PURPOSE

The purpose of this staff report is to recommend that City Council approve revisions to the Sheakley Uniservice, Inc. Flexible Benefits Plan Adoption Agreement, the City of Burbank Flexible Benefits Plan Summary Plan Description, and Sheakley Uniservice, Inc. Flexible Benefits Plan Basic Plan Document to include new Internal Revenue Code (IRC) provisions.

BACKGROUND

On July 16, 1996, with the adoption of Resolution No. 24,792, the City amended its fringe benefits plan to incorporate �125 provisions of the IRC.  The establishment of this �125 Flexible Benefit Plan provided City employees with the opportunity to pay medical and dental premiums on a pre-tax basis.  In addition, incorporation of these provisions allowed employees to participate in the following two flexible spending accounts:

�         The dependent care reimbursement flexible spending account enables an employee to deduct eligible childcare (day care) or elder care expenses up to $5000.00 a year per family on a pre-tax basis, and

�         The medical reimbursement flexible spending account enables employees to deduct eligible medical expenses that are not covered by a health or dental insurance plan up to $5,000.00 a year on a pre-tax basis.

Periodically, the Internal Revenue Service (IRS) updates regulations pertaining to �125 Flexible Benefit Plans.  Recently, the IRS has issued the following:

�         A two and one-half month extension beyond the plan year for participants to incur eligible medical expenses pertaining to the medical reimbursement flexible spending account;

�         Amending the definition of �eligible medical expenses� to allow for Health Savings Accounts (HSAs);

�         Amending the definition of �eligible medical expenses� to include over-the-counter drugs; and

�         Rules governing the disclosure of health information as governed by the Health Insurance Portability and Accountability Act of 1996 (HIPAA).

Sheakley Uniservice (Sheakley),  the City�s �125 Employee Benefit Plan provider, recommends that the City�s plan be amended to allow for these new provisions.   Sheakley has amended the Sheakley Uniservice, Inc. Flexible Benefits Plan Adoption Agreement (Attachment A), the City of Burbank Flexible Benefits Plan Summary Plan Description (Attachment B), and Sheakley Uniservice, Inc. Flexible Benefits Plan Basic Plan Document (Attachment C) to include these new IRC provisions.  These amendments would apply to plan years ending December 15, 2005, and thereafter.

ANALYSIS

Two and One-Half month Extension Period

Each plan year, employees have the opportunity to elect a certain dollar amount up to $5,000 to contribute to the medical reimbursement flexible spending account.  This elected amount is deducted from the employee�s gross earnings, on a pre-tax basis each payroll period during the plan year which runs from December 16^th of one calendar year through December 15^th of the following calendar year.   Currently, employees enrolled in the �125 Flexible Benefit Plan only have until December 15^th to incur eligible medical expenses for that plan year.  If an employee contributed more to the flexible spending accounts than he or she incurs in expenses, then the remaining money is forfeited at the end of the plan year.

In May 2005, a new Internal Revenue Service ruling was issued, allowing �125 Flexible Benefit Plans to adopt a two and one-half month extension for employees participating in the medical reimbursement flexible spending account.  This extension provides employees with an additional two and one-half months beyond the end of the plan year to incur eligible medical expenses.  The medical expenses incurred during this extension period are applied toward the participant�s previous plan year�s balance with any remaining balance applied to the current plan year�s balance. 

Under this new ruling, employees have an additional two and one-half months (i.e., until February 28^th) to incur medical and/or dependent care expenses.  This extension is intended to alleviate the employee�s burden of incurring claims within a twelve month period and reduces employees� risk of forfeiting funds. 

Amending the Definition of �Eligible Medical Expenses�

In 2003, the Medicare legislation authorized Health Savings Accounts (HSAs).  HSA�s allow individuals to put money into an account to save for future medical expenses.  Under the City�s �125 Flexible Benefit Plan�s current definition of �eligible medical expenses,� employees participating in a HSA would not be eligible to participate in the medical reimbursement portion of the �125 Flexible Benefit Plan.  However, if the City amends the definition of �eligible medical expenses,� those employees with a HSA would be able to participate in the medical reimbursement portion of the �125 Flexible Benefit Plan but for vision and dental expenses only.  Those employees without a HSA would still be eligible for reimbursement of all eligible medical, dental and vision expenses.

In addition, the IRS has also extended its definition of �eligible medical expenses� to include eligible over-the-counter drugs.  Eligible over-the-counter drugs must be needed for medical treatment and not used for general health. 

Rules Concerning Protected Health Information

The IRS established rules to protect employees and prevent employers and Plans from disclosing or using protected health information except in accordance with those permitted by HIPAA.  In order to maintain separation between the Plan and the employer, the Plan provides for a HIPAA privacy officer who will have access to and use protected health information solely for plan administration functions that the employer performs for the plan.

Future Amendments

Staff recommends that the City Manager, or her designee, be given the authority to make plan amendment changes, from time to time, as necessary to meet future IRC provisions.

FISCAL IMPACT

The cost to the City for amending the Sheakley Uniservice, Inc. Flexible Benefits Plan Adoption Agreement, the City of Burbank Flexible Benefits Plan Summary Plan Description, and Sheakley Uniservice, Inc. Flexible Benefits Plan Basic Plan Document is $100.

In addition, staff anticipates that adoption of these IRS provisions will encourage more employees to participate in the City's �125 Flexible Benefit Plan.  Increased participation will reduce Federal, State, and Medicare tax liability for the participating employees, and to the extent that participation in the Plan increases, the City�s Medicare tax liability will also decrease.

RECOMMENDATION

Staff recommends that City Council approve the Resolution entitled: �A Resolution of the Council of the City of Burbank approving revisions to the Sheakley Uniservice, Inc. Flexible Benefits Plan Adoption Agreement, the City of Burbank Flexible Benefits Plan Summary Plan Description, and Sheakley Uniservice, Inc. Flexible Benefits Plan Basic Plan Document.�

go to the top