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Where to Start
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Working with your Combined Services Representative, your Company should create an outline of the features they would like their plan to include.
There are some legal restrictions which your representative can go over, but here are some elements to consider for your Medical Reimbursement Account:
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How is your company structured? Sole Proprietor, Partnership or Corporation? |
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What is the maximum amount of money employees will be allowed to contribute? |
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Will the employer select to use debit cards for participating employees? |
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Should the plan year be a calendar year or set for when the health and dental insurance plans are renewed? |
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Will there be a grace-period provision added to the plan year? |
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Important Points to Consider
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Employer Eligibility
Any Employer can sponsor a Medical Reimbursement Plan, but certain individuals are not eligible:
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Self-Employed Individuals* |
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Partners in a Partnership* |
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A Shareholder who holds 2% or more in a Subchapter S Corporation* |
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Members in an LLC |
*These individuals are allowed to sponsor Medical Reimbursement Plans.
Employer Risk Factor - Uniform Coverage Rule
Medical Reimbursement Accounts operate like insurance; therefore, a company providing this benefit will have some financial exposure as a self-insurer.
For example, once a participant has elected a total amount to be set aside in the Medical Reimbursement Account and the election year begins, those
funds must be available to the participant immediately. According to the Uniform Coverage Rule, if that participant submits a reimbursement request
for the full election amount, even if the claim is more than the contributions made year-to-date, the full election amount must be reimbursed to the participant.
Balancing Employer Risk
Below are some provisions that employers can put in place to help reduce their risk as a self-insurer with a Medical Reimbursement Account:
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Put a cap on the amount a participant can elect for a Medical Reimbursement Account in the plan document. |
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Require a longer probationary period of employment than that of other employee benefits. |
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Decide which circumstances allow participants to change their elections during a plan year. These circumstances should be listed as qualifying events in your plan document. (See Qualifying Events) |
Employee Risk Factor
The Medical Reimbursement Account is a "use-it-or-lose-it" plan. If a participant does not use all the funds elected to his/her Medical Reimbursement Account by the end of a given
coverage period (or a grace period if one is written in the plan document) those funds are forfeited to the plan. The Employer must disclose this important element to employees
in the Summary Plan Description. To be sure that employees understand how their specific Medical Reimbursement Account is set up, the employer should provide additional
communication materials for employees to review. Your Combined Services Representative can help you provide materials on this topic. (See Forms & Samples Section)
Participant Restrictions & Accountability
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Expenses that participants receive reimbursement for under the Medical Reimbursement Account cannot be itemized as expenses on their tax returns. |
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Funds from a Medical Reimbursement Account cannot be used to reimburse insurance premiums. |
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Neither the employer nor the claims administrator bear any responsibility for the participants' taxes. Each participant in the Medical
Reimbursement Account remains fully accountable to the IRS to prove the eligibility of any expense that is submitted. |
Effects on Social Security
Because the money in the Medical Reimbursement Account is taken out of the participant's salary before taxes, the pre-tax amount is no longer considered part of the participant's
gross salary. The participant's Social Security withholdings will only be deducted from the lower, adjusted gross salary which means less money will be allocated toward the
participant's Social Security earnings. Generally, the overall impact on the participant's Social Security benefit is small.
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Plan Implementation Requirements
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Written Plan Document
The Internal Revenue Service (IRS) requires that any company implementing a Medical Reimbursement Account have a Written Plan Document in place with required language detailing;
the benefits under the pre-tax plan; participation and eligibility requirements; open enrollment; qualifying status change events (if applicable); plan administration;
continuation of coverage; and a claims procedure. Once your Company decides how the Medical Reimbursement Account will be administered, Combined Services can provide a Written
Plan Document that will meet the IRS's requirements.
Key Items to be Included in the Written Plan Document:
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Participant eligibility requirements |
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Maximum contributions allowed to the account |
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Plan year calendar or Insurance plan renewal time |
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List of which events will merit a change in enrollment between open enrollments - if qualifying events are adopted |
Adoption
Once the Written Plan Document has been completed and reviewed, it must be adopted by the employer before the effective date. This adoption process should pass through
the same channels the employer uses for any other major business transaction.
Summary Plan Description
The Department of Labor requires that ALL of your eligible employees receive information on how your specific Medical Reimbursement Account works.
When the plan becomes available to your employees, or when you have new hires or newly eligible employees, you should give them a Summary Plan
Description. The Summary Plan Description outlines, in simplified terms; the Medical Reimbursement Account's; advantages and limitations; the name
and address of the Plan Administrator; and a person who employees can contact if they have questions or complaints regarding the benefits of the
plan. Combined Services can create a Summary Plan Description for you to distribute to employees that meets these requirements. Once in place,
the Summary Plan Description should remain available for employees to review.
Non-Discrimination Testing
The IRS requires that companies implementing a Medical Reimbursement Plan complete Non-Discrimination Testing each plan year.
This is to ensure that "key employees" in a company do not receive an unfair tax advantage from the plan.
The IRS has a series of non-discrimination tests that your Company or Combined Services can administer. (See Non-Discrimination Tests in the Forms & Samples Section)
Constructive Receipt Doctrine
According to the IRS, if the requirements for Medical Reimbursement Plan are not met, such as the adoption of a Written Plan Document, the company's employees
will be taxed on their Medical Reimbursement Account under the Constructive Receipt Doctrine. Rather than treating this plan as a non-taxable benefit,
it would be treated as a taxable benefit.
Irrevocable Election Requirement
Before enrolling, employees must be made aware that the Medical Reimbursement Account has what is known as an Irrevocable Election Requirement. Once an employee elects
to participate in the Medical Reimbursement Account, they cannot make any changes to their election until the next open enrollment. However, if the employer chooses,
the plan document can be set up with a list of IRS approved, qualifying events. In that case, a participant could change his/her election prior to the next open
enrollment if he/she experienced a qualifying event. The election change would have to coincide with the qualifying event in order for a change to be made to the
account. (see Qualifying Events)
Qualifying Events for Election Change During Plan Year
The Irrevocable Election Requirement limits when participants can change the elections to their Medical Reimbursement Accounts. However, an employer can choose to include a set of
Qualifying Events in the plan document which would allow the election amount of a Medical Reimbursement Account to be changed or terminated in accordance with a participant's life
changing event during the plan year. According to the IRS, an employer is not required to make any exceptions to the Irrevocable Election Requirement. If an employer chooses to
make exceptions, the IRS does have some specific guidelines for which events can be considered qualifying events for a change in election outside of open enrollment.
If your Company decides to include qualifying events in the Written Plan Document, the events chosen must fall within the guidelines laid out by the IRS. Keep in mind, employers
may choose as many or as few of the IRS's exceptions as they feel necessary. Your Combined Services Representative can walk you through the options available to you. Below is
a list of the more common IRS approved qualifying events for election changes to a Medical Reimbursement Account:
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Change in Marital Status |
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Change in Number of Dependents |
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Significant Change in Insurance Contribution Mid-Year |
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Loss of Insurance Coverage for Spouse/Dependent |
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Change in Employment Status |
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Legal Decree Ordering Change in Coverage |
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Contributions & Reimbursement Request Process
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Participant Contributions
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The full amount elected by a participant to be set aside in the Medical Reimbursement Account must available to
him/her on the first day of the plan year. This is known as "Uniform Coverage Rule". |
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Participants cannot contribute more to the Medical Reimbursement Account than their employer allows.
The employer may cap the maximum coverage that can be elected to limit employer risk. |
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A participant cannot be reimbursed for more than the amount he/she predetermined to contribute at the
time of election unless a qualifying event allows the participant to increase the election. |
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The participant will only be reimbursed for the medical expenses that he/she, his/her spouse and
dependents (dependent as defined in IRS Code Section 152) incur during the given coverage period. |
IRS Code 213 (d) - Medical Care
Only expenses that are considered "Medical Care" under IRS Code 213(d) can be reimbursed under the Medical Reimbursement Account. These are expenses that diagnose,
cure, mitigate, treat or prevent disease, or affect a structure or function of the body. The expenses must be primarily for medical care to prevent or alleviate
a physical or mental defect or illness. They cannot be primarily to maintain general health or for personal or cosmetic procedures. However, cosmetic procedures
that are necessary to correct a deformity arising from or directly related to a congenital abnormality, or a personal injury arising from an accident or trauma
or a disfiguring disease are considered medical care.
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Dual - Purpose Treatments
Some medical care expenses are considered "dual-purpose" because they have personal, general health or cosmetic purposes, but they also have medical
purpose like massage therapy. Any dual-purpose medical expenses would require a medical practitioner's note that clearly explains the diagnosis of
a medical condition and the recommendation that includes the dual purpose treatment. |
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Medication
Prescription and over the counter medications must meet the same standards of medical care. The medication must be primarily for medical care to
prevent or alleviate a physical or mental defect or illness. Neither nutritional supplements nor orthotics fall under medical care unless a
practitioner can substantiate medical care usage in writing. |
Reimbursement Request Process
In order for a participant to be reimbursed for a medical expense, they must submit a Reimbursement Request form.
The request should include the following:
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Date of service within the plan year or grace period (if applicable) |
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The recipient of the service with his/her relationship to the participant |
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The type of service rendered or item purchased |
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Where the service was rendered or item was purchased |
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The expense for the service or item |
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Signature of participant |
Attached to the request form should be:
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Documentation for medical services rendered or item purchased (should show item or service;
where the item was purchased or services were rendered; and the cost) |
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Substantiation for items or services that require additional documentation by IRS |
The reimbursement request with the proper documentation (copies are acceptable) can be submitted to Combined Services LLC through mail, fax, e-mail or in person at:
Combined Services LLC
15 North Main Street, Suite 300
Concord, New Hampshire 03301-4945
Fax: 1 603 224-4256 |
Combined Services processes medical reimbursement requests according to the guidelines set by the IRS. Reimbursements are released weekly for valid requests
of $40 or more and can be paid to the participant by check or direct deposit. (see Forms & Samples for Direct Deposit Authorization Form)
If participants have questions, they can reach a Combined Services Flexible Benefit Claims Analyst, Monday through Friday, from 8:00 a.m. to 4:30 p.m. (EST),
toll-free at 1 888 227-9745.
Grace Period
An employer may choose to include a Grace Period to their Medical Reimbursement Plan as provided in IRS Notice 2005-42. With a grace period, a participant
could submit reimbursement requests for payment/reimbursement up to 2½ months (15th day of the 3rd calendar month) past the plan year to be paid with left
over funds from the immediately proceeding plan year. In other words, if an employer's plan document for Medical Reimbursement included a grace period,
and one month after the plan year ended, a participant incurred a new qualified medical care expense and submitted a request with the proper documentation,
the claim would be paid out of his/her funds remaining from the prior year.
Run-Off Period
According to the IRS, employers who adopt a Medical Reimbursement Account must allow for a Run-Off Period of at least 30 days. The run-off period, not to be
confused with the grace period, is an additional number of days after the plan year has ended for participants to submit reimbursement requests for medical
expenses that were incurred in that proceeding plan year. It is not an opportunity to incur new medical expenses for reimbursement. However, the run-off
period does run simultaneously with a grace period (if one is included in the plan document).
The IRS mandates that 30-days be allowed for those last minute reimbursement requests, however, Combined Services recommends that employers extend the
run-off period to 90-days because once the run-off period ends, (if there is no grace period) the participants' unused funds are forfeited to the plan.
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Plan Administration
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Debit Card Option
As a convenience to Medical Reimbursement Account participants, employers may elect to provide participants with a Debit Card to use for medical expenses.
Rather than having the participants wait to receive funds from a claim submitted, the card allows a participant to pay for medical expenses with those
funds at the point of service. The participant is then required to provide receipts of transactions to Combined Services to substantiate that purchases
made with the debit card fall within IRS guidelines as a medical expenses. If the cardholder does not provide the proper documentation, he/she is
notified by a Combined Services Claims Analyst that documentation is needed to substantiate a medical expense.
If, after Combined Services' third request for documentation, the cardholder is unable to provide the proper documentation for a transaction, he/she is
required to reimburse the employer for any expenses that were ineligible or unsubstantiated. Employers should refer to their plan document or contact
Combined Services if they have questions on this procedure.
Enrollment Forms
In order to enroll in the Medical Reimbursement Plan, participants need to submit signed Election Forms stating specifically how much money they would
like to contribute to the account through salary reductions for the plan year. Because of the Irrevocable Election Requirement, they cannot make any
changes to that election until the next open enrollment or after a qualifying event (if qualifying events are contained in the employer's plan document).
Participants must fill out a new enrollment form each plan year even if the election will remain the same.
Enrollment forms should be forwarded to Combined Services at least one month prior to the start of the plan year to set-up the accounts.
Payroll Changes
For those employees who elect the Medical Reimbursement Plan, payroll will deduct their elected salary contribution before State, Federal and FICA
withholdings. The amount of the contribution should be clearly stated on the signed enrollment form. Copies of these election forms should be sent
to Combined Services LLC to set-up the accounts.
Termination of Employment
Assuming the employer is subject to COBRA, when a participant's employment is terminated, the employer will need to determine what will
happen with the Medical Reimbursement Account. In either situation, the former employee can submit claims incurred prior to the termination
date up until the end of the plan year (unless otherwise stated by the plan document). Below is a basic rule of thumb, but in specific
cases, please refer to your plan document or contact Combined Services who will be available to walk you through the process.
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Account Fund - Remaining Balance
If a the former employee has contributed more funds into the Medical Reimbursement Account than he/she has been reimbursed,
he/she should be offered the option to elect Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). If he/she
elects COBRA, he/she will continue to contribute to the Medical Reimbursement Account with the former employer on a
post-tax basis. This would keep the account open for claims for as long as the former employee continued to make payments.
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Account Fund - No Balance/Exceeded Balance
If the former employee has been reimbursed for more than he/she has contributed, or has a zero balance in their Medical
Reimbursement Account, he/she cannot be offered COBRA coverage of the Medical Reimbursement Account.
In cases where reimbursements exceed a former employee's contributions (due to the Uniform Coverage Rule), the employee
cannot be held liable for the difference in funds. The assumption of risk is on the employer in this case and the
employer will be responsible for the difference between the amount reimbursed and the amount contributed
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Open Enrollment
Each year should bring an Open Enrollment period for un-enrolled employees to opt for the plan, or for participants to change or terminate
their elections. If participants choose to keep their election the same as the prior year, they will still need to complete new enrollment
forms confirming the election amounts with their signatures. Enrollment forms should be sent to Combined Services to set-up these accounts.
Annual Non-Discrimination Testing
Companies that adopt a Medical Reimbursement Plan must complete non-discrimination testing each plan year. The IRS requires this Annual
Non-Discrimination Testing to insure that "key employees" of an employer do not receive unfair tax advantages from the plan.
(see Non-Discrimination Tests in Forms & Samples Section)
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Should the plan include insurance premiums for medical, dental, life and disability? |
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Should automatic enrollment be included in the plan? |
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Will employees be allowed to change their elections outside of open enrollment? |
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Contact Us
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The laws regarding Flexible Benefits can be complex. This online guide is only meant to be used as an overview to administering
those benefits. If you have specific questions that are not answered here, you should refer to your Company's Plan
Document or Summary Plan Description for more details. You should also feel free to contact a Representative at
Combined Services LLC if you need assistance.
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