Health, Accident & Retirement Nancy E. Parkinson, CPP

Content coverage: Health Insurance  Traditional Health Insurance Plans  Health Maintenance Organizations (HMOs)  Preferred Provider Organizations (PPOs) Sick Pay  STD  LTD  3 rd Party Sick Pay Worker’s Compensation Insurance FMLA Retirement and Deferred Compensation Plans

Health & Accident Insurance Contribution- Tax Treatment Non-Taxable Contributions − Contributions made by an employer − Contributions made under a Section 125 Cafeteria Plan If employer reduces salary and then reimburses premium to employee, then the premium is taxable to the employee − Premiums must be for Employee, Spouse, Dependents (on 1040) For purposes of this provision dependent status will continue to apply to a person who is receiving more than ½ his/her support from the taxpayer even if their earnings more than the annual exemption. Coverage for “adult children” (under age 27 by end of taxable year) – married or unmarried. Plan cannot define “dependent” for purposes of eligibility other than relationship between child & participant. No coverage for grandchildren allowed

−Domestic/Life Partners Premiums for life partners are federal taxable unless recognized as a spouse under state law. If the employee’s domestic partner is of the same sex as the employee, the partner does not qualify as the employee’s spouse for federal tax purposes regardless of the state law. The partner may qualify as a dependent if partner receives more that ½ support from employee, lives with employee, and the relationship does not violate local law. Health & Accident Insurance Contribution- Tax Treatment Cont.

−Change in definition of “Medical Expenses” Applies for purposes of direct reimbursement of employee expenses or indirect reimbursements through FSAs, HRAs, and Archer MSAs. °Only costs of medicines prescribed by a doctor and insulin are eligible. Change only affects over-the- counter medicines unless doctor prescribes with a written prescription – for tax years beginning 2011

Taxes Involved −Federal Income Tax Employment Taxes ◦Social Security ◦Medicare ◦FUTA Based on one of the following Plan is written Referred to in employment contract Employees contribute to the plan Employer contributions are made to a separate fund Employer is required to contribute Health & Accident Insurance Contribution- Tax Treatment Cont. Exclusion from Social Security, Medicare & FUTA must :

Employer-paid physical exams – NOT excluded from income as a working condition fringe benefit, but IS excluded from income as an employer-paid medical care expense Benefits received directly or indirectly reimbursing the employee for medical expenses incurred are not included in employee’s income Any reimbursements in excess of actual expenses are taxable income to the employee Payments for loss of limb or disfigurement as part of AD&D are not included in income (payments must not be related to time lost from work). Health & Accident Insurance Contribution- Tax Treatment Cont.

Patient Protection and Affordable Care Act – effective for plan years beginning on or after September 23, 2010 −If insurance is provided through third party insurance company there is no nondiscrimination requirement. −If employer is self-insured (reimbursing employees’ medical expenses from its own funds), employer may not discriminate in favor of highly compensated employees in either benefits or eligibility. −IRS Code Section 105(h ) Health Insurance – Nondiscrimination Requirements

Non Discriminatory Plan Self-insured plan must benefit: At least 70% of all employees At least 80% of employees eligible to participate in the plan (IF at least 70% of all employees are eligible to participate) A classification of employees that the Secretary of the Treasury finds not to be discriminatory If all benefits provided to highly compensated employees are provided for all other participating employees

Although discriminatory reimbursements are taxable to the highly compensated employees receiving them, they are not subject to federal income tax withholding or employment taxes. Amounts paid to highly compensated employees must be included in taxable income Highly Compensated employees: 5 highest-paid officers Owner of more than 10% of employer’s stock Top-paid 25% of employees Discriminatory Plan

W-2 Reporting of employer-sponsored health coverage Patient Protection and Affordable Care Act Requires employers to report the total cost of employer- sponsored health coverage on employees Forms W-2. Applies to Forms W-2 for 2012 for first time. For informational purposes only ◦To inform employees of the cost of their health care coverage ◦Does NOT cause excludable employer-sponsored health care coverage to become taxable ◦Aggregate reportable employer cost reported on W-2 in box 12, code DD ◦No reporting on Form W-3 Reporting exceptions for 2012 W-2’s: ◦If employer filed less than 250 W-2’s for preceding calendar year ◦If employee terms and requests a W-2 before end of calendar year

W-2 Reporting of employer-sponsored health coverage Definitions to know (pages 4-12 thru 4-18) Aggregate Cost – total cost of coverage under all applicable employer-sponsored coverage provided to employee Applicable employer-sponsored coverage – coverage under any group health plan made available to employee by employer that is excludable from employee’s gross income – see exceptions (p & 4-13) Group health plans – A plan of, or contributed to by, an employer or employee organization to provide health care to employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families Aggregate reportable cost – Includes both the portion of the cost paid by the employer and the portion of the cost paid by the employee, regardless of pre-tax or after-tax contributions

W-2 Reporting of employer-sponsored health coverage Definitions to know (continued) Not included in the aggregate reportable cost – ◦Archer medical savings account ◦Health savings account ◦Multiemployer plan (IE: amounts contributed to a union plan) ◦Health reimbursement arrangement ◦Health flexible spending arrangement ◦Dental or vision plan (if plan is offered under a separate policy, certificate, or contract of insurance) ◦Cost of coverage under hospital indemnity or other fixed indemnity insurance (UNLESS employee purchases policy on a pre-tax basis under a Section 125 plan OR employer makes any contribution to the cost of coverage that is excludable ◦Self-insured plan not subject to COBRA ◦Plan primarily for the military ◦Excess reimbursements ◦Coverage provided under an EAP, wellness program, or on-site medical clinic

W-2 Reporting of employer-sponsored health coverage Definitions to know (continued) Methods of calculating the cost of coverage – ◦COBRA applicable premium method ◦Premium charged method ◦Modified COBRA premium method ◦Composite rate ◦Employer provides some benefits that are employer-sponsored coverage and others that are not ◦Cost changes during the year ◦Employee begins, changes, or terminates coverage during the year ◦Adjustments for events after end of calendar year ◦Coverage period that includes December 31 st and continues into the subsequent calendar year ◦Transition relief

Medical Savings Accounts (Archer MSA) Established by Health Insurance Portability and Accountability Act (HIPA) of 1996 Small Employers (no more than 50 employees). Eligibility can continue for all employees until the year after the employer has 200 employees. At that point only employees currently enrolled can continue to contribute Employee must be covered only by high deductible health insurance plan. For 2012 annual deductible $2,100 – $3,150 for individual $4,200 - $6,300 for family Maximum out-of-pocket expenses can be no more than $4,200 for individual coverage $7,650 for family coverage Cannot be part of Cafeteria Plan

Contributions can be made by employer or employee (not both) Employee contributions are deductible from income on personal tax return. Subject to federal income tax withholding and employment taxes. Employer contributions are excludable from income. Medical Savings Accounts (Archer MSA) Cont. Employee deduction cannot exceed employee’s compensation Deduction or Contribution is limited to: 65% of the plan deductible for individual coverage 75% of the plan deductible for family coverage. −Employer contributions must be the same amount for each employee - either dollar amount or percentage of applicable deductible −Employer contributions in excess are included in income. MSA Contribution Limitations

−Cannot be part of a Cafeteria Plan −Distributions from MSAs are excluded from income if they are for medical expenses incurred by employee or his/her dependents Covered medical expenses don’t include premiums for insurance (other than long-term care), for health care under COBRA, or for health care coverage while receiving unemployment insurance benefits Person for whom expenses are incurred must be covered only by high deductible health plan Distributions of earnings included in income are ◦subject to an additional 20% tax ◦unless made after age 65, disability, or death MSA Trustee or Custodian is not required to determine use of distributions; this is the responsibility of the account holder Medical Savings Accounts (Archer MSA) Cont.

Reporting Requirements: Employer Contributions Box 12 R on W-2, code R Plan trustees report on 5498-SA Reported on employee’s personal tax return Employee Deductions Box 1, 3 and 5 on W-2 Employee takes deduction on personal income tax return for amount contributed Plan trustees report on 5498-SA Distributions Plan trustees report on 1099-SA Medical Savings Accounts (Archer MSA) Cont.

Treated as accident and health insurance under “Health Insurance Portability and Accountability Act of 1996”  Employer provided coverage is excluded from income  Benefits are excluded from income If per diem – excludible limit is $290/day in 2010 (indexed for inflation) Excess will be excluded to the extent of actual cost of care Long Term Care Insurance Restrictions  Not subject to COBRA  Cannot be part of Cafeteria Plan  If part of flexible spending arrangement it is included in employee’s taxable income

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Requires health plan sponsors to provide employees and their beneficiaries with the opportunity to elect continued group health coverage for a given period should their coverage be lost due to “qualifying event”  Applies to employers with 20 or more employees (FTEs) on typical business day.  Coverage period generally is 18 to 36 months Coverage same as provided to similarly situated beneficiaries who have not suffered the qualifying event.  Employees who purchased health care coverage under a cafeteria plan (including flexible spending) are eligible for COBRA continuation at level of coverage before event.  Long Term Care Insurance is not included in COBRA

Death of covered employee – 36 months Covered employee’s termination of employment or reduction in work hours (other than gross misconduct) – 18 months  If the reason for absence is employee’s military service – 24 months  If another qualifying event occurs (other than employer’s bankruptcy) period extends to 36 months.  Qualified beneficiary (employee or dependent) is disabled under Social Security Act during the first 60 days of continued coverage - 29 months If another qualifying event during 29 months (other than employer bankruptcy) coverage extends to 36 months Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont.

Employer’s bankruptcy  Coverage is life of retiree or retiree’s spouse.  Once retiree dies – 36 months for retiree’s spouse and children from date of retiree’s death Divorce or separation of covered employee (date of divorce is the qualifying event) – 36 months Dependent child losing that status – 36 months Premium Requirements Can be up to 102% of the group premium paid for similar coverage under the plan by the employer and employees.  The maximum premium increases to 150% for disabled qualified beneficiaries after the 18 th month of continuation coverage. Premium payment may not be required earlier than 45 days after the qualified beneficiary elects continuation of coverage Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont.

Election and notice provisions  Election period must last at least 60 days from the date when coverage was terminated or the qualified beneficiary receives notice – which ever is later.  Plan must provide written notice of COBRA continuation coverage when coverage begins  Employee or Employer must notify plan administrator of qualifying event, responsibility and timing depends on the event  Once aware of the qualifying event, plan administrator has 14 days to notify qualified beneficiaries of their rights. Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont.

Penalties for Noncompliance  Employers subject to $100 per day penalty for each qualified beneficiary (maximum $200 per day per family affected by same qualifying event). Penalty will not be imposed if failure is due to reasonable cause and is corrected within 30 days of discovery Unintentional failures due to reasonable cause – maximum penalty is lesser of 10% of employer premiums for group health plans during preceding taxable year to $500,000 Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont.

FMLA/COBRA Interaction  Date employee is to return to work at end of FMLA Leave (or date employee notifies employer he/she is not returning if before end of FMLA Leave) is qualifying date. Unpaid required premium while on FMLA Leave does not eliminate the employees right to COBRA continuation coverage

American Recovery and Reinvestment Act of 2009 (AARA) Discounted COBRA Premiums & Subsidies  American Recovery and Reinvestment Act of 2009 (AARA) – provides employees who have involuntarily lost their job chance to pay for continued health insurance at a deep discount. “Assistance eligible individuals” pay 35% of COBRA continuation coverage premium. Assistance Eligible Individual defined as an employee who has involuntarily lost his/her job The qualifying event must have occurred between Sept 1, 2008 and February 28, Termination has to be involuntary and no caused by employee’s gross misconduct. Individual can be “assistance eligible” more than once! Discounted premium is calculated on the amount employee would normally be required to pay for COBRA coverage.

American Recovery and Reinvestment Act of 2009 (AARA) Cont.  Assistance for the subsidy ends with first month beginning on or after the earlier of: 15 months after 1 st day of 1 st month of eligibility End of maximum required period of COBRA continuation coverage Date the individual becomes eligible for Medicare benefits or health coverage under another group health plan (after end of any applicable waiting period)  Employee must notify plan upon eligibility for other coverage

American Recovery and Reinvestment Act of 2009 (AARA) Cont.  Regular COBRA continuation notice must now also include: Description of beneficiary’s right to premium reduction Forms necessary to establish eligibility & apply for premium reduction Contact information for group health plan administrator Description of extended election period for individuals who had COBRA continuation coverage in effect on Feb 17, 2009 If available, option to enroll in different coverage than what beneficiary was covered by (prior to the qualifying event) Beneficiary’s obligation to notify plan of eligibility under another group health plan or Medicare and subsequent penalties for not providing such information  Employer can face penalties for not providing notices to eligible individuals

American Recovery and Reinvestment Act of 2009 (AARA) Cont.  Employer can allow an assistance eligible individual to change coverage options. If allowed: Premium must be no more than than premium paid by individual for coverage prior to termination of employment Different coverage must also be offered to employers’ active employees Coverage requirements: Must include health care coverage Cannot be a flexible spending arrangement Cannot be for treatment at an on-site medical facility maintained by employer that consists primarily of first-aid services, prevention & wellness care, or similar care

American Recovery and Reinvestment Act of 2009 (AARA) Cont.  High earners may have to pay back subsidy as tax payment (if modified AGI exceeds $145,000 ($290,000 for joint filers) – employer does not make this determination but is made when filing Form 1040 High earners can “opt out” of the COBRA subsidy  Employer is usually responsible for subsidizing COBRA discount and claiming reimbursement of that amount against its payroll taxes on Form 941

Paid solely by employer (not salary reduction election or cafeteria plan)  Not limited by number of employees or only to employees who have High Deductible health plans.  Reimburses employee for medical care expenses (for employee, spouse & dependents).  Reimbursements up to maximum dollar amount (unused portion carried forward to subsequent coverage periods).  Unused portion cannot be paid to employee at end of year (or at termination) Health Reimbursement Arrangements (HRA)

Health Reimbursement Arrangements (HRA) Cont’d Benefits under HRA:  Generally excluded from employee’s gross income  Qualifications for exclusion: May only reimburse expenses for medical care as defined in IRC section 213(d) Expenses must be substantiated Expenses may not be for prior taxable year, incurred before date the HRA began, or before employee enrolled in HRA

Qualifications for exclusion  No right to receive cash or any benefit (other than reimbursement of medical care expenses). If any person has such a right currently or in an future year, all distributions to all persons under HRA in current year are included in gross income (even amounts paid to reimburse medical care expenses).  Arrangements outside HRA that provide for adjustment of employee’s compensation will be considered in determining eligibility for exclusion. If bonus at retirement is related to HRA balance or severance is paid only to employees who have HRA balance, then all reimbursements for all participants are disqualified. Health Reimbursement Arrangements (HRA) Cont’d

Qualifications for exclusion (Cont)  Reimbursements can be to former employees and retirees up to the unused balance.  Employer may reduce maximum balance after retirement or termination for any administrative costs of continuing coverage.  Employer may or may not provide an increase in amount available after an employee retires or terminates employment.  If HRA allows payment of medical benefits to designated beneficiary other than the employee’s spouse or dependents payments are not excludable from income – effective 8/14/06 (delayed until 2009 for HRA provisions created before 8/14/06) Health Reimbursement Arrangements (HRA) Cont’d

HRAs and Cafeteria Plans Employer contributions to an HRA may not be attributable to salary reductions or provided under a section 125 cafeteria plan to be excluded from taxable income Look at all circumstances in determination If salary reduction election for coverage period exceeds the actual cost of the accident or health plan coverage for that period, salary reduction is attributable to HRA – Look to COBRA rates for this. If correlation exists between maximum reimbursement amount available and amount of salary reduction election for accident and health plan then reduction is attributable to HRA Health Reimbursement Arrangements (HRA) Cont’d

HRAs and Flexible Spending Accounts (FSAs) Amount credited to HRA must not be directly or indirectly based on amount forfeited under FSA If medical expenses are reimbursable under HRA and FSA, HRA must be exhausted before FSA Before FSA plan year begins, the plan document can specify coverage In no case can HRA and FSA reimburse the same medical care expenses. Health Reimbursement Arrangements (HRA) Cont’d

Nondiscrimination rules applicable to HRAs Section 105(h) same as for self-insured medical reimbursement plans HRA is subject to COBRA HRA must provide for continuation of maximum reimbursement with increase(s) at same time and same increment as similarly situated non-COBRA beneficiaries Plan can provide for continued reimbursement regardless of election of continuation coverage (not mandatory) No Reporting Requirement for HRA.

Medicare Prescription Drug Improvement and Modernization Act of 2003  Effective for Taxable years beginning after 12/31/03  Tax-exempt trust or custodial account created exclusively to pay for qualified medical expenses of the account holder (employee) and his or her spouse and dependents.  Subject to rules similar to those for IRAs Health Savings Accounts (HSA)

Health Savings Accounts (HSA ) Cont’d Qualifications for exclusion Individuals must be only in high deductible health plan (HDHP)  Annual deductible for 2010 at least $1,200 for individual coverage out of pocket expense limits no more than $5,950 $2,400 for family coverage out of pocket no more than $11,900 for family coverage. no amounts payable for medical expenses until family has incurred annual covered medical expenses in excess of minimum annual deductible  An HDHP can have a smaller deductible or none at all for preventive care.

Qualifications for exclusion (cont’d) The insurance can be a PPO or POS – in which case the annual out-of-pocket limit is determined by services within the network Contributions  Contributions can be made by the employer and employee  All contributions are aggregated for purposes of maximum contribution limit.  Contributions to Archer MSAs reduce the limit available for HSA for tax exclusion  Any amount over the limit is includable in gross income There is a 6% excise tax for excess individual and employer contributions in addition to all federal taxes Health Savings Accounts (HSA ) Cont’d

Contributions (cont’d) Maximum annual contribution is the lesser of  100% of annual deductible or  Maximum deductible permitted same as Archer MSA For 2010 maximum is  $3,050 for an individual  $6,150 for a family Catch up is allowed for individuals at least 55 years old on the last day of the tax year.  For 2009 and beyond $1,000 Health Savings Accounts (HSA ) Cont’d

Contributions (cont’d)  No contributions can be made once the individual is eligible for Medicare (65 years old).  Amounts can be rolled over from an Archer MSA and IRA, or another HAS Employer contributions must be the same for everyone with comparable coverage either at the same amount or percent of deductible Comparability is applied separately to part-time workers (normally less than 39 hours per week).  Employers can make a one-time transfer of balance in employee’s HRA or FSA to an HSA. Maximum amount is lesser of HSA or FSA balance on date of transfer OR September 21, Must be completed by January 1, 2012.

Health Savings Accounts (HSA ) Cont’d Contributions (cont’d)  Transfer from an IRA is permitted as a one-time contribution to an HSA – up to maximum deductible contribution limit at the time of the contribution  Transfers from an an HRA, FSA, or IRA are treated as rollover contributions and are non taxable EXCEPTION: unless employee is not an eligible individual with coverage under an HDHP at any time during the 12 months beginning with the month of the HSA distribution)

 HSA and HDHP can be included in a Cafeteria Plan  HSAs are not subject to COBRA continuation coverage Calculating Comparable Contributions  Sect 4980G mandates use of calendar year for comparability testing purposes  Several ways to comply with testing requirements: Pay-as-you-go basis Look-back basis Pre-funded basis  Impermissible Contribution Methods do exist! Health Savings Accounts (HSA ) Cont’d

Distributions Excluded from gross income if qualified medical expenses of employee, spouse or dependents. If not used for qualified medical expenses  included in gross income  subject to additional 10% tax unless after death, disability, or the employee reaches 65 years old.

Distributions Qualified medical expenses Generally health insurance premiums are not qualified except:  Qualified long term care insurance  COBRA health care continuation coverage  Health insurance premiums while the individual is receiving unemployment compensation benefits  Individual over 65 for Medicare premiums and employer share of premium for employer provided health insurance Cannot use HSA funds to pay premiums for Medigap policies. Health Savings Accounts (HSA ) Cont’d

 Employers are not required to determine whether HSA distributions are used for qualified medical expenses.  Employee makes determinations and must maintain records to substantiate.  Employers can provide eligible individuals with debit, credit or stored-value cards – same guidance as under HRAs

Health Savings Accounts (HSA ) Cont’d In 2004, IRS issued guidance clarifying how FSAs and HRAs interact with HSAs  Employee covered under DHDP and a health FSA or HRA that pays or reimburses medical expenses, not eligible to make contributions to an HSA CAN make contributions to an HSA for period of time employee is covered under certain specified types of employer-provided plans that reimburse employee medical expenses  Limited purpose health FSA or HRA  Suspended HRA  Post-deductible health FSA or HRA  Retirement HRA

Health Savings Accounts (HSA ) Cont’d Effect of FSA grace period on HAS eligibility In 2005, IRS issued guidelines clarifying an employee participating in an FSA and covered by a grace period (for incurring medical expenses after the end of the plan year) is not eligible to contribute to an HSA until after the FIRST DAY of the FIRST MONTH following the end of the grace period. Employer could adopt one of two options which will affect employees’ HSA eligibility during the cafeteria plan period  General purpose health FSA during grace period  Mandatory conversion from health FSA to HSA compatible health FSA for all participants

W2 Reporting Requirements Employer contributions and salary reductions contributions (pre-tax deductions) Box 12W on W-2 Employer contributions over limits Box 1,3, and 5 on W-2 with taxes in boxes 2, 4, and 6 Employee contributions not made by salary reduction Box 1, 3, and 5 on W-2 Employee can deduct up to the annual limit on personal tax return Health Savings Accounts (HSA ) Cont’d

Family Medical Leave Act (FMLA) Allows employees to take up to 12 weeks of unpaid leave in any 12 month period  Newborn or newly adopted child  Take care of seriously ill child, spouse, or parent  Care for themselves if they are seriously ill  Employee’s spouse, child or parent is a covered military member on active duty, OR has been notified of an impending call to active duty in support of a contingency operation (can take up to 26 wks in a 12 month period to care for covered military service member with a serious injury or illness)  Guarantees continuation of employees’ health benefits while on leave

Family Medical Leave Act (FMLA) Cont ‘d  Applies to private sector employers with 50 or more employees (including part-time and employees on leave or suspension, but not laid-off employees)  For public sector employees, FMLA applies if the public agency has 50 employees working within a 75-mile radius of employee’s worksite  Employee must have been employed by employer for at least 12 months and have worked at least 1,250 hours within the previous 12-month period the 12 months of employment need not be consecutive Employment prior to a continuous break in service of 7 years or more does not need to be counted, unless: For fulfillment of National Guard or Reserve Period of approved absence or unpaid leave

Family Medical Leave Act (FMLA) Cont ‘d  Employer can require employee to take leave  “Serious Health Condition” defined in FMLA regulations  Intermittent leave Can be several days or weeks at a time or by working reduced hours Reduced hours can be deducted from an exempt employee’s salary without jeopardizing exempt status If employee would be required to work overtime if not for FMLA leave, hours employee would have been required to work may be counted against FMLA entitlement

Family Medical Leave Act (FMLA) Cont ‘d  Designation as paid or unpaid leave Employer an require employee to use paid leave available to the employee Employer must designate leave as paid or unpaid FMLA leave within 5 days of receiving notice from employee a leave will be taken. Notice must be in writing. Must inform employee of number of hours, days, or weeks that will be counted against the employee’s FMLA leave entitlement Employer must notify employee of eligibility to take FMLA leave within 5 business days after either employee requests leave or employer learns employee’s leave may be for an FMLA qualifying reason. If employee is not eligible for FMLA, notice must indicate at least one reason why employee is not eligible or has no FMLA leave available.

Family Medical Leave Act (FMLA) Cont ‘d  Regulations provide for a notice of FMLA rights and responsibilities of the employer separate from the eligibility notice. Notice must include the following information: FMLA leave designations How 12 mo period and “single 12-mo period” are determined Employee certification requirements Substitution of paid leave for unpaid leave Premium payment requirements to maintain health benefits Job restoration rights, including effect of a “key employee” designation Potential liability for health insurance premiums if employee does not return to work

Family Medical Leave Act (FMLA) Cont ‘d  Consequences exist for employer’s failure to follow FMLA notice requirements  There is a notice requirement for employees If medical treatment is forseeable, a 30 day notice (or as much as can be given under the circumstances)  Medical or military certification can be required by employer  Health insurance benefits employee enjoyed before the leave must be continued during FMLA leave on the same basis Employer can require any employee premiums If employee fails to pay, employee can lose coverage after 30 days, but coverage must be restored when employee returns to work without employee having to meet any additional qualifications for coverage

Family Medical Leave Act (FMLA) Cont ‘d  Job guarantee upon return from leave – either previous job or one that is “equivalent” with no loss of pay or benefits Employer may deny reinstatement to “key employees” if it’s necessary to prevent “substantial and grievous” economic injury to the employer’s operations Key employee = paid on a salary basis; among the highest paid 10% of all employees within 75 miles of employee’s worksite when FMLA leave was requested  Recordkeeping Requirements Basic payroll records – hours worked, rate of pay, deductions from wages Records detailing dates and amount of FMLA leave taken Copies of notices and documents related to FMLA leave

Family Medical Leave Act (FMLA) Cont ‘d  Enforcement administered and enforced by Department of Labor’s Wage & Hour Division  Retaliation for exercise of FMLA rights is prohibited by law  Employers covered by both FMLA and state law must comply with the law that provides the greatest benefits and protection to the employee requesting leave  Interaction of FMLA and cafeteria plans Employee is responsible for premiums during leave Cafeteria plan may offer one or more of the following 3 payment options Pre-Pay Pay-As-You-Go Catch-up

Sick Leave Pay  Paid by employer from regular payroll account Taxable as regular income  Sick Leave Pay under a Separate plan (STD, LTD) Premiums paid by employee on after tax basis – benefits are not taxable Premiums paid by employer or on pre-tax basis – benefits are fully taxable Premiums paid by employer and employee (after-tax) – portion of benefits attributable to employer-funded portion is taxable Sick Pay

Responsibility for income withholding and employment taxes Employer pays and is self-insured  Employer withholds taxes based on employee’s most recent W-4  Employer withholds and pays employer share of Social Security, Medicare, and FUTA taxes for all payments made within 6 calendar months after the end of the last month during which the employee worked. If employee returns to work, new six-month period begins if employee is later on disability Sick Pay Cont ‘d

Responsibility for income withholding and employment taxes  Payments made by employer’s agent OR employer is self insured. Agent may withhold FIT at 25% in 2010 Employer retains responsibility for Social Security, Medicare, and FUTA unless agreement with agent to take on this responsibility.  Payments are made by an insurance company (3 rd party) who receives premiums for disability coverage. Third party not required to withhold FIT from payments unless requested by disabled employee (W-4S) IRS allows for fixed amount or percentage (W-4S has no provision for percentage) Third party withholds and remits Social Security and Medicare taxes or advises employer who pays the taxes and includes in 941. Sick Pay Cont ‘d

Reporting Responsibilities  Employer makes payments Report taxable amounts on Form 941 Report income tax withheld on Form 941 Report taxable amounts to employee on Form W-2 Report payments on Form 940  Employer’s agent makes payments Usually employer retains reporting responsibilities  Third-party insurer makes payments Both the employer and the 3 rd party have reporting responsibilities; if 3 rd party does not properly transfer liability to employer, 3 rd party is required to report on Form 941, Form W2, and Form 940

Permanent Disability benefits  Payments subject to income tax when premiums were paid by employer or with pre-tax dollars  Payments are not subject to Social Security, Medicare, or FUTA On or after employment relationship has terminated because of death or disability retirement Employee receiving disability insurance benefits under the Social Security Act – still subject to FUTA Sick Pay Cont ‘d

Form of insurance employers are required to buy to insulate them from lawsuits brought by employees who are hurt or become ill while working.  Benefit payments – not included in gross income or subject to any employment taxes  Premium payments – paid by employer based on specific earnings and classifications Each state has its own Workers Compensation Insurance law. There are 4 categories:  National Council States (38 states plus District of Columbia)  Non-National Council States (7 states)  Monopolistic States (5 states)  Competitive State Funds (12 National Council States) Workers Compensation Insurance

Workers Compensation Insurance Cont’d  Employers are assigned Classification Codes based on the type of business There are classification code exceptions for employees who work exclusively in an office, outside salespeople, and drivers & their helpers Certain types of compensation can be excluded when determining total payroll figure The “half” portion of overtime premium Reimbursed travel expenses Third-party sick pay Reimbursed moving expenses Tips Personal use of company-provided vehicle Group Term Life Insurance over $50,000. Severance Pay Education Assistance Payments Employer contributions to pension or insurance plans

Cafeteria Plans Cafeteria Plans provide employees a choice from a “menu” of cash compensation and nontaxable benefits authorized by Section 125 of the Internal Revenue Code A qualified Cafeteria Plan must contain at least one taxable (cash) and one nontaxable (qualified) benefit Examples of qualified benefits:  Coverage under accident & health insurance plans  Coverage under dependent care assistance plans  Group Term Life insurance on lives of employees  Qualified adoption assistance  Premiums for COBRA continuation coverage  Accidental death & dismemberment insurance  Long-term and short-term disability coverage  A 401(k) plan  Contributions to HSA

Cafeteria Plans Cont’d  Premium-only plan – known as POP’s or premium conversion plans. Used by employers who require their employees to contribute towards benefits (usually health insurance)  Deferred Compensation is prohibited under the rules governing cafeteria plans EXCEPTIONS 401(k) Educational institution contributions for postretirement group-term life insurance Amounts remaining in a HSA at end of calendar year Benefits under a long-term disability policy relating to more than one year Mandatory two-year election for vision or dental Using salary reduction amounts to pay premiums for the 1 st month of the next plan year

Cafeteria Plans Cont’d Cafeteria plans are usually funded by either or both of the following:  “Flex dollars” or “flex credits”  Salary reduction – pre-tax contributions by the employee result in a higher take-home pay for the employee Automatic deferrals (i.e., “negative elections”) are OK After-tax employee contributions also are part of a cafeteria plan A Cafeteria Plan must have a written document laying out the particulars of the plan and it must be intended to be a permanent plan. There are certain items the plan must contain to be considered a Cafeteria Plan according to IRC Section 125.

Cafeteria Plans Cont’d Benefit Elections Usually irrevocable before the benefit becomes available or the plan year begins. Changes or revocations during the plan year are only allowed under limited circumstances. IRS Regulations clarify employees’ right to revoke or change an election during a plan year based on a change in status  Marital status changes  Changes in the number of dependents  Employment status changes (applies to employee, spouse, or dependent)  Change in dependent status  Residence change  Adoptions An election change can be made only if the status change results in the employee, spouse, or dependent gaining or losing eligibility for coverage under the plan

Cafeteria Plans Cont’d Special Exceptions  COBRA  Medical Support orders  Medicare or Medicaid eligibility  Special enrollment rights under HIPPA  Elective deferrals under a CODA  FMLA leave changes Election changes may also be made to reflect significant cost or coverage changes for all types of qualified benefits provided under a Cafeteria Plan during the plan year. Contributions may be made to a HSA through a cafeteria plan, with specific rules surrounding the pre-tax qualification Option election for new employees – 30 days after hire date to elect coverage

Cafeteria Plans Cont’d Participation in a Cafeteria Plan must be restricted to employees and the plan must be maintained for their benefit. Nondiscrimination testing  Plan cannot discriminate in terms of eligibility, contributions, or benefits in favor of highly compensated individuals, or participants, or key employees  Three main nondiscrimination tests Eligibility test Contributions and benefits test Concentration test  Special health benefits test  Separate tests allowed for new employees

Cafeteria Plans Cont’d Flexible Spending Arrangements (FSA’s)  Employees can elect a pre-tax salary deduction to pay for certain covered health care, dependent care, and adoption expenses.  There are specific requirements that FSA’s must meet Elections cover a full plan year No deferred compensation – “use it or lose it” Plan can allow a “grace period” up to 2 ½ months Unused balances can be distributed to reservists – “qualified reservist distributions” allowable if employer decides to include it in the cafeteria plan Uniform coverage throughout coverage period 12 month period of coverage Reimbursements must be for medical expenses Prohibited reimbursements; claim substantiation; claims incurred Limiting health FSA enrollment to health plan participants

Cafeteria Plans Cont’d Flexible Spending Arrangements (FSA’s) (cont’d)  Coordination with HIPAA requirements  FSA benefits followed transferred employees after asset sale  Can be set up to use debit and credit cards for payments and reimbursements with specific requirements  Special dependent care assistance rules

Retirement and Deferred Compensation Plans  Qualified Pension and Profit Sharing Plans IRC 401(a)  Cash or Deferred Arrangements IRC 401(k)  Tax-Sheltered Annuities IRC 403(b)  Deferred Comp Plans for Public Sector and Tax-Exempt Groups IRC 457  Employee-Funded Plans IRC 501(c)(18)(D)  Individual Retirement Accounts (IRA)  Simplified Employee Pensions IRC 408(k)  Savings Incentive Match Plans for Employees of Small Employers (SIMPLE Plans)  Employee Stock Ownership Plans  Nonqualified Deferred Compensation Plans

Retirement and Deferred Compensation Plans Cont’d Qualified Pension and Profit Sharing Plans – 401(a) Defined Benefit Plans − Benefit to employee based on age, compensation level and length of service Defined Contribution Plans − Account for each employee, with set amount being contributed. Employee’s retirement benefit depends on the amount of money in the account at retirement.

Defined Contribution Plans − Money Purchase Pension Plan - Employer makes contributions each year based on employee’s compensation. − Profit Sharing Plan – Employer contributions are substantial and recurring, although they may be discretionary to some degree Qualified Pension and Profit Sharing Plans 401 (a) Retirement and Deferred Compensation Plans Cont’d

Annual Compensation and Contribution Limits  Set by Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)  For 2009 annual compensation limit is $245,000 (indexed annually to the next lowest multiple of $5,000).  Annual contributions and other “additions” to defined contribution plans is limited under IRC 415 to the lesser of $49,000 in 2009 (indexed annually) or 100% of employee’s annual compensation.  Pre-tax elective deferrals to 401(k), 403(b), 457, 125, 132(f)(4) are included in employee’s contribution to determine the limit. Qualified Pension and Profit Sharing Plans 401 (a) Tax Treatment of Pension and Profit Sharing Plans  Qualified Plan – meets certain requirements under IRC 401(a) regarding participation, vesting, contribution limits, benefit limits, and nondiscrimination in favor of highly compensated employees. Employer contributions are excluded from wages and are not subject to federal income tax withholding, or Employment taxes. Employee after-tax contributions are included in income and taxable whether voluntary or required.

Cash or Deferred Arrangements (CODA) Voluntary Salary Reduction Plan – 401(k)  Pension Protection Act of 2006 put ability to automatically enroll employees in 401(k) plan into the law for plan years starting after 12/31/07 Must provide specific schedule of automatic contribution. It must be at least 3% at hire and may stay at that level until the beginning of the second year after hire. Increases must be at least 1% each year up to 6% for fourth. The arrangement can specify larger percents up to 10% of compensation. If employer matches contributions, the plan must provide 100% match for first 1%; plus 50% for contributions between 2% and 6% or non-elective contribution of at least 3% of compensation – cannot contribute at high percent for highly compensated employees and cannot match contributions over 6%.  When hired employees must have 90 days to withdraw from automatic elections and recover contributions from the plan. Employees can change or stop future contributions at any time.

Contribution Limits for 401(k) 2009 contribution limit is $16,500 Adjusted for inflation in $500 increments Tax Treatment of 401(k) contributions Not taxable for Federal Income Tax (and most states) Taxable for Employment Taxes Reporting for 401(k) contributions on W-2 Not in box 1, but in boxes 3 & 5 In box 12 with a “D” Retirement box is checked if any deductions in the tax year. Cash or Deferred Arrangements (CODA) Catch-up” contribution began in 2002 Under EGTRRA –plans 401(k), 403(b), SEP, Simple, and 457 plans Employee must be at least 50 years old in the current year Limits of “catch-up” for all but SIMPLE 2009 catch-up limit is $5,500 Adjusted for inflation in $500 increments SIMPLE “catch-up” limit is $2,500 in 2009 Adjusted for inflation in $500 increments

Non Discrimination Testing Must not discriminate in favor of highly compensated employees 5% owner of stock or capital Annual compensation over $110,000 (2009) or top paid 20% of employees Other Contributions can be included “Catch-up” Contributions are not counted. At least 70% of non-highly compensated employees must be eligible or the % of non-highly compensated eligible employees is at least 70% of the percentage of eligible highly compensated employees. Other ways to meet non-discrimination testing Employer matches 100% of elective deferrals for not highly compensative employees up to 3% and 50% up to 5% Employer is required to contribute at least 3% of salary for non highly compensated employees regardless of the employee’s participation in 401(k) Cash or Deferred Arrangements (CODA)

Failure of ADP (Actual Deferral Percentage) Test Must distribute some elective deferrals and earnings to highly compensated employees within certain period and report on 1099-R Cash or Deferred Arrangements (CODA) Holding period for 401k contributions  In 1996 the Labor Dept. shortened the maximum holding period for 401(k) contributions from 90 days to the 15 th business day of the month following the month during which the amount would have been paid to the employee.  Employers who cannot meet the deadline can have an extra 10 business days, but must provide reasons for the delay.

 Early Distribution Penalty If employee receives a distribution before retirement (with exceptions) there is a 10% excise tax on the taxable portion of the distribution.  Veterans can make deferrals for years spent in military service Extra deferrals can be made for up to three times the period of military service (not to exceed 5 years) Separate reporting requirements Not included in non-discrimination tests Cash or Deferred Arrangements (CODA)

Roth 401(k)  Starting in 2006 employers may permit employees to designate some or all of the contributions as Roth 401(k) The contributions are made with after-tax dollars. The earnings from the eventual distribution will be tax exempt. All 401(k) contributions (both pre-tax and Roth) are taken into account for limits and anti-discrimination testing.  Reporting of Roth 401(k) on W-2 The amount contributed in boxes 1, 3 & 5. The amount contributed in box 12 with “AA”

Tax Shelter Annuities (403 (b)  Who can offer Public Schools, Tax Exempt Charitable, Religious, and Educational Organizations  Automatic salary reductions Can qualify as elective deferrals Newly hired employee, who does not make an election can have automatic 4% deductions toward purchase of annuity. o At hire employee must receive notice of auto election and right to elect to change the amount or opt out altogether. o Every year employee notified of reduction percentage and their right to change it, including procedure and timing for doing so.

 Requirements Annuity contract may not be purchased through a qualified annuity plan under Section 403(a) Employee’s rights must be non-forfeitable unless employee fails to pay premiums Plan (other than church plan) must meet non-discrimination requirements. Plan must offer all employees the chance to defer at least $200 annually if one employee is given the opportunity. The elective deferral limits must be met if plan provides for salary reduction agreement. Tax Shelter Annuities (403 (b)

 Requirements and Taxability Has many of the same requirements as 401(k) Employer contributions (e.g. match) are not included in wages or subject to withholding Employee contributions are not Taxable for Federal Income Tax and most state income taxes. Employee contributions are Taxable for employment taxes  Reporting on W-2 Contributions not in box 1 but in boxes 3 & 5. Contributions also show in box 12 with an “E” Box 13 Retirement plan is checked if there are any contributions for the tax year

Tax Shelter Annuities (403 (b)  Amount of catch-up limited to the lesser of $3,000 additional contribution in any year (same as catch-up for those at least 50 years old) $15,000 reduced by any amounts contributed under this special provision in previous years. $5,000 x years of service less total elective deferrals from previous years. If eligible for both special and over 50 catch-up cannot go over $5,500 – first dollars considered under special rule.  Catch-up special rule For employees with as least 15 years of service with employer.

IRC 457  Who can Offer State and local government employers and tax-exempt organizations (other than churches)  Eligibility Only individuals performing services for the employer are eligible (including independent contractors)  Nondiscrimination Testing 457 plans can be discriminatory.  Deferral Limits Same as 401(k)

 Catch-up Contributions – new in 2002 Same as 401(k)  Special rule near retirement For last 3 years before normal retirement, maximum deferral is lesser of twice the normal deferral or the current year limit plus the limits from previous years, reduced by participant’s deferrals for those years.  Cannot use both Catch-up and Special Rule IRC 457

Rules Funds and earnings in tax-exempt trust for exclusive benefit of employees and beneficiaries Funds must be transferred within 15 business days after the month when would have been paid to employees. Deferrals and earnings remain assets of the employer subject to employer’s general creditors Tax Treatment Not subject to federal income tax withholding Subject to Social Security, Medicare, and FUTA as soon as there is no substantial risk of forfeiture of right to the benefit Reporting Not in Box 1 of W-2, in Box 3 and 5 & in Boxes 4 and 6 Box 12 preceded by Code “G.” Employer should not mark check box in Box 13 “Retirement plan” based on 457 deferrals IRC 457

Distributions Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 No distributions before employee reaches age 70-1/2 separation from employment (retirement) or the employee faces an unforeseeable emergency. Plan may allow early distribution if total amount payable is no more than $5,000 and no amount has been deferred within 2 years of the distribution.  Distributions are considered pension Entity distributing has responsibility for withholding and remitting income taxes IRC 457

Employer sponsored IRA must be in writing and created for exclusive benefit of employees and beneficiaries. Contribution Limits $5,000 Adjusted for inflation to next multiple of $500 Catch-up Provision Participant must be at least 50 by the end of the year. Additional $1,000 in years 2009 and beyond. Individual Retirement Account (IRA)

Tax Treatment Contributions are deductible Reduced if employee or spouse is an active participant in a qualified retirement plan Amount of reduction is based on adjusted gross income. For 2009 the reduction: married employees filing a joint return at $89,000 single $55,000 married filing separately $00. Employee not active participant (but spouse is) reduction starts at $166,000 for 2009 (married filing joint return)  Taxability for deduction totally eliminated at $10,000 over the above limits ($20,000 for joint filers beginning in 2007). Individual Retirement Account (IRA)

Contributions Established by Taxpayer Relief Act of 1997 Contributions are Taxable no phase-outs because of active plan participant status, but amount allowed is reduced by contributions by the individual to other IRAs for that year For 2009 phased out once individual’s adjusted gross income exceeds $166,000 for joint filers $105,000 for single filers in 2008 Contributions are completely phased out at $176,000 for joint filers $120,000 for single filers. Roth Individual Retirement Account (IRA)

Employers can allow direct deposit of contributions No contribution allowed by employer Participation Voluntary No endorsement by employer allowed IRA sponsors publicize direct to employees Contributions are remitted to IRA sponsor Employer does not receive any kind or consideration. Distributions Distributions are not included in gross income If made no sooner than 5 years after first contribution and Made on or after age 59-1/2, death, disability, or used for a first time home purchase. Roth Individual Retirement Account (IRA)

 Defined Contribution Plan  Stock bonus plan or combined stock bonus and money plan designed to invest primarily in the employer’s stock.  Same general requirements as IRC 401(a Tax Treatment Employer contributions are not wages and not subject to federal income tax withholding, Social Security, Medicare, or FUTA Limit lesser of $49,000 or 100% of compensation. Employee Stock Ownership (ESOP)

 Employer plan to defer compensation to a later date which may or may not coincide with retirement. Plan does not meet requirements of 401(a) No limits Can be discriminatory Tax Treatment The majority of these plans are unfunded employee has only employer’s promise funds are not protected from employer’s creditors or successors. When unfunded: amounts are not subject to federal income tax are subject to Social Security, Medicare, and FUTA. When distributions are made later, deferrals & subsequent interest are Subject to federal income tax, not subject to Social Security, Medicare, or FUTA Non Qualified Deferred Comp Plan

Requirements Written plan Employee has a legally binding right to compensation that has not been actually or constructively received and that is payable in a later year. Reporting Requirements  Amounts deferred into unfunded plan are reported in Box 3 and 5  Such deferrals are reported in Box 11, if for prior years services  Amounts distributed are reported in Box 1 only  The amounts should be reported in Box 11, if there were no deferrals in the year of distribution. Non Qualified Deferred Comp Plan

Guarantees employees (in workplaces with 50 or more employees) unpaid leave in a 12-month period for specific reasons. Employer decides what constitutes a 12-month period. If employer fails to make decision clear, the 12-month period applied is the one most favorable to the employee. 12 weeks in a 12 month period To be with a newborn or newly adopted child To take care of a seriously ill child, spouse, or parent. To care for themselves if they are seriously ill. Any qualifying exigency (i.e. need) arising out of the fact that the employee’s spouse, son, daughter, or parent is a covered military member on active duty or has been notified of an impending call to active duty in support of a contingency operations. Family & medical Leave Act (FMLA)

26 weeks in a “single12 month period” To care for military service member with serious injury or illness suffered in the line of duty if the employee is the employee is spouse, son, daughter, parent, or next of kin of covered service member. If employee does not take full 26 weeks remainder is forfeited. No more than 26 weeks can be taken even if there is another reason during the 12 month period beginning on the first day the employee takes leave. This is a need to know… Family & medical Leave Act (FMLA)

 Has been employed by employer for at least 12 months (not necessarily consecutively)  And has worked at least 1,250 hours within the previous 12-month period. Exempt employees who have been employed one year are deemed to meet the hours worked requirement unless employer can prove otherwise (A part time exempt employee scheduled to work less than 24 hours per week). Family & medical Leave Act (FMLA) Employers can require eligible employees to use any paid leave as part of guaranteed leave. Employer must designate time off as paid or unpaid FMLA within 2 business days of receiving notice. Employee must give employer 30 days notice If not foreseeable – whatever notice is possible under the circumstances. If foreseeable and not notified, employer can deny leave request for up to 30 days after notice is provided.

Employer must advise eligibility within 5 days of notice or when employer becomes aware that employee may qualify for FMLA If employee is not eligible the employer must give at least one reason for the denial Employer must provide separate notice as the same time of FMLA rights including How 12 month period was determined Certification Requirements Requirement to take paid leave Premium payment requirements for health benefits Job Restoration rights including effect of “key employee” designation Potential liability for health insurance premiums if employee does not return to work Family & medical Leave Act (FMLA)

Upon return employee is entitled to previous job or “equivalent” with no loss of pay or benefits. Employee is not entitled to accrue any benefits or seniority during an unpaid FMLA leave Any benefit increases or improvements not dependent on seniority must be made effective upon return FMLA time must be treated as continuous service under pension and retirement plans for vesting and qualification purposes.  Several Days  Working reduced hours If reduced hours, employer can deduct from exempt employee’s salary without converting employee to non-exempt under FLSA Family & medical Leave Act (FMLA)

 Coverage Loophole The law requires employers to allow leave if there are 50 employees employed by the employer within 75 miles of the employee’s worksite when leave is requested.  Recordkeeping requirements Basic payroll records regarding hours worked, rate of pay, deductions, details of dates and amounts of FMLA leave taken; copies of notices and documents related to FMLA leave. Family & medical Leave Act (FMLA)

FMLA guarantees continuation of employee’s health benefits while on leave. Employer can require employee’s premiums Can be paid before, during or upon return Pre-paid cannot be only option Catch-up can be sole option only if it is the only option offered to employees on unpaid non-FMLA leave. If during leave, payments are missed, the employee can be dropped after 30 days. Notice must be provided to employee and 15 days allowed before coverage is dropped. Family & medical Leave Act (FMLA) Employees must be allowed to: Continue coverage including health FSA while on FMLA leave Revoke coverage or to continue coverage but discontinue paying premiums during the leave. Reinstate health FSA coverage upon returning to work from unpaid FMLA leave Employer can require reinstatement if required of employees on unpaid non-FMLA leave.

Qualifying event is deemed to occur on the last day of FMLA leave if employee terminates employment at the end of FMLA leave. Maximum continuation coverage period is measured from that date or the date coverage is lost whichever is later. Family & medical Leave Act (FMLA)

Employer may deny reinstatement to “key employees” if necessary to prevent “substantial and grievous” economic injury to the employer’s operations. Key Employee Salaried person among the highest 10% of all employees within 75 miles of the employee’s worksite. Employee must be informed of possibility upon request and must be notified in writing (in person or certified mail) as soon as the determination is made within 5 days of request for leave. Family & medical Leave Act (FMLA)

Specific type of flexible benefit plan authorized by Section 125 of the Internal Revenue Code Must contain at least: one Taxable (cash) and one Non-Taxable (qualified) benefit. Participation must be restricted to employees and must be maintained for their benefit. Examples of Qualified Benefits Accident and health insurance plans Dependent care assistance Group-term life insurance Qualified adoption assistance Cafeteria Plans– Section 125

Funding Flex Dollars or Flex Credits Salary Reduction Prohibition – Deferred Compensation Carry over unused contributions or benefits from one plan year to another. Use contributions from one plan year to purchase benefits employer will provide in later plan year. Written Permanent Plan Description of benefits and period of coverage Plan’s rules for eligibility Procedures for elections Manner in which contributions are made Maximum amount of employer contributions available to any participant Definition of plan year Cafeteria Plans– Section 125

Change in status that allows employee to revoke or change an election during plan year Marital status Change in number of dependents Employment status change – employee or spouse Change in dependent status Residence change – employee, spouse or dependent Adoption Cafeteria Plans– Section 125 Cost-driven change that allows change in election during plan year Cost of qualified benefits increases or decreases New benefit option Dependent Care - cost change imposed by non-relative care provider Spouse change – different enrollment period or change in cost of benefits available to spouse

Cafeteria plan may permit an employee to change or revoke election deferrals to 401(k) plans or employee contributions governed by 401(m). The election revocation restrictions of Section 125 to not apply to these plans. Cafeteria Plans– Section 125 Non-discrimination Testing Plan must not discriminate in terms of eligibility, contributions, or benefits in favor of highly compensated individuals, participants, or key employees. Eligibility Eligibility must not exceed 3 years Length of service requirement must be the same for all employees Contributions and benefits test Each participant must have an equal opportunity to select non- taxable benefits Highly compensated participants must not disproportionately select non-taxable benefits.

Employer contributions or pre-tax contributions are not subject to federal withholding or employment taxes to the extent that they are used to purchase non-taxable benefits. After-tax contributions toward benefits are fully taxable – the benefits purchased are excluded from employee’s income. Cash – if employee chooses cash, it is fully taxable. Cafeteria Plans– Section 125 Discriminatory plans No negative tax consequences to non-key employees Key employees have taxable income equal to the highest amount of taxable benefits they could have selected.

Can be offered as part of a cafeteria plan Coverage requirements Specified expenses incurred by employees subject to maximums and other reasonable conditions. Maximum reimbursement amounts cannot be more than five times the total premium for employee’s coverage (life, health, dental, vision). Flexible Spending Arrangements (FSA)

Elections must be made before year begins Cannot allow compensation to be deferred beyond the plan year or used for another benefit. Excess premiums in health FSA that exceed all reimbursements of claims and administrative costs can be used to reduce employees’ required premiums as a dividend or premium refund. Must be allocated on uniform basis. Starting in 2006 employers can allow a 2-1/2 month grace period for employees to spend money in their FSA – this will affect employees ability to elect HSA Health Care FSA

Maximum amount of reimbursement selected by participant must be available at all times during the plan year. Amount available is reduced by reimbursement claims The premium payment schedule cannot be accelerated because of claims or employee separation from employment. Health Care FSA Reimbursements Medical FSAs can only reimburse medical expenses incurred during coverage period – cannot reimburse premiums Medical expenses must be substantiated by third party and a statement from employee that the expense is not reimbursable under any other coverage is required. Reimbursements can only be made for expenses actually incurred during period of coverage – when medical care if provided.

Not subject to uniform coverage rule reimbursements are only the amount already deducted. Employees can be reimbursed up to $5,000 of dependent care expenses. Employees must reduce any dependent care tax credit they receive dollar for dollar by any amounts contributed to Dependent FSA  Amount deducted for Dependent FSA goes in Box 10 on the W-2 Dependent Care FSA

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