internet access

Disadvantages To the Employee: Could reduce future Social Security Benefits Does not reduce earned income for computation of the EIC

Disadvantages To the Employer: Takes financial risk under the “uniform coverage rule” Administration Fees Discrimination testing must be done Medical Reimbursement is a health plan and may have to be offered under COBRA

Setting Up A Plan Plan Document - must be available upon request by DOL and a copy of Summary Plan Description must go to employees Discrimination Testing Form 5500, if required

Setting Up A Plan Plan Document - POP or FSA? Additional document or attachment required for medical reimbursement and dependent care reimbursement Must be formally adopted by Employer before beginning of plan year

Setting Up A Plan Plan Document Must Describe Eligibility Class of Employee or # of Hours Service Requirements Plan Entry Date

Setting Up A Plan Plan Document Must Also Specify What Benefits Can Be Elected How the Plan is Funded Maximum and Minimum Contribution Amt Plan Year Rules Governing Method, Timing, & Irrevocability of Elections

Who Can Not Participate? Self-employed individuals Partners in a partnership A 2% or More Shareholder in a S Corp or their spouse, children, grandchildren or parents Outside Directors, Limited Partners, and Members in LLC’s

Discrimination Testing Who Is Highly Compensated? An officer, or a more than 5% owner this year or last (including their spouse, parents, children & grandchildren), or Compensation in excess of $95,000, or A spouse or dependent of any of the above.

Discrimination Testing Who Is A Key Employee? An officer - annual compensation exceeding $135,000 or a greater 5% owner this year or last (including their spouse, parents, children & grandchildren), or a greater than 1% owner w/ compensation greater than $150,000.

Discrimination Testing Do Before the End of the Plan Year 25% Test - benefits provided to key employees can not exceed 25% of the aggregate of such benefits provided for all employees under the plan 55% Test - for dependent care only the average benefits provided to non-HCE’s must be at least 55% of the average benefits provided to HCE’s Other Considerations: controlled groups, classes of employees,

Penalty is $25/day up to a maximum $15,000/return IRS Form 5500 Must Be Completed and Submitted within 7 months after the end of the plan year if you have 100 or more participants in Medical Reimbursement Penalty is $25/day up to a maximum $15,000/return

Keys To A Successful Plan Consider an outside administrator Set up plan to include classes of employees with low turnover – can restrict based on number of hours and have waiting pd Set up plan that reimburses weekly Communicate & educate employees Support the plan in-house and encourage participation

Benefits of Using Outside Administrators Limits administrative hassle – HIPAA More privacy - encourages participation Avoids lawsuits

Flexible Spending Accounts Benefit Solutions, Inc.* 8/29/201807/16/96 Flexible Spending Accounts A WIN-WIN SITUATION FOR EVERYONE Linda A. Meyerhoffer, CPA*