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==> RED ALERT good NEWS 05/18/05 - The Bush administration is relaxing the "use-it-or-lose-it" rule! Per Notice 2005-42, issued 05/17/05, Treasury & IRS have eased the rule so that employees can use FSA balances that remain at the end of a plan to pay for health care and dependent care expenses incurred during the first 2 months of the following plan year. The new grace period goes into effect immediately. Employers wanting to adopt the grace period will have until the end of the current plan year to amend their plan documents. Treasury Secretary John Snow said the change in policy "will ease the spending rush prompted" by the use-it-or-lose-it rule. This extended "grace period" for participants to use up their health FSA or DCAP balances will reduce forfeitures, but might cause administrative and compliance issues for employers and administrators. Ordinarily, the spending of unused amounts after the plan year would result in deferred compensation to the employee, in violation of the tax code. However other areas of tax law provide that for a short, limited period, compensation for services paid in the year following the year in which those services were performed is not treated as deferred compensation. Unused FSA amounts should be treated consistent with these other areas of the law. The grace period must apply to all plan participants. Expenses for qualified benefits incurred during the grace period may be paid or reimbursed from benefits or contributions remaining unused at the end of the immediately preceding plan year only. The period must not extend beyond the 15th day of the third calendar month after the end of the immediately preceding plan year to which it relates. The plan cannot permit cash-out or conversion of unused benefits or contributions, during the graced period, to any other taxable or nontaxable benefit.   For Example: Assume a 2005 calendar year plan document is amended to include the grace period (extending to 3/15/06), unused FSA funds from the 2005 plan year where they incur qualifying expenses during the grace period may be reimbursed for those expenses from unused 2005 funds.  -- Participants can be given up to 14 months, 15 days to use the benefits or contributions for a plan year before unused amounts are forfeited. If a grace period is adopted, systems will have to be set up to ensure that expenses incurred during the grace period are reimbursed first from the preceding year's account balance (if any). The grace period extends the when expenses may be incurred; it is different from a claims run-out period, which extends the time for submitting expenses. Employers that adopt a grace period need to extend the claims run-out period under their plans to coordinate with the grace period.   No Cash-Out, Conversion, or Carryforward: Unused amounts cannot be cashed out or converted to other benefits during the grace period, i.e., a participant's unused DCAP amounts cannot be used to pay or reimburse health care expenses incurred during the grace period (only unused health FSA amounts can be used to reimburse those expenses). If the unused amounts are not used to pay or reimburse expenses incurred during the grace period, they cannot be carried forward for use in future plan years but must be forfeited.  Plans that are amended to provide a grace period will administrative and recordkeeping challenges & potential COBRA, ERISA, and other compliance issues.

NEWS 04/22/05 - As reported in CFO Magazine Some good news this week on the benefits front. According to Mercer Human Resource Consulting, the average cost of health-care coverage rose just 7.5 percent in 2004. That's a big slowdown from the 10.1 percent jump in 2003, and the smallest increase in five years. The survey found that companies spent, on average, $6,679 per employee on health-care coverage, up from $6,215 in 2003.

NEWS 04/23/05 - IRS Addresses How Medical Expense Exception to 10% Early Distribution Penalty Applies [IRS Information Letter 2005-0009 (Apr. 23, 2004)  http://www.irs.ustreas.gov/pub/irs-wd/05-0009.pdf ]  = "To discourage the use of retirement plan funds...for purposes other than retirement," an additional 10% early distribution penalty is imposed on distributions from qualified plans, including 401(k) plans, that are made before the participant has reached age 59-1/2, unless an exception applies. One of those exceptions is for distributions used for certain medical expenses. The IRS says the medical expense exception applies only if the medical expenses would have been deductible medical expenses on the participant's federal income tax return (i.e., deductible on Schedule A, Form 1040). To qualify for the medical expense exception, the medical expenses must (1) be unreimbursed medical expenses during the year of the distribution; (2) be deductible medical expenses under Code Section 213; and (3) exceed 7.5% of the participant's federal adjusted gross income for the year of the distribution. The exception applies even if medical expenses are not actually itemized on the participant's federal income tax return.

ROTH 401(k) news: 401(k), Roth IRA & now a new Roth 401(k); it is a new provision in the Economic Growth and Tax Relief Reconciliation Act of 2001 taking effect Jan. 1, 2006 - section 402a of EGTRRA allows employers to add Roth contributions to 401(k) or 403(b) plans that are funded with employee after-tax dollars. Employees may withdraw contributions and earnings tax-free with a qualified distribution & avoid taxes on withdrawals (during retirement). Employees can choose both a regular 401(k) and a Roth 401(k). These additional options may be more complex and cost the employer a little more but are well worth the small additional expense. Roth IRA income limits may exclude highly compensated people but Roth 401(k)s do not! ($15,000 maximum)  -  Roth 401(k) accounts may enhance employers recruiting and retention efforts. Employers should have a 401(k) AND a Roth 401(k) and match both! Since matching contributions are not after-tax contributions, they must be deposited in a separate account from the employee's Roth 401(k) account & it may or may not be the same account used for the employer's 401(k) matching contributions.          Roth 401(k)s must be accounted for separately from existing 401(k) money & a 401(k) plan must take these Roth contributions into account for the ADP testing on deferrals. Roth contribution accounts must be held in trust by a financial institution or IRS-approved custodian while ERISA 401(k)s to use non-institutional trustees. Roth 401(k)s are also subject to the "sunset provision on Dec. 31, 2010. For a qualified distribution, the contributions and earnings are withdrawn tax-free but they must satisfy a five-year holding period however, in plan rollovers, time in the prior employer's plan is taken into account but one of three other factors must apply: the employee turns 59 , becomes disabled or dies & the cash is transferred to their beneficiary or estate. Contribution limits are $15,000 [age 50 & up are allowed a $5,000 catch-up contribution].       Employees can have a 401(k), a Roth 401(k) or both - but the accounts must be kept separate, & have a combined total of $15,000, not $15,000 in each. Similar hardship & loan rules apply to both. Workers can make Roth salary deferrals at any age. When an employee terminates with a Roth 401(k), they can roll it over into another Roth account, either an IRA or a 401(k), provided the plan permits rollovers or leave it with the former employer.

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