Cafeteria Plan

[Gretel]

Couldn't find any info on this.

1. Employee pays to much into plan = taxable income to employer

2. Employee gets reimbursed too much for medical expenses because he quit to early in the year.

What happens now? Is the overpayment included in box 1,3 and 5 of the W-2?

[Koss]

Couldn't find any info on this.

1. Employee pays to much into plan = taxable income to employer

2. Employee gets reimbursed too much for medical expenses because he quit to early in the year.

What happens now? Is the overpayment included in box 1,3 and 5 of the W-2?

You lost me on #1. I'm not sure how any competent plan administrator would allow that to happen.

For #2... what kind of medical expense reimbursement was it? Are we talking about a traditional health-care spending account, that works just like dependent care, with payroll deductions, where the employee loses the money, and the employer keeps it, if he doesn't use it up by the end of the year? Or is it something else, such as an Archer MSA?

How did the employee get reimbursed "too much?" How did the employer pay out a reimbursement that exceeded what was in the account from payroll deductions?

Burton M. Koss
koss@usakoss.net

[GIMoe]

Over spending on FSA

How did the employee get reimbursed "too much?" How did the employer pay out a reimbursement that exceeded what was in the account from payroll deductions?

Over-spending on your FSA could easily be done. For example, my comapny has a third party administrator to manage the cafeteria plans, at the beginning of year, that company issues the employee a Debit Card with the full annual amount of the FSA loaded on it. An employee can easily use more than the actual amount that has been deducted from their paycheck to that point. If that employee quits before the duductions catch up to cover their spending, then they have over spent.

[Koss]

Overspent FSA

Okay, that makes sense... kind of...

But is the employer expected to eat the excess reimbursement?

If so, I can see where that would become taxable income to the employee.

In a perfect world, the employer could simply take the excess reimbursement out of the employee's final paycheck.

But I'm not saying that's allowed under the regs that govern an FSA. I can see where it would violate the original terms selected by the employee, i.e., how much is contributed per pay period.

BMK

[les grans]

Yup!

"But is the employer expected to eat the excess reimbursement?" was the question.

And "yes" is the answer. It's required; it's part of the plan; it's how Health FSAs work.

[GIMoe]

Taxable Income

Okay, that makes sense... kind of...

But is the employer expected to eat the excess reimbursement?

If so, I can see where that would become taxable income to the employee.

In a perfect world, the employer could simply take the excess reimbursement out of the employee's final paycheck.

But I'm not saying that's allowed under the regs that govern an FSA. I can see where it would violate the original terms selected by the employee, i.e., how much is contributed per pay period.

BMK

My initial reaction would be that it just simply becomes taxable income, much the same way that dependant care benefits does. If an employee receives dependant care benefits but ends up spending less on dependant care than they received, the excess becomes taxable income.

Also, what if the excess amount spent is more than the amount earned in the final paycheck? The only way to recapture that is to show it as taxable income.

Does that make sense, or am I missing something?

[outwest]

Le grans has it right..

A cafeteria plan medical flex account has two notable features from a planning point of view:

1. the "use it or lose it rule"
Depending on the plan document, unused deferrals may be either 1)absorbed in the plan and used against admin expenses of the plan or 2) pooled and allocated equally to plan participants in the following plan year. Either way, there is no effect on the employer because the events happen in the plan not the employer.

2. The "insurance" requirement of the medical flex plan. This means the plan must make the full amount of the election available to the participant on day one. If the participant/employee uses all of the benefits on Jan 2, the plan must pay it. Assuming the participant remains employed for the full year, the plan will be whole at year end, but you must pay expenses as presented. This is why plans have a election cap (often $5000) to limit the exposure. It also explains why the debit card was fully loaded on day one as noted above.



Second consequence of that "insurance" aspect is that if the employee leaves before year end and full amount is deducted, the plan eats it.

[Gretel]

A cafeteria plan medical flex account has two notable features from a planning point of view:

1. the "use it or lose it rule"
Depending on the plan document, unused deferrals may be either 1)absorbed in the plan and used against admin expenses of the plan or 2) pooled and allocated equally to plan participants in the following plan year. Either way, there is no effect on the employer because the events happen in the plan not the employer.

2. The "insurance" requirement of the medical flex plan. This means the plan must make the full amount of the election available to the participant on day one. If the participant/employee uses all of the benefits on Jan 2, the plan must pay it. Assuming the participant remains employed for the full year, the plan will be whole at year end, but you must pay expenses as presented. This is why plans have a election cap (often $5000) to limit the exposure. It also explains why the debit card was fully loaded on day one as noted above.



Second consequence of that "insurance" aspect is that if the employee leaves before year end and full amount is deducted, the plan eats it.

Wow. I thought there might be something special with cafeteria plan for health care costs. When you say: "The plan eats it", do you mean the administrator has to pay out of his pocket and reimburse employer? Or is this a cost to the employer?

I understand that the exact handling of the plan is up to the plan administrator and they should know the answers to all questions, right?

[FEDUKE404]

Agree with outwest

Several years ago I ran into this exact situation - I doubt if the rules have changed but I did research it thoroughly at the time.

There is a difference between a dependent care benefit plan versus a medical flex/cafeteria plan. The DCB can only pay, against a legitimate claim, what is already in the account. The medical flex plan can pay, against a legitimate claim, what is going to be in the account during that entire calendar year.

Examples:

DCB - Employee puts $100/month into DCB, and files a claim of $1200 in month of January. Plan pays $100 in Jan, $100 more in Feb, etc. If employee leaves, payments cease and amount of DCB shown on Form W2 accurately matches $100/month x months employed.

Flex plan - Employee puts $100/month into flex plan, and files a claim of $1200 in month of January. Plan pays full $1200 immediately. If employee leaves work on July 1st, his wages have been decreased by $100/month x months employed. Yes, the employer's health plan "eats" the remaining $600 previously paid before the money arrived from the employee.

I was amazed to see this is how the system apparently works, and even made some jokes about setting up $5k for orthodontics work in January, perhaps having January wages reduced by 1/12th of $5k, and then leaving town in February. Nice severance pay??

One caveat, as I mentioned, is that these specific events were around six years ago but the rules probably have not changed significantly, if at all.

FE

[outwest]

The cash comes from...

even though it is technically the plan that eats the loss, from a practical point of view, the employer will have to fund it to keep the plan solvent.

[FEDUKE404]

Absorbing the losses

even though it is technically the plan that eats the loss, from a practical point of view, the employer will have to fund it to keep the plan solvent.

You are, of course, correct but I would bet "the plan" also has a few people who never use all of the funds put into the plan in the first place. Not unlike all of those cash cards everyone gave at Christmas but that frequently never get used entirely.

It would be the same "business decision" type scenario for the plan provider that would come into play offering regular medical insurance to a group of employees in a company with primarily young employees versus a similar company with the same number of folks in their fifties. The young group would have little medical exposure (maybe Lasik!) whereas the older group would have, ah, lots of older folks problems.

FE