Flexible Spending Accounts a Hassle Or an Opportunity

Flexible Spending Accounts -A Hassle or an Opportunity?

By Greg Grimaldi, CPA, RHU Conner Strong & Buckelew

Among the monumental changes that Chapter 78, P.L. 2011 brings to public school districts, is the requirement to offer a Flexible Spending Account (FSA) for unreimbursed medical or dental expenses, and the option to offer an FSA for dependent care expenses.

Let’s back up for a moment. School business officials hear the following terms during the course of any “pre-tax contribution” discussion: Cafeteria Plan, Section 125 Plan, Premium Only Plan, POP, Premium Conversion Plan, Flexible Spending Account, FSA, Opt-Out Plan, Cash-Back Plan, Dependent Care Account, and Unreimbursed Medical Account. These terms are not interchangeable; so let’s clear up the “big picture” before proceeding any further.

Section 125 – Cafeteria Plan

When an employee has the option to select “cash” or a “non-taxable benefit”, the employer needs to establish a Section 125 Cafeteria Plan to provide a safe harbor from “constructive receipt”. Section 125 of the Internal Revenue Code governs the following three programs:

Premium Only Plan (POP) Opt-Out Plan Flexible Spending Account or or (FSA) Premium Conversion Plan Cash-Back Plan

Premium Only Plan (POP) or Premium Conversion Plan Most, if not all school districts, have implemented this plan because employees are contributing toward healthcare premiums. Employees have the option to pay premiums for certain non- taxable benefits, such as medical, dental, prescription, vision, disability, and life insurance (up to $50,000), with pre-tax dollars, thereby increasing their net pay. Why does this plan become subject to Section 125? From the IRS perspective, each employee has the option to take “cash” by NOT pre-taxing his or her contribution, or electing the “non- taxable benefit” which is the pre-taxable premium option.

Opt-Out Plan or Cash-Back Plan

Many school districts have deployed this arrangement, offering an employee the option to take “cash” in lieu of enrolling in one or more health benefit coverage options.

The fact that this plan is subject to Section 125 is clear. Each employee has the option of taking “cash” or enrolling in a specified “non-taxable benefit,” typically medical, dental, and prescription plans.

Flexible Spending Account (FSA)

There are two types of Flexible Spending Accounts: 1. Unreimbursed Medical Expenditures – REQUIRED BY P.L. 78 2. Dependent Care Expenses – NOT REQUIRED BY. PL. 78

The most common “Unreimbursed Medical Expenditures” are employee out-of-pocket costs for copayments, deductibles, dental expenses, vision care expenses, and a host of other eligible expenses that are not covered by your benefits plan.

“Dependent Care Expenses” are qualified expenses for childcare, such as a day-care facility or adult care for those in need.

Hassle

The fact that you feel compelled to read this article could qualify as a hassle. The legislation requires that you add one more to-do item to your long list of tasks. Let’s get past the hassle part first, and then we can outline the opportunities.

This is the time to lean on your broker or consultant to recommend a preferred vendor that can perform all of the tasks and duties associated with administering an FSA plan. There are many vendors to choose from, with a reasonable amount of pricing variation. The good news is that you will not be in the FSA administration business; that is the vendor’s job. . It is a highly transactional business that requires a competent administrator to facilitate the details.

If you offer voluntary benefits to your employees, your voluntary benefits provider may have access to FSA vendors and preferred pricing (or even at no cost), in exchange for a new voluntary open enrollment, whereby the voluntary benefits provider meets with each employee.

Once you select an FSA provider, you will have some decisions to make:

 Select the effective date of the program.  Should we manage the program on a calendar year basis or a fiscal year basis?  How will we communicate the FSA plan to district employees?  Should the district offer a medical FSA grace period? (This provides an extension to the normal period of time for employees to incur and submit claims. It helps employees with the “use it or lose it” rule.)  Select the medical FSA annual contribution limit.  Should we implement a probationary period that is unique to the FSA, or set the same parameters as the health benefits plan?  Should we 0ffer a Dependent Care FSA?  Who will pay the monthly participant cost, the school district or the employees?

Your benefits professional will review the Cafeteria Plan Document with you to ensure that the program is setup properly, inclusive of the variable items that you need to select, such as those listed above. This document will formalize the plan, and once adopted by your board of education, will protect your employees from constructive receipt.

Under the constructive receipt doctrine, offering an employee a choice between cash and a “non- taxable employee benefit” requires that the amount of cash that could have been received be included in gross income.

Therefore, without a formalized Cafeteria Plan:

Premium Only Plan (POP) Opt-Out Plan Flexible Spending Account or or (FSA) Premium Conversion Plan Cash-Back Plan

The entire “eligible employee population” Premium All unreimbursed medical will be taxed on the Contributions can only expenses and dependent amount of the available be made with AFTER care expenses must be cash-back dollars, even TAX dollars. paid for with AFTER TAX those who do not elect dollars. the cash-back dollars! Opportunity

Now that we have gone beyond the hassle part of the legislation, you should consider how to best use cafeteria plans for collective bargaining purposes. Here are some thoughts:

1. Don’t offer a Dependent Care FSA without collective bargaining. It is not required by P.L. 78 and is likely a valuable benefit for a good number of your employees. Employees can place up to $5,000 in a Dependent Care FSA, generally saving 20% to more than 30% in taxation, depending upon their federal tax bracket. That is like receiving a $1,000 to $1,500 (or more) discount from the day care facility or other eligible provider.

2. P.L. 78 requires that a Medical FSA be offered to your employees, but does not address the maximum contribution amount the employee can fund. Therefore, you may want to consider a low cap amount, such as $1,000. Then with future collective bargaining, make the cap amount part of your negotiations. Note that federal healthcare legislation caps the Medical FSA at $2,500 beginning on 1/1/2013. Currently, the employer can set the cap at any amount they desire.

3. Employers can fund a Medical FSA too! As a giveback in your collective bargaining negotiations, you could agree to fund each account with a specified annual contribution. The advantage for you is that you control the amount of the contribution. Unlike benefit premiums, it is not subject to an uncontrollable increase. Also, any unused funds revert back to the employer to offset some of the administrative costs of managing the FSA program.

4. FSA plans contain a monthly fee for each enrollee, typically in the four to six dollar range. P.L. 78 does not stipulate that the employer pay the monthly fees. Consider charging the monthly fees to the participants, and then make the issue part of your next collective bargaining discussions.

An understanding of the big picture combined with careful planning and attention to detail, will help business administrators turn a hassle for public school districts into an opportunity to balance the benefits provided to employees with your fiscal responsibilities.

Greg Grimaldi, CPA, RHU is Vice President, New Business Development for Conner Strong & Buckelew. He can be reached at 856-552-4634 or [email protected].