Section 125 Flexible Benefit Plans

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

2. 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

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

4. 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

5. 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

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

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

8. 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

9. 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?

10. 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?

11. 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?

12. 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

13. 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

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

15. 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

16. 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

17. 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

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

19. 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

20. 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?

21. 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

22. 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

23. 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

24. 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

25. 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

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

27. A WIN-WIN SITUATION FOR EVERYONE Flexible Spending Accounts