2½ Month Rule
The IRS 2½ Month Rule gives the Flex Plan Sponsor the option to design the Flex Plan to allow participants a “grace period” of up to 2½ months after the end of the plan year. During the claims grace period, participants can incur expenses that can be reimbursed out of their prior year Flex account(s). This rule modifies but does not eliminate, the “Use-It-Or-Lose-It” rule that requires participants to “spend down” the money in their Flex Accounts by the end of the plan year.
The “Carryover” is an option that Employer’s can choose to add to their Medical Flex Spending Account (Med-FSA). This option allows up to $500 of the Med-FSA balance remaining AFTER the claims runoff per ends to “Carryover” to the next plan year. If the Employer offers the Carryover and you are an active employee and remain eligible to participate in the Flex Plan, up to $500 of your Med-FSA balance from the prior plan year will “Carryover” and be added to the top of whatever you have elected for the Med-FSA in the new plan year after the usual claims runoff to allow for any last minute claims. The “Carryover” is a maximum of $500; it does not accumulate. So, if you had $500 that was carried forward from 2020 to 2021 and your 2021 election was $500, you have $1000 for 2021. At the end of 2021, up to $500 can rollover to 2022. The Employer can choose either the 2½ Month Rule OR the Carryover for the Med-FSA (all or none) but the Employer can choose to offer the Carryover for the Med-FSA and then offer the 2½ Month Rule For the Dependent “Day Care” Benefit.
COBRA and Flex and HRA
The Med-FSA benefit option of the Flex Plan and the HRA are subject to COBRA, much like a group insurance plan. If at the time of a Qualifying Event, the available Med-FSA benefits exceed the cost of the COBRA premiums, then you must offer the individual COBRA to extend their Med-FSA for the rest of the year.
Day Care Reporting
While Flex Plan contributions are not usually identified or reported on the annual W-2, you will need to report the amount of the DCAP contributions on your W-2 forms each year.
The IRS does not recognize Domestic Partners as eligible dependents unless the individual otherwise qualifies as a dependent for Federal Income Tax purposes.
Elections Fixed For Year
The IRS requires that participation and benefit elections be enforced for the entire year unless the employee has a “Change In Status”. “Change In Status” events are situations such as marriage, divorce, death, birth, adoption and employment changes. The election change must directly relate to the event and there is a limited amount of time, usually within 30 days of the event, for the employee to request a change in their elections.
While virtually all employers can offer a Flex, Commuter or HRA Plan, only true common-law, “W-2” employees of the employer can participate in these benefit plans. Accordingly, Sole Proprietors, Partners and more-than-2% owners of an S Corporation would not be able to participate.
Family and Medical Leave Act
If your company is subject to FMLA, the HRA and Med-FSA benefits are also subject. You will need to offer the participants the same payment options you offer employees for their health insurance during an FMLA leave.
If your insurance company changes the premium costs, contributions to the plan can be changed. If the premiums increase, employees may change to another, less expensive plan if one is offered. No more than $50,000 of group term life insurance can be provided or paid pre-tax. It is generally recommended that disability premiums be paid on an after-tax basis because if the disability premiums are paid pre-tax, then any benefits may be taxable.
Medical Child Support
Your HRA, Med-FSA and Group Insurance Premium benefits are subject to qualified medical child support orders. For example, if an employee is required to maintain health insurance for their non-custodial child, they can pay those premiums pre-tax in your Flex Plan.
The Flex Plan cannot discriminate in favor of highly compensated or “key” employees and officers.
Flex Plan benefits are exempt from Federal taxes including FICA (Social Security and Medicare), FUTA and Federal Income Taxes and, in most States, State Taxes as well. In some States, such as California, Flex benefits are not included in the computation of Workers’ Compensation premiums. Other State taxes, local taxes and benefit programs may vary by location. Employees may find that their reduced taxable income may somewhat reduce their Social Security and similar benefits.
The Med-FSA benefit option acts somewhat like an insurance policy because the participant has access to their annual election amount without regard to their contributions. This also means that an employee could terminate before they funded their benefits. Employers usually find that the Flex Plan tax savings outweighs this consideration.
Uniformed Service (USERRA)
If an employee takes a leave of absence for “uniformed service,” they are entitled to continue their benefits (including the HRA, Med-FSA, Pre-Tax Premiums and DCAP) during their leave and to make a change in their elections upon their return.
If a participant does not use the funds they contributed during the year, any balance left after the plan year-ends and the claims filing deadlines have passed will be forfeited. The forfeitures revert back to the employer to be used to offset the costs of offering the plan.