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Medical Reimbursement Plans

(Note: Whenever you see a water droplet, try a left click.  There are many water droplets (aqua spheres or aqua ovals) that allow you to collapse or enlarge the topic)

This section is fairly complete, but it is to include more helps in the future -

Client Letter - What this idea is about

These plans provide a method for the employee to exclude medical reimbursements from income and for the employer to take a tax write-off for the amount of the benefits paid to the employee.  (Refer also to  Cafeteria Plan Introduction which is an introduction letter to clients explaining the Cafeteria Plan Concept)

Important:  There are two distinct plans presented (or available) as "Medical Reimbursement Plans".

1. A Plan in which the employer pays for (funds) the plan which is a  §105 Plan, OR
2. A Plan in which the employee pays for (funds) the plan which is a §125 Plan

The SECOND plan has become popularly known as a "Cafeteria Plan", "Flex-Plan" or the "Use it or Lose It" plan.

In accordance with the Internal Revenue Code, sole proprietors, partners in a partnership and shareholders of a subchapter "S" corporation cannot participate in a cafeteria plan; however, their employees, if eligible, can participate. There is no minimum employee participation requirement. Based on the dynamics of the employer group, a cafeteria plan can be very beneficial to both employees and employers.

    At this time there is no sample plan or model plan included in this page for the §105 Plan which is funded by the employer.  Therefore watch carefully which plans you choose to learn about the Medical Reimbursement Plans.

Individuals, SOHO, Closely Held Corporations, Professional Corporations, Professional Associations, Tax Exempt, LLC, Partnerships, Limited Partnerships

In accordance with the Internal Revenue Code, sole proprietors, partners in a partnership and shareholders of a subchapter "S" corporation cannot participate in a cafeteria plan; however, their employees, if eligible, can participate. There is no minimum employee participation requirement. Based on the dynamics of the employer group, a cafeteria plan can be very beneficial to both employees and employers.  Cannot Participate means the 2% or more owner must include the cafeteria benefits in his or her income for the year.

Anytime during the year

Special Circumstances

There are special compliance procedures, reports and documentation, along with the computations and qualifications - There are IRS Rules and ERISA Rules.  Non-compliance quite be hazardous to your financial health.

IT IS VERY IMPORTANT TO UNDERSTAND THAT ALL EMPLOYEES MUST BE COVERED.  YOU MAY NOT DISCRIMINATE.  Therefore, you should have Bob Parrish CPA PC prepare a costs-benefits analysis for you before you make a final decision.  IF you want to make the analysis yourself, a form will be added in the future which will assist you with the analyses.

Your company will need to adopt forms for the plan, including the written plan itself.  Some examples (samples will be added to this site in the future):

1. Application for admission
2. Notice of qualifications to participate
3. Notice to newly qualified participant
4. Explanation of the plan
5. Application for reimbursements
6. Notice of Acceptance or Denial of Reimbursement
7. Others ---

For any entity type other than a sole proprietor, then it is mandatory to have the minutes reflect the adoption, the members, partners or directors should approve the actions, etc.

As a "qualified" plan, a discrimination test must be met based on the elections of the participants. A cafeteria plan discriminates as to eligibility to participate if the qualified benefits provided to key employees under the plan exceed 25 percent of the aggregate of such benefits provided for all employees under the plan.

 A cafeteria plan must also meet the following requirements:

Why This Is Important

Obtains tax write-off's for expensive categories where the deductions are usually difficult to attain.

General Benefits 7 Objectives

The two types of plans:

• Employer funded plan §105
• Employee funded plan §125

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Engagement Letter

This entire site is for educational or informational purposes only.   You are not to use the forms, concepts, strategies, or knowledge without assistance from a professional.   The author, the corporation, the ISP, Bob Parrish CPA, Bob Parrish CPA, P.C. or other parties related to those or this site do not guarantee or warrantee in any manner the suitability, usefulness, accuracy, timeliness, or results of any portions of this site, nor the links contained in this site which link to other areas.   At times, information is taken from other sources and is believed to be accurate, but no verification or confirmation is performed.  Furthermore, if any federal or state law invalidates a portion of this disclaimer, the other portions still apply.   In addition, any allegations or actions are restricted to arbitration only and must be arbitrated by the Better Business Bureau in Sarasota Florida.  Reading of these pages constitutes complete acceptance and agreement with all disclaimer provisions on all pages of this site. .......

Monday, March 05, 2007 03:37 AM

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Learning Objectives

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What it does, Why it works - Plain English Analysis

Employer Funded Plan -- Employee Funded Plan

Employee Funded Plan

The two terms "cafeteria plan" and "flexible plan" are sometimes confusing as sometimes the two terms are used interchangible and sometimes to denote a plan in which the employer funds the plan (cafeteria plan) and a plan in which only the empoloyee funds the plan (flexible benefit).  In this section we shall use both to mean the employee funded plan.

These salary reduction arrangements are usually called flexible benefit plans (FBP). They allow employees to purchase certain fringe benefits allowed in the IRC with pretax dollars. FBP are similar in some ways to cafeteria plans since both are concerned with employees buying fringe benefits, with them having choices as to which ones to buy. But cafeteria plans provide for the purchase of fringe benefits paid for by the employer; whereas FBP provide for the purchase of fringe benefits paid for by the employees.

A cafeteria plan is a written plan under which employees may choose among two or more benefits consisting of cash and qualified benefits. Qualified benefits excludable under specified IRC sections include group term life insurance coverage under IRC Sec. 79, medical expense benefits under IRC Sec. 105, accident and health plan coverage under IRC Sec. 106, and dependent care assistance benefits under IRC Sec. 129.

Employers can make contributions to such plans under a salary reduction agreement with the employee. A plan can also include flexible spending accounts (FSAs, also referred to as reimbursement accounts, flexible benefit plans -FBP; and other terms that are less commonly used) that are funded by employee contributions on a pre-tax salary reduction basis to provide coverage for reimbursement of specified expenses for qualified medical care or dependent care assistance costs not otherwise reimbursed.

Under a typical FSA, or FBP, arrangement, a participating employee may seek reimbursement for any medical expenses deductible under IRC Sec. 213 or any dependent care expenses eligible for the IRC Sec. 21 credit. The latter expenses are subject to the IRC Sec. 129 statutory limit of $5,000 (or, if less, the lesser earned income of the employee or his or her spouse).

Although medical care reimbursements are not subject to a statutory limit, the employer may impose a limit. Furthermore, FSAs are subject to a "use it or lose it" rule. Once an employee designates an amount for the FSA at the beginning of the year, any unused amounts in the account at the end of the plan year are forfeited.

The IRC Sec. 125 cafeteria plan rules applicable to such FSAs provide an exception to the constructive receipt doctrine that would otherwise apply to elections that include a taxable option, such as cash. To the extent a participant chooses a nontaxable benefit, such salary reduction contributions are not subject to Federal income tax, FICA (Social Security) tax, or the Federal unemployment tax (FUTA). However, certain nondiscriminatory tests described later must be met to retain this exemption. Additionally, such contributions may also be exempt from state income or state unemployment (SUTA) taxes, depending on state statutes. As a result of these tax exemptions, employers will realize employment tax savings to the extent such taxes apply to the amounts selected by employees for qualifying nontaxable fringe benefits.

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What It does, Why it works - Technical Analysis & Citations

Law (commentary and citation)

Regs (commentary and citation)

Cases (commentary and citation)

§§§ Law §§§

§105 - Employer Funded Plan

§125 - Employee Funded Plan

§§§ Regs §§§

§§§ Cases §§§

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Tax Killers

This is about Activity Based Taxplanning - maximizing deductions, minimizing cash outlay and maximizing the amount of cash retained and the net worth.

Tax is a subject that many view in order to cut costs.  Taxes are a cost just as any other cost.  It happens this cost is somewhat intangible and is defined by legislation without a tangible item to view and control.  The money is spent and the control of the expenditure is more appropriately administered by someone trained in the law.

The Employer Benefits

An employer who must deal with the ever increasing costs for group medical insurance premiums may be faced with the decision to pass these costs onto the employees. By adopting a cafeteria plan, even one with limited types of benefits, the cost to the employees can be reduced by allowing them to pay the expense with pre-tax dollars. The employee elects to reduce his or her compensation by the amount of the premiums and have that amount contributed to the plan by the employers on their behalf The monies contributed reduce the amount of payroll taxes that the employers are required to pay, including the employers share of social security taxes.

Another benefit under a cafeteria plan could be the creation of a Flexible Spending Arrangement (FSA) where employees can elect to pay, for example, for those medical expenses not covered under an insurance contract using pre-tax dollars. Here the employee designates a fixed sum of money to be set aside in a special account to cover uninsured medical expenses. A FSA would require an employee to estimate his or her total medical expenses for the year at the beginning of the year and have this amount deducted from his or her paycheck in equal installments. As medical expenses are incurred during the plan year, the employee would submit the bills to the administrator of the special account and would be reimbursed for this amount up to the fixed sum elected for the year. Any excess funds in the account at the end of the year are retained by the plan and accordingly, lost to the employee. It is, therefore, important to carefully estimate the total potential expense for the year in order to avoid this result. Since this arrangement is easy to implement and has minimal costs associated with it, it is of great benefit to all employers.

The Employee Benefits

Cafeteria plans benefit employees as well, by giving them the ability to elect to pay their share of health insurance premiums and uninsured medical costs on a pre-tax bases. The monies contributed are not subject to federal, state or local income taxes, and the employee's share of social security taxes. The uninsured medical costs can include payments required to be made under a medical insurance plan such as the annual deductible and the co-insurance amount (employees share of expenses partially covered by the policy), as well as qualifying medical costs not covered by many plans such as dental expenses.

An Example

The advantage to an employee can be seen from the following illustration. Assume employee A, who is single, incurred the following medical costs during 1989: 1) annual deductible under the Company's medical plan of $500; 2) employee's share of medical expenses partially covered under the medical plan of $1,600; 3) dental expenses not covered under the medical plan of $800; and 4) other medical expenses not covered under the medical plan of $700 for a total of $3,000. Also assume that employee A's adjusted gross income for 1989 is$100,000 in the absence of a salary reduction agreement. If employee A participated in the plan having elected a salary reduction of $3,000, he or she would receive reimbursement of up to this amount during the year. Since the $3,000 is not subject to federal, state or local income tax, the adjusted gross income for 1989 would be reduced to $97,000 resulting in an income tax savings of $1,200 assuming a combined federal, state and local tax bracket of 40%. If, however, employee A did not elect a salary reduction arrangement he or she would have paid for the $3,000 of medical expenses with after-tax dollars. He or she would not be entitled to a medical expense deduction on the personal tax return since the total 1989 medical expenses of $3,000 does not exceed 7-1/2% of the 1989 adjusted gross income. To the extent an employee is under the social security wage base the plan would also save both the employee and employer social security tax.

FSA affords employees protection in case of termination. Since the employer must bear some of the risk under this health plan, an employee will be entitled to full reimbursement of the medical expenses incurred before termination up to the maximum amount designated under the plan. This is so even though it exceeds the amount that has been deducted from an employee's salary as of the date of termination. The excess amount is lost to the employer.

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Cost Killers

This is about Activity Based Costing  - methods to cut costs, management accounting, management information systems, decision support systems - in general about being a manager.

Companies are dealing with the issue of changing workforce demographics by offering 'cafeteria' or 'flexible spending account' programs. These plans allow employees to choose from an array of employer-provided benefits those fringes that are best suited to their individual needs. However, despite the advantages of flexible spending accounts, many employees still hesitate to adopt them because of the high cost of plan implementation and maintenance. Furthermore, employers are concerned about their employees' lack of sophistication in utilizing such plans. While these concerns may be valid, they are not insurmountable. Cost is no longer much of an issue because the competition between third-party service providers and the availability of more advanced software programs are driving down the expense of managing flexible spending accounts. In addition, employers can minimize their payroll taxes by excluding the cost of the benefits from their employees' income.

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What to gather - preparing for your CPA, your attorney, or preparing to start the job on your own

• From Banking Records

• From Customer Records

• From Signed Documents

• From Your Other Business, or Financial Records

• From Corporation or Organization Records (meetings, etc.)

What to do:

COMPANY CONTACT: ___________________________________________________

COMPANY NAME: ___________________________________________________

COMPANY ADDRESS: ___________________________________________________

COMPANY PHONE: ___________________________________________________

COMPANY FAX NO.: ___________________________________________________

PLAN NAME: ___________________________________________________

COMPANY DIRECTORS: ___________________________________________________

___________________________________________________

___________________________________________________

COMPANY PRESIDENT: ___________________________________________________

COMPANY FEDERAL TAX ID NO.: ___________________________________________________

ELIGIBILITY & PARTICIPATION REQUIREMENTS: _____ - Same as medical insurance plan eligibility, or _____ - First day of month after completing _______ (mos., days, weeks, years) of service, or _____ - Other: ____________________________________________

____________________________________________

OTHER ELIGIBILITY REQUIREMENTS:

• _____ - Full-time (meaning ____ hours per ______), and/or
• _____ - Other: ______________________________________________

  ______________________________________________

  PLAN NUMBERS:
  Health Plan - 50___
  Dependent Care - 50___
  Medical Reimbursement - 50___
  Cafeteria Plan - 50___
  

  DATE OF CENSUS
  INFORMATION: _____________________________________________________

  NO. OF ELIGIBLE
  EMPLOYEES ON
  ABOVE DATE: _____________________________________________________

  NO. OF ELIGIBLE EMPLOYEES ON DATE IN "Q" WHO ARE OFFICERS EARNING OVER $60,000 ANNUALLY; WHO ARE 5% SHAREHOLDERS; OR AMONG INDIVIDUALS OWNING 10 LARGEST INTERESTS IN EMPLOYER:_________________

  WILL EMPLOYEES IN (R), ABOVE, RECEIVE MORE THAN 25% OF PLAN'S NON- TAXABLE BENEFITS? __________________________________________________

  EFFECTIVE DATE OF PLAN: __________________________________________________

  LAST DAY OF PLAN YEAR: ________________________________________________ MAXIMUM ANNUAL ALLOWED EMPLOYEE CONTRIBUTION FOR MEDICAL INSURANCE: __________________________________________________

  MAXIMUM ANNUAL ALLOWED EMPLOYEE CONTRIBUTION FOR DEPENDENT CARE: ________________________________________________

  MAXIMUM ANNUAL ALLOWED EMPLOYEE CONTRIBUTION FOR MEDICAL REIMBURSEMENT: ____________________________________________

  MAXIMUM ANNUAL ALLOWED EMPLOYEE CONTRIBUTION FOR CAFETERIA PLAN (IN AGGREGATE):_________________________________________

  EMPLOYER ANNUAL CONTRIBUTION PER PARTICIPANT (IF ANY) __________________________________________________

  TYPE OF PLAN(S):

• _____ Cafeteria Plan
• _____ Medical Reimbursement
• _____ Dependent Care

   

  PLEASE SUMMARIZE ADDITIONAL INFORMATION AND PLAN DESIGN FEATURES ON THE LINES BELOW:

  ________________________________________________________________________

  ________________________________________________________________________

  ________________________________________________________________________

  ________________________________________________________________________

  ________________________________________________________________________

  ________________________________________________________________________

  NAME AND TITLE OF PERSON COMPLETING THIS QUESTIONNAIRE: _________________________________________________

  DATE THIS QUESTIONNAIRE WAS COMPLETED: _________________________________

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Assistance - What To Do - Forms - checklists, time-line to do, etc.

Employer Funded Plan - Employee Funded Plan

• Assistance - What to do

• Forms - Checklists - Etc.

§105 Plan - Employer Funded

§125 Plans (Employee Funded) - To set up the FLEXIBLE SPENDING PLAN you need:

Cafeteria Plan Legal Documents. Contact your attorney and have him/her draft both Flexible Spending Plan documents that meet the requirements of Internal Revenue Code Section 125. You will need both a Summary Plan Description and a Full Cafeteria Plan Legal Document.

If you prefer, you can have an experienced law firm that specializes in writing customized flexible spending plan documents that meet all IRS and DOL guidelines prepare your plan documents for you. 

Annual Report. The IRS requires the annual filing of Form 5500 or 5500-C. The  form will be generated by your tax professional.   The form itself  is available from your local IRS office, or the Department of Labor web site.

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Spreadsheets & Computations

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Contracts, Plans, Trusts, etc.

§125 Plan - THE EMPLOYEE PAYS FOR THE PLAN (Usually a reduction of the salary)

NOTE: This Plan is designed to allow an employer to fund the reimbursement of an employee's medical expenses (or those of the employee's spouse or dependents) with pre-tax dollars and on a tax-free basis to the employee. The provisions regarding employee eligibility and benefit limits are illustrative and should be tailored to meet the specific needs of each client. For example, benefits can be specifically defined to include or exclude orthodontia, eyeglasses and contact lenses, prescription drugs, and psychiatric counseling. 

Note also that benefits paid to self-employed persons under noninsured plans are not excludable from gross income because a self-employed individual is not an employee. {Code Sec. 105(g)}  However, consider paying one's spouse if the spouse works for the business.  Then the spouse can participate, just as any other employee.

* * * * * * * 

Sample Plan #1

MEDICAL REIMBURSEMENT PLAN OF _____________________________________



Section 1 Purpose of Plan
1.01 The purpose of this Medical Reimbursement Plan (hereinafter the "Plan") is to provide for the payment for, or provision of, uninsured medical and dental expenses for participating Employees, spouses of participating Employees, and Dependents of participating Employees. 
1.02 It is intended that this Plan qualify as an accident and health insurance plan as defined by Code Sec. 105 of the Internal Revenue Code of 1986, as amended ("Code"), and that benefits paid to Employees hereunder be excludible from their gross incomes by reason of Code Sec. 105(b).

Section 2 Definitions

Unless a different meaning is clearly indicated by the context, whenever used in this document, these words shall have the following meaning: 
2.01 Benefits. Any amounts paid to a Participant in the Plan as reimbursement for Eligible Medical and Dental Expenses (as defined in Section 2.06) incurred by the Participant during the Plan Year or by the Participant's spouse or the Participant's Dependents (as defined in Code Sec. 152). 
2.02 Code. The Internal Revenue Code of 1986, as amended. 
2.03 Coverage Period. The Plan Year during which Benefits under this Plan are available. 
2.04 Dependent. Any individual who is a Dependent (as defined in Code Sec. 152) of a Participant. 
2.05 Effective Date. The ________ day of ____________________, ______. 
2.06 Eligible Medical and Dental Expenses. Expenses incurred by the Employee, the Employee's Spouse, or the Employee's Dependents, after the Effective Date of the Employee's participation in this Plan and during the Plan Year otherwise allowable as deductions under Code Sec. 213 (without regard to the limitations in Code Sec. 213(a)), but shall not include an expense incurred for the payment of premiums under a health insurance plan not sponsored by Employer. For purposes of this Plan, an expense is incurred when the Employee, Spouse or Dependent receives the medical care or services giving rise to the claimed expense. 
2.07 Employee. Any person who is an Employee of the Employer for federal withholding tax purposes. 
2.08 Employer. The company creating this Plan, or an affiliate or successor thereof that adopts this Plan. 
2.09 Participant. Any Employee who has met the eligibility requirements set forth in Section 3. 
2.10 Plan Administrator. The person appointed by Employer who has authority and responsibility to manage the Plan. 
2.11 Plan Year. The Plan's annual accounting period, which begins on ____________________ and ends on ____________________ for the first Plan Year and thereafter as long as the Plan remains in effect, the period beginning on ____________________ and ending on ____________________. 
2.12 Spouse. An individual who is legally married to a Participant other than an individual separated from a Participant under a legal separation agreement or decree.

Section 3 Conditions for Eligibility

3.01 Any full-time Employee who has completed at least twelve months of service with Employer is eligible to participate in the Plan as of the Effective Date provided that the Employee is not a member of a collective bargaining unit of Employees covered by a collective bargaining agreement with Employer as part of which accident and health benefits have been the subject of good-faith negotiations. 
3.02 For this purpose, a full-time Employee is an individual who normally works at least ________ hours per week. 

Section 4 Amount of Benefits

4.01 The maximum amount per Plan Year that a Participant may receive as reimbursement under this Plan is $____________________. 
4.02 For purposes of this Section 4, reimbursements of expenses for a Participant's Spouse or Dependent are treated as having been received by the Participant. 
4.03 Employer shall pay all costs of providing the Benefits due under this Plan. Employer reserves the right to enter into any arrangement, contractual or otherwise, that Employer deems helpful to the proper and efficient operation of the Plan including, but not by way of limitation, the right to enter contracts with insurance companies and third-party administrators.

Section 5 Payment of Benefits; Claims; and Claims Review Procedure

5.01 Subject to the provisions of this Section, each Participant shall be entitled to the Benefits set out in this Plan for Eligible Medical and Dental Expenses incurred after the Effective Date of his or her participation in the Plan. 
5.02 All claims for Benefits under the Plan must be made on forms maintained by Employer. Claims may be submitted at any time after the expense is incurred but in no event later than ________ days after the close of the Plan Year in which the medical treatment or service giving rise to the claim was received. 
5.03 Once payment of a claim has been approved by the Plan Administrator, Employer shall pay the Participant's Benefit due under the Plan as soon as is reasonably feasible, but in no event later than ________ days after the date payment of the claim was approved. 
5.04 If any claim for Benefits under this Plan is denied, in whole or in part, then Employer shall promptly provide the Participant written notice stating the reason(s) for the denial, citing the Plan provisions upon which the denial is based, describing what information Participant needs to supply in order to perfect the claim (if applicable), and notifying Participant of the review procedure herein. 
5.05 A Participant whose claim for reimbursement has been denied may request a review of the denial by ______________________________. The request for review must be in writing and must be received by Employer no later than ________ days from date the claim was denied. Employer shall permit any Participant who timely files a request for review of a claim denial hereunder to inspect all pertinent documents relating to the Plan in general and to the denial in particular (other than those documents the disclosure of which is prohibited by law). After conducting the review (which may, at the reviewer's discretion, include interviews with Participant and such other individuals as Employer or Participant may suggest), the reviewer shall issue a written decision that includes the reasons therefor and the Plan provisions upon which the decision is based. 
5.06 Coverage under this Plan shall cease as of the first day of the month after the month in which a Participant is no longer employed by Employer. Such Participant shall, however, have the right to submit a reimbursement claim for any Eligible Medical and Dental Expense arising during the Coverage Period at any time before the expiration of ________ days after the close of the Plan Year in which the expense arose, and to receive the Benefits provided under the Plan. 

Section 6 Plan Administration
6.01 Employer shall have the exclusive authority and responsibility to direct administration of the Plan. Subject to Section 6.02, the individual who serves in the position of ______________________________ shall be the Plan Administrator 
6.02 Notwithstanding Section 6.01, Employer reserves the right, at its option, to delegate all or any part of the authority and responsibility for plan administration to any party or parties, regardless of whether said party or parties are employed by Employer. 
6.03 The Plan Administrator shall have the authority to:
• make such regulations and to prescribe the use of such forms as may be necessary for the efficient operation of the Plan; 
• require any person to provide such information as may, in the Plan Administrator's discretion, be necessary for the Plan's proper administration and to condition the payment of Benefits hereunder upon receipt of said information; 
• to decide questions regarding eligibility and the payment or nonpayment of Benefits; and
• exercise such other powers as may be reasonably necessary to administer the Plan properly and efficiently.

6.04 Except to the extent permitted by law, the Plan Administrator shall not be personally liable for any act or failure to act in the performance of his or her duties as such, except for his or her own wilful misconduct or wilful breach of the terms of this Plan. 
6.05 Unless the Board of Directors otherwise directs, the Plan Administrator shall serve without compensation. Employer shall pay for all reasonable expenses incurred by the Plan Administrator in the performance of his or her duties.

Section 7 Amendment or Termination of Plan

7.01 Although Employer intends this Plan to continue indefinitely, Employer reserves the right to amend or terminate the Plan at any time. This right includes the right to make such retroactive amendments as may be necessary to comply with Code Sec. 105 or any successor or similar provision or to comply with the rules and regulations of any other governing authority. 

Section 8 No Employment Rights

8.01 Neither the existence of this Plan, nor any action with respect to it, shall confer upon any person the right to continued employment with Employer. 
8.02 The existence of this Plan, and all actions taken with respect to it, confer no additional rights to any type of financial benefit from Employer other than that described in Section 4.01.

Section 9 Governing Law

9.01 Unless otherwise governed or pre-empted by the provisions of the Employee Retirement Income Security Act of 1974 (ERISA), this Plan shall be governed by the laws of ______________________________, the situs of Employer's principal business office.

Section 10 Headings and Terms

10.01 All headings in this Plan are for reference only and shall not be construed as defining or limited the matter contained thereunder. 
10.02 All terms contained in this Plan shall be deemed to include the masculine and feminine genders and all references to the singular shall be interpreted to include the plural and vice versa, as proper construction may require.

Section 11 Tax Effects

11.01 Neither the Employer nor the Plan Administrator makes any representation or warranty as to whether payments received under this Plan shall be includible in income for federal or state income tax purposes. 
11.02 As between Employer and Employee, an Employee receiving reimbursement hereunder shall bear full responsibility for payment of federal and state income tax (if any) that Employee's receipt of such reimbursement may generate.

Section 12 Severability and Integration

12.01 If the event that any part of this Plan shall be declared invalid by a court of competent jurisdiction, the remaining provisions hereof shall be give full force and effect to the fullest extent possible. 
12.02 This document contains the entire Plan. In the event that the provisions hereof shall be in conflict with any other document of Employer describing the parties rights and and duties arising hereunder, this Plan shall control. 
On behalf of Employer, the following Corporate Officers have set forth their signatures below. 



___________________________ ____________________________
President Date





___________________________ ____________________________
Secretary Date

END OF §125 MEDICAL REIMBURSEMENT SAMPLE PLAN #1

Sample Plan #2 

MEDICAL CARE REIMBURSEMENT PLAN OF _______________ INC.

1. Benefits

The Corporation will reimburse all eligible employees for expenses incurred by themselves and their dependents (as defined in IRC Sec. 152) for medical care (as defined in IRC Sec. 213) subject to the conditions and limitations set forth below. The Corporation intends that the benefits shall qualify under IRC Sec. 105 so as to be be excludable from the gross income of the employees covered by the plan.

2. Eligibility

The plan shall be open to all full-time workers (those who customarily work 35 or more hours in a given week), who have attained the age of 25, and have completed three years of service with the Corporation.

3. Limitations

(a) The Corporation shall reimburse any eligible employee no more than $1,000 in any calendar year for medical expenses.

(b) The Corporation shall only be liable for the reimbursement of expenses that are not covered under any insurance policy(ies), whether owned by the corporation or the employee.

4. Submission of Claims

Any eligible employee seeking reimbursement under this Plan shall submit to the Corporation, at least quarterly, all bill for medical care, including those for accident or health insurance. Such bills and other claims for reimbursement shall be verified by the Corporation prior to reimbursement. The Corporation, in its sole discretion, may terminate the employee's right to reimbursement if the employee fails to comply.

5. Termination

This Plan may be terminated at any time by a vote of the board of directors of the Corporation. Medical expenses incurred prior to the date of termination shall be reimbursed by the Corporation. The Corporation is under no obligation to provide advance notice of termination.

6. Determination

The president shall determine all questions arising from the administration of the Plan except where reimbursement is claimed by the president. In such case, determination of any question shall by made by the board of directors.

Adopted by the Board of Directors

on November 10, 1998

_____________________

Secretary

Don't forget. The plan must be formally approved by the board of directors. You should make sure you have the minutes of that meeting and attach a copy of the plan to the minutes. File the minutes in your minute book.

END OF §125 MEDICAL REIMBURSEMENT SAMPLE PLAN #2

§105 MEDICAL REIMBURSEMENT PLAN - The Employer pays for the plan

END OF §105 MEDICAL REIMBURSEMENT PLAN

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Reports Required

Reports are required.  Reports must be made to each employee participant monthly or no later than every calendar quarter.

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Checklists for Deployment

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Checklist for Monitoring

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Financial Accounting: Bookkeeping & Financials

• Financial Statement Presentation

• Notes to Financial Statements

• How to Make Entries

• What Kind of Records to Keep

• Bookkeeping Methods - Cash, Accrual and Other

• How the Business Entity Affects the Recording

  Sole Proprietor

  Corporation - C & S

  Partnerships - General, Limited, Limited Liability Company, Registered Limited Liability Partnership or Company

  Trusts

  Tax Exempt

Record Keeping Requirements

Employers who adopt a cafeteria plan are required to keep such records as necessary to determine whether they are in compliance with provisions contained in the IRC. For example, these records can be used to determine whether the plan wrongly discriminates in favor of certain highly compensated individuals such as officers of the company and shareholders owning more than 5% of the stock of the employer. In addition, employers are required to file an annual report with the IRS.

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Compliance - what is required for protection, defense, etc.

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Alerts & Dangers - Risks, Asset Protection, IRS Defense

• Alerts & Dangers - Risks

• Asset Protection

• Your Defense

Alerts & Dangers - Risks

Listed below are a few of the common but very serious legal compliance mistakes which can result in disastrous consequences if they are not identified and resolved properly:

1. Failing to file annual Form 5500 for: a) an employee health care plan covering over 100 employees, or b) any qualified retirement plan. IRS penalties are $25 per day and DOL penalties are $1,000 per day.
2. Failing to provide pension plan participants with election forms to waive pre-retirement survivor annuities between the ages of 32 and 35.
3. Failing to obtain employee election forms and to provide required employee notices when employees receive retirement plan distributions.
4. Failing to pass employee participation and coverage tests for qualified retirement plans after an employer acquires another company without amending retirement plans to accomodate the transaction.
5. Failing to properly determine when employees are eligible to participate in a qualified retirement plan.
6. Failure to properly compute vesting percentages based on total years of service, rather than on years of plan participation.
7. Failing to include employees in a qualified retirement plan because they are classified as "part-time" employees.
8. Allowing employees to elect to pay for their share of health insurance premiums on a pre-tax basis without adopting a formal cafeteria plan document and filing an annual Form 5500.
9. Allowing owners and highly paid employees to direct the investment of their retirement plan account balances without allowing all employees to similarly direct the investment of their retirement plan account balances.
10. Failing to file a registration form with the Department of Labor for nonqualified retirement plans. This filing is required in order to allow non-qualified retirement plans to avoid formal ERISA requirements.
11. Failing to properly compute annual limitations on contributions to qualified retirement plans. Exceeding these limitations can result in excise taxes or plan disqualification.
12. Failing to amend qualified retirement plans for all current laws.
13. Failing to provide forms to waive the pre-retirement survivor annuity form of distribution to participants between the ages of 32 and 35 in retirement plans which provide annuities as a form of distribution alternative.

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DEPARTMENT OF THE TREASURY ~ Internal Revenue Service

26 CFR Part 1 ~ [TD 8738] RIN 1545-AV43

Tax Treatment of Cafeteria Plans §125

[1] AGENCY: Internal Revenue Service (IRS), Treasury

[2] ACTION: Temporary regulations

[3] SUMMARY: This document contains temporary regulations that clarify the circumstances under which an employer may permit a cafeteria plan participant to revoke an existing election and make a new election during a period of coverage. The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.

[4] DATES: These regulations are effective on December 31, 1998.

[5] FOR FURTHER INFORMATION CONTACT: Sharon Cohen, (202) 622- 6080 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

[6] This document contains amendments to the Income Tax Regulations (26 CFR part 1) under section 125. These temporary regulations provide guidance relating to the circumstances under which a cafeteria plan participant may revoke an existing election and make a new election during a period of coverage.

Explanation of Provisions

[7] A "cafeteria plan" under section 125 allows an employee to choose between cash and certain nontaxable benefits, such as accident or health coverage. Section 125 generally permits the employee to choose the nontaxable benefit (rather than the available cash) without the employee having to include the available cash in gross income. The temporary regulations:

o Permit a cafeteria plan to allow an employee, during a plan year, to change his or her health coverage election to conform with the new special enrollment rights provided under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), and

o Permit a cafeteria plan to allow a change in coverage election for a variety of other changes in status.

These regulations are designed to provide clear, administrable guidelines for determining when changes can be made in cafeteria plan
elections during a plan year.

[8] These regulations are effective for plan years beginning after December 31, 1998. However, taxpayers may rely on the guidance in the temporary regulations (or on the existing proposed regulations) for prior periods.

Summary

[9] Section 125 generally provides that an employee in a cafeteria plan will not have an amount included in gross income solely because the employee may choose among two or more benefits consisting of cash and "qualified benefits." A qualified benefit generally is any benefit that is excludable from gross income because of an express provision of the Code, including coverage under an employer-provided accident or health plan under sections 105 and 106, group-term life insurance under section 79, elective contributions under a qualified cash or deferred arrangement within the meaning of section 401(k), dependent care assistance under section 129, and adoption assistance under section 137. /1/

[10] Under sections 1.125-1 and 1.125-2 of the existing proposed regulations, /2/ an employee is permitted to make an election between cash and qualified benefits before the beginning of the period of coverage (which generally is the plan year of the cafeteria plan); changes in the election during the plan year are permitted only in limited circumstances.

[11] The temporary regulations clarify the circumstances under which a cafeteria plan may permit an employee to change his or her cafeteria plan election with respect to accident or health coverage or group-term life insurance coverage during the plan year. Proposed regulations are also being published that cross- reference these temporary regulations, and that replace the change in family status provisions in Q&A-6 of proposed section 1.125-2 with respect to accident or health plans and group-term life insurance.

HIPAA Special Enrollment Rules.

[12] The temporary regulations conform the cafeteria plan rules to the new special enrollment rights provided under HIPAA (which generally require group health plans to permit individuals to be enrolled for coverage following the loss of other health coverage, or if a person becomes the spouse or dependent of an employee through birth, marriage, adoption, or placement for adoption). /3/ Under the regulations, if an employee has a right to enroll in an employer's group health plan or to add coverage for a family member under HIPAA, the employee can make a conforming election under the cafeteria plan. This allows required contributions for such health coverage to be paid on a pre-tax basis.

Changes in Status.

[13] The temporary regulations include rules for other events, called "changes in status," under which a cafeteria plan may allow an employee to change his or her election during the plan year. The events that constitute changes in status under the regulations are changes in legal marital status, number of dependents, employment status, work schedule, and residence or worksite, and cases where the dependent satisfies or ceases to satisfy the requirements for unmarried dependents.

[14] The regulations permit a cafeteria plan to allow a change of election during the plan year if a change in status occurs that affects eligibility for coverage and the election change corresponds with the effect on eligibility. For example, if under the terms of an accident or health plan a child of an employee loses eligibility for coverage upon graduation from college, the cafeteria plan may allow the employee to cease payment for the child's coverage when the child graduates and coverage ceases.

[15] Certain of these changes in status (marriage, birth, adoption, and placement for adoption) overlap with the special enrollment events under HIPAA. The regulations include examples that clarify the relationship between HIPAA's special enrollment rights and these change in status rules. In addition, if a change in status occurs that entitles an employee or family member to "COBRA" continuation coverage (or coverage under a similar State program) with respect to the employer's plan, the regulations permit payments for the continuation coverage to be made on a pre-tax basis under a cafeteria plan. Other Events. The regulations allow a corresponding cafeteria plan change if a plan receives a court order, such as a qualified medical child support order under section 609 of ERISA. In addition, if an employee, spouse, or dependent becomes entitled to Medicare or Medicaid, a cafeteria plan can permit a corresponding election change.

Elective Contributions Under a Qualified Cash or Deferred Arrangement:

[16] The temporary regulations, in provisions similar to those of the existing proposed regulations (proposed section 1.125-2(f)), make clear that the rules of section 401(k) and (m), rather than the rules in these temporary regulations (which apply to other qualified benefits), govern changes in elections under a qualified cash or deferred arrangement (within the meaning of section 401(k)) or with respect to employee after-tax contributions subject to section 401(m).

Scope of Temporary Regulations and Reliance on Proposed Regulations.

[17] The temporary regulations do not address certain provisions concerning cafeteria plan election changes that are included in the existing proposed regulations. Guidance on these provisions is reserved at paragraphs (f)-(i) of the temporary regulations.

[18] For example, future guidance under the significant cost change provision (reserved at paragraph (g) of the temporary regulations), rather than the change in status rules, would determine whether an employee who switches from full-time to part-time employment and who remains eligible under the employer's health plan could make an election change if the part-time employee is required to pay significantly higher amounts for the coverage. The temporary regulations also reserve guidance with respect to provisions set forth in the existing proposed regulations that permit an election change in the case of a significant change in coverage (which includes a significant change in the health coverage of the employee or spouse attributable to the spouse's employment /4/). Other matters not addressed in the temporary regulations include the application of the cafeteria plan election change rules to qualified benefits other than accident or health coverage and group-term life insurance coverage (for example, dependent care assistance programs), and special rules concerning changes in elections by employees taking leave under the Family and Medical Leave Act of 1993 (Public Law 103- 3). /5/ Pending further guidance, taxpayers can continue to rely on the existing proposed regulations /6/ concerning these and other matters not addressed in the temporary regulations. /7/

[19] The temporary regulations are effective for plan years beginning after December 31, 1998. Prior to that date, however, taxpayers can rely on the guidance provided in the temporary regulations (as well as on the guidance provided in the existing proposed regulations that relates to matters addressed in the temporary regulations) in order to comply with the provisions of section 125.

Special Analyses

[20] It has been determined that this Treasury Decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) do not apply to these regulations, and because the regulation does not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

[21] The principal authors of these regulations are Catherine Fuller and Sharon Cohen, Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations). However, other personnel from the IRS and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

[22] Income taxes, Reporting and recordkeeping requirements. Adoption of Amendments to the Regulations

[23] Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. section 1.125-4T is added to read as follows:

SECTION 1.125-4T PERMITTED ELECTION CHANGES (TEMPORARY).

(a) ELECTION CHANGES. A cafeteria plan may permit an employee to revoke an election during a period of coverage and to make a new election only as provided in paragraphs (b) through (i) of this section. See paragraph (j) of this section for special provisions relating to qualified cash or deferred arrangements.

(b) SPECIAL ENROLLMENT RIGHTS. A cafeteria plan may permit an employee to revoke an election for accident or health coverage during a period of coverage and make a new election that corresponds with the special enrollment rights provided in section 9801(f), whether or not the change in election is permitted under paragraph (c) of this section.

(c) CHANGES IN STATUS FOR ACCIDENT OR HEALTH COVERAGE AND GROUP- TERM LIFE. (1) IN GENERAL. A cafeteria plan may permit an employee to revoke an election for accident or health coverage or group-term life insurance coverage during a period of coverage and make a new election for the remaining portion of the period if, under the facts and circumstances --

(i) A change in status occurs; and

(ii) The election change satisfies the consistency requirement in paragraph (c)(3) of this section (consistency rule for accident or health coverage) or (c)(4) of this section (consistency rule for group-term life insurance coverage).