1. Section 125 Plans Presented by Susan E. Poliquin, APA, CPA Third Party Administrators, Inc.

2. What is a Section 125 Plan? A Section 125 Plan (also referred to as a Cafeteria Plan) is a program that Employers can use to help Employees pay for certain expenses with pre-tax dollars such as: 1. Group insurance premiums; 2. Out-of-pocket medical expenses; and 3. Dependent care expenses

3. Does a Cafeteria Plan Have to consist of all 3 parts? No. A Plan can be a Premium Only Plan (POP); or No. A Plan can be a Premium Only Plan (POP); or A Plan may consist of Premium Only plus Flexible Spending Accounts for medical and/or dependent care A Plan may consist of Premium Only plus Flexible Spending Accounts for medical and/or dependent care

4. What is a Premium Only Plan (POP)? Employees who are paying any portion of their employer-sponsored group insurance (single or family coverage) may do so under the Plan on a before-tax basis. Employees who are paying any portion of their employer-sponsored group insurance (single or family coverage) may do so under the Plan on a before-tax basis. This includes premiums for major medical, dental, vision, LTD, STD, Group Term Life up to $50,000 This includes premiums for major medical, dental, vision, LTD, STD, Group Term Life up to $50,000

5. How does a Section 125 Plan benefit an Employee? Allows them to pay for uninsured and unreimbursed medical expenses and dependent care expenses on a pre-tax basis. Allows them to pay for uninsured and unreimbursed medical expenses and dependent care expenses on a pre-tax basis. Contributions are exempt from Federal, State, FICA taxes resulting in more take home pay. Contributions are exempt from Federal, State, FICA taxes resulting in more take home pay. Most employees would not qualify for a medical tax deduction. Most employees would not qualify for a medical tax deduction. Many employees derive more dependent care benefits from Section 125 plan Many employees derive more dependent care benefits from Section 125 plan than tax credit.

6. How does a Section 125 Plan benefit an Employer? Employer saves matching FICA taxes on every dollar that an employee runs through a Section 125 Plan Employer saves matching FICA taxes on every dollar that an employee runs through a Section 125 Plan Cost Control – an employer can control the company’s share of medical costs without limiting employee choices Cost Control – an employer can control the company’s share of medical costs without limiting employee choices Recruit and Retain Quality Employees Recruit and Retain Quality Employees

7. What benefits can be included in a Section 125 Plan? Accident or health plan coverage including Group Health, HMOs, PPOs, self-insured medical reimbursement plans, health FSAs Accident or health plan coverage including Group Health, HMOs, PPOs, self-insured medical reimbursement plans, health FSAs AD&D coverage AD&D coverage Hospital Indemnity or Cancer Insurance Hospital Indemnity or Cancer Insurance STD STD LTD LTD Group Term Life up to $50,000 Group Term Life up to $50,000 Dependent Care Assistance Program (DCAP) Dependent Care Assistance Program (DCAP) HSA Contributions HSA Contributions

8. How much can be contributed to a Section 125 Plan? Premiums - the amount necessary to cover the premiums. Premiums - the amount necessary to cover the premiums. Health FSAs - there is no statutory limit. The amount is set by the Employer. Rule of thumb is that it should not exceed the annual salary of the lowest paid person. Health FSAs - there is no statutory limit. The amount is set by the Employer. Rule of thumb is that it should not exceed the annual salary of the lowest paid person. Dependent Care - the statutory maximum for most people is $5,000 unless their tax filing status is Married Filing Separately then the Dependent Care - the statutory maximum for most people is $5,000 unless their tax filing status is Married Filing Separately then the maximum is $2,500

9. Will Social Security Benefits be affected? Possibly Because the employee is contributing less into Social Security, it is possible that benefits may be slightly reduced. For most people the current tax savings (usually between 23%-35%) is much greater than any potential reduction in Social Security benefits.

10. Who is Eligible to Participate in a Section 125 Plan? Only Employees may participate Only Employees may participate Sole Proprietors, Partners in a Partnership, LLC Members and more than 2% owners of an Subchapter S Corporation may not participate in a Section 125 Plan nor can their spouses and lineal descendants and ascendants. Sole Proprietors, Partners in a Partnership, LLC Members and more than 2% owners of an Subchapter S Corporation may not participate in a Section 125 Plan nor can their spouses and lineal descendants and ascendants.

11. Who Can Sponsor a Section 125 Plan? Any employer with employees subject to U.S. income taxes can sponsor a cafeteria Plan for its employees, no matter what its size. Any employer with employees subject to U.S. income taxes can sponsor a cafeteria Plan for its employees, no matter what its size. Eligible employers include corporations (subchapter S or subchapter C), partnerships, nonprofit organizations, government entities, LLCs, LLPs and sole proprietorships. Eligible employers include corporations (subchapter S or subchapter C), partnerships, nonprofit organizations, government entities, LLCs, LLPs and sole proprietorships.

12. Non-Discrimination in Section 125 Plans Section 125 Cafeteria Plans can not discriminate in favor of Highly Compensated or Key Employees. Certain tests must be performed annually to ensure that the Plan is not operating in a discriminatory manner. These tests include: ● Eligibility Test ● Contributions and Benefits Test ● 25% Key Man Test ● 55% Average Benefits Test ● More than 5% Owners Concentration Test

13. Does the Plan have to be based upon a Calendar Year? The Plan Year may be any one of the following: Calendar Year to match employee W2s; Calendar Year to match employee W2s; Fiscal Year to match employer tax year; Fiscal Year to match employer tax year; Fiscal Year to match health insurance year. Fiscal Year to match health insurance year.

14. How are Health FSAs Funded? Money is deducted from employee’s pay Money is deducted from employee’s pay Money is deposited into Employer’s general asset account to await reimbursement; or Money is deposited into Employer’s general asset account to await reimbursement; or Money is deposited into trust account set aside for reimbursements Money is deposited into trust account set aside for reimbursements

15. What are eligible medical expenses in a Health FSA? IRS defines medical expenses as "Amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, and for treatments affecting any part or function of the body. The medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness.” Listed below is a list of some qualified medical expenses: Routine Medical CarePrescription Drugs Corrective Vision ExpensesDental and Orthodontia Medical EquipmentCopays & Deductibles X-RaysLab Work Most Over-the Counter Drugs

16. What are Ineligible Medical Expenses in a Health FSA? Insurance Premiums Insurance Premiums Long-term Care Expenses Long-term Care Expenses Personal Hygiene products including toothpaste and toothbrushes Personal Hygiene products including toothpaste and toothbrushes Over-the-Counter Drugs if used for general well being Over-the-Counter Drugs if used for general well being Illegal operations, treatments and drugs Illegal operations, treatments and drugs

17. What Rules Apply to Health FSA Reimbursements? Expenses must be incurred during coverage period. Expenses must be incurred during coverage period. Expenses must be for services provided to a participant, a participant's spouse, or a participant's dependent. Expenses must be for services provided to a participant, a participant's spouse, or a participant's dependent. Expenses must be permitted under the Plan. Expenses must be permitted under the Plan. Expenses must be primarily for a medical purpose. Expenses must be primarily for a medical purpose. Expenses must not be paid for or payable under other insurance. Expenses must not be paid for or payable under other insurance. Expenses would not have been incurred "but for" the medical condition. Expenses would not have been incurred "but for" the medical condition.

18. Elections and Election Changes A participant cannot add, terminate, or change benefits at will during the plan year. A participant cannot add, terminate, or change benefits at will during the plan year. A participant can only change their election during the annual enrollment period or if the participant has a valid change in status. A participant can only change their election during the annual enrollment period or if the participant has a valid change in status. Newly Hired Employees make elections once they complete the service period. Newly Hired Employees make elections once they complete the service period. Terminated employees’ coverages will be terminated unless eligible for COBRA continuation. Terminated employees’ coverages will be terminated unless eligible for COBRA continuation.

19. What is the Uniform Coverage Rule? Applies to Health FSAs Applies to Health FSAs Maximum Amount of reimbursement must be available at all times during the period of coverage – can not be restricted by contributions received from participant. Maximum Amount of reimbursement must be available at all times during the period of coverage – can not be restricted by contributions received from participant. Employer must advance money for reimbursement if contributions to date from participants are not sufficient. Employer must advance money for reimbursement if contributions to date from participants are not sufficient.

20. What is meant by Use-it-or-Lose-it? Cafeteria Plans are prohibited from allowing participants to carry over unused contributions from one year to another, therefore, a participant will “forfeit” the unused amounts he or she has contributed during the plan year. Cafeteria Plans are prohibited from allowing participants to carry over unused contributions from one year to another, therefore, a participant will “forfeit” the unused amounts he or she has contributed during the plan year. A limited exception allows cafeteria plans to provide for a grace period of up to 2 ½ months after the end of a plan year to use up any remaining funds from the prior year. A limited exception allows cafeteria plans to provide for a grace period of up to 2 ½ months after the end of a plan year to use up any remaining funds from the prior year.

21. Proper Planning is Key Participants should set aside contributions for planned expenses only. Participants should set aside contributions for planned expenses only. Not recommended for emergencies or “what ifs”. Not recommended for emergencies or “what ifs”. Follow through with treatment is key (ie dental, Lasik etc.) Follow through with treatment is key (ie dental, Lasik etc.)

22. Dependent Care Claims Must Meet the Definition of Employment-Related Expenses. Expense enables the employee (and the employee’s spouse) to be gainfully employed. Expense enables the employee (and the employee’s spouse) to be gainfully employed. Expenses must be for the care of one or more qualifying individuals. Expenses must be for the care of one or more qualifying individuals. Day care must be for dependent 12 or younger or a disabled spouse or dependent. Day care must be for dependent 12 or younger or a disabled spouse or dependent.

23. How Does a DCAP Work? A dependent care FSA generally works in the same manner as a health care FSA. The major differences between the health care and dependent care FSA are: 1. There are statutory maximums for DCAP; 2. Uniform Coverage Rule does not apply, participants will only get back what they put into the Plan; 3. There is more flexibility to change during the Plan Year

24. Dependent Care Providers Qualified Providers Qualified Providers Day care services Day care services General purpose day camps General purpose day camps Babysitters Babysitters Pre-school Pre-school Non-Qualified Providers Non-Qualified Providers Overnight camps Overnight camps Cannot pay your spouse or any other dependent of yours Cannot pay your spouse or any other dependent of yours Cannot pay a child under 19, even if he/she is not your dependent Cannot pay a child under 19, even if he/she is not your dependent

25. How are Reimbursements From Health FSAs and DCAPs Made? Reimbursements may be made using one or more of the following methods: Check directly to the participant; Check directly to the participant; Debit Card Debit Card Credit Card Credit Card Direct pay to the provider of services Direct pay to the provider of services **Claim forms and receipts may be required to substantiate some or all of the expenses.**

26. How is a Section 125 Plan Established? Plan Documents must be adopted Plan Documents must be adopted Enrollment meetings are conducted Enrollment meetings are conducted Election Forms are filled out by participants Election Forms are filled out by participants Payroll is notified about the deductions Payroll is notified about the deductions Funding is established Funding is established

27. Thank you for your attention! Feel free to contact me with further questions or comments. spoliquin@tpainc.net or 666-5799 ext. 115 spoliquin@tpainc.net