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Section 125 Flexible Benefit Plans. Linda Meyerhoffer, CPA Benefit Solutions, Inc. linda@yourflex.com 804-379-0909. Flexible Benefit Plan.

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section 125 flexible benefit plans

Section 125 Flexible Benefit Plans

Linda Meyerhoffer, CPA

Benefit Solutions, Inc.

linda@yourflex.com

804-379-0909

flexible benefit plan
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
What’s Are The Advantages?
  • To Employees:
  • Reduction of Federal, State & FICA Taxes
  • Opportunity to choose benefits they really want
what are the advantages
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
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
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
What To Offer?
  • POP Plan - Premium Only
  • Typical Flexible Benefit Plan
  • Full Flexible Benefit Plan with Benefit Credits
medical reimbursement account
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

How Does Medical Reimbursement Work?
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

What Medical Expenses Can be Reimbursed?
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

How Does Dependent Care Reimbursement Work?
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
use it or loose it rule13
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

Use-It or Loose-It Rule
disadvantages
To the Employee:

Could reduce future Social Security Benefits

Does not reduce earned income for computation of the EIC

Disadvantages
disadvantages15
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

Disadvantages
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
setting up a plan17
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
setting up a plan18
Plan Document Must Describe Eligibility

Class of Employee or # of Hours

Service Requirements

Plan Entry Date

Setting Up A Plan
setting up a plan19
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

Setting Up A Plan
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

Who Can Not Participate?
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
discrimination testing22
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
discrimination testing23
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,

Discrimination Testing
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

IRS Form 5500
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

Keys To A Successful Plan
benefits of using outside administrators
Limits administrative hassle – HIPAA

More privacy - encourages participation

Avoids lawsuits

Benefits of Using Outside Administrators