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Way to reimburse individual employees for health insurance payments on pretax basis?


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17 replies to this topic

#1 zzedzz

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Posted 08 October 2004 - 03:44 PM

I am trying to help a company that does not offer insurance to their employees solve a problem. They currently are reimbursing their managers for insurance premiums that are paid out-of-pocket by "grossing up" the managers' salary. This is a questionable practice at best, and also not ideal because it's aftertax dollars being used. (They tried more than once to offer insurance to all employees but couldn't meet the required 50% participation test for NC.)

Does anyone know how they might be able to set up a pretax means of reimbursing managers, or at least set up a pretax means for managers to pay the premiums themselves? My reading in EBIA's cafe plan manual suggests to me there is a way, but so far no one I've talked to has given me an actual way to implement a solution.

Any suggestions on this are appreciated.

Ed

#2 vebaguru

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Posted 08 October 2004 - 06:23 PM

There have been several threads discussing this topic since 2000. I suggest that you search under 125 and read through those threads. Then ask you questions.

#3 GBurns

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Posted 08 October 2004 - 06:46 PM

I suggest that you read the EBIA manual again. I wonder where you could have found anything that would suggest such a thing?

The issue of reimbursing premiums that were paid pre-tax has been the subject of numerous articles since August 1999 ECFC Annual Conference. Do a Google search on ""Double Dipping" health plan" and "Double dipping IRS" then do a search on whatever names you then get.

The IRS also addressed this issue in Revenue Ruling 2002-3 and 2002-80. Also do a Google search.

It might be good to clarify your post:

What is a "pretax means of reimbursing managers"? This suggests giving them back what they paid.

A "pretax means for managers to pay the premiums themselves" is done through a section 125 Cafeteria Plan. Section 125 Cafeteria Plans have been around since before 1980 so I wonder if you mean something else?
George D. Burns
Cost Reduction Strategies
Burns and Associates, Inc
www.costreductionstrategies.com(under construction)
www.employeebenefitsstrategies.com(under construction)

#4 oriecat

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Posted 08 October 2004 - 07:01 PM

I don't see anything in his post to indicate any double dipping. Where did he say the original premiums are being paid pre-tax already?

I think some Sec125 tpas offer this and call it Premium Reimbursement Account.

#5 GBurns

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Posted 10 October 2004 - 02:48 PM

That is why I posted:

"It might be good to clarify your post:

What is a "pretax means of reimbursing managers"? This suggests giving them back what they paid.

A "pretax means for managers to pay the premiums themselves" is done through a section 125 Cafeteria Plan. Section 125 Cafeteria Plans have been around since before 1980 so I wonder if you mean something else? "
George D. Burns
Cost Reduction Strategies
Burns and Associates, Inc
www.costreductionstrategies.com(under construction)
www.employeebenefitsstrategies.com(under construction)

#6 Guest_named_b2kates_*

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Posted 11 October 2004 - 08:10 AM

if the company is willing to reimburse the managers 100%, why not adopt a medical plan that only covers managers?

#7 g8r

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Posted 14 October 2004 - 09:21 PM

I agree with B2kates. For insured benefits, an employer can decide which employees it will pay the coverage for. However, you may find that state insurance restrict your ability to do this - that would obviously vary from state to state.

This has been discussed in prior threads, but you could have a premium payment account under a cafeteria plan. There are some non-tax issues that arise (such as HIPAA) so you have to be very careful doing this. The other wrinkle is that you only want this to be available to managers. If they are HCEs, then you're going to have a potential discrimination problem.

#8 mbozek

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Posted 14 October 2004 - 10:22 PM

Under Rev. rule 61-146 an employer can reimburse an employee for premiums that the employee pays for individual health ins. and the reimbursement will be excluded from the employees gross income. The employer must require that the employee provide proof of the purchase of insurance.
mjb

#9 GBurns

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Posted 14 October 2004 - 11:15 PM

q8r

A premium payment account is the essence of all cafeteria plans, What does that have to do with this issue?
*****

Rev Ruling 61-146 has nothing to do with pre-tax premiums or premium reimbursement, but it did have to do with non-taxable reimbursement of premiums that were paid after tax. But the original post wanted to "set up a pretax means of reimbursing managers" as a possible solution.

The other solution to "at least set up a pretax means for managers to pay the premiums themselves" would be to set up a cafeteria plan.
George D. Burns
Cost Reduction Strategies
Burns and Associates, Inc
www.costreductionstrategies.com(under construction)
www.employeebenefitsstrategies.com(under construction)

#10 mbozek

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Posted 15 October 2004 - 09:33 AM

I thought the question was how to provide pre tax payments for health ins premiums now paid by employees on an after tax basis. If the er reimburses the employee for health care and the reimbursement is excluded from the employees' taxable income how is that different than the direct payment by the employer to the ins co of the premiums on a pre tax basis (which is also permitted under RR 61-146)? Employee has 0 taxable income on the cost of the ins premiums in both cases.
mjb

#11 GBurns

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Posted 15 October 2004 - 11:00 AM

This is not an issue of semantics.

RR 61-146 does not permit "the direct payment by the employer to the ins co of the premiums on a pre tax basis". It has nothing to do with pre-tax. It has to do with non-taxable and excluded income. There is a big and important difference and the implementation of each is different.

The question was about what we thought of his 2 suggestions and how to implement.

The only way to "provide pre tax payments for health ins premiums now paid by employees on an after tax basis" is through a cafeteria plan. In other words convert the employee's after tac deduction or payment to a pre-tax salary reduuction. However, this would make the premium non-reimburseable on a non-taxable basis by the employer.

Under 61-146 the employees would continue after tax premium payments but the employer reimbursement, if monitored properly, would not be taxable income.

No pre-taxing of any premium is under 61-146.
George D. Burns
Cost Reduction Strategies
Burns and Associates, Inc
www.costreductionstrategies.com(under construction)
www.employeebenefitsstrategies.com(under construction)

#12 mbozek

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Posted 15 October 2004 - 11:59 AM

GB: Method 2 of RR 61-146 specifically permits the employer to issue a check for the premium payable to the employee's ins co on a pre tax basis under Reg 1.106-1.
mjb

#13 GBurns

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Posted 15 October 2004 - 03:38 PM

mbozek,

You are confusing non taxable with pre-tax. Non-taxabkle means not included in the employees gross income. Pre-tax means reduced from the employee's gross income. Pre taxing is done on a payroll. A non taxable amount is paid to the employee in any manner not including payroll even if paid with the paycheck.
George D. Burns
Cost Reduction Strategies
Burns and Associates, Inc
www.costreductionstrategies.com(under construction)
www.employeebenefitsstrategies.com(under construction)

#14 mbozek

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Posted 15 October 2004 - 04:12 PM

Isnt pre tax vs. non tax a distinction without a difference because the premium is excluded from taxable income in either event?
mjb

#15 GBurns

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Posted 15 October 2004 - 04:23 PM

Just try to non tax an employee's section 125 salary reduction instead of pre-taxing it and you will see the difference and the need for the difference. Or ask payroll of they can pre tax an employee non-taxable expense reimbursement and they will explain the big difference.

Excluded means kept away from or out of being included. Pre-tax is used to denote what is reduced.
George D. Burns
Cost Reduction Strategies
Burns and Associates, Inc
www.costreductionstrategies.com(under construction)
www.employeebenefitsstrategies.com(under construction)

#16 g8r

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Posted 15 October 2004 - 11:07 PM

Here we go again. Yes, there is a difference in pre-tax vs. non-taxable. But, the end result is the same - which is what the initial question was.

How can you provide insurance coverage for employees (here it's a select group) on a tax "preferred" basis. I used preferred so you don't have to get hung up on the technicalities.

There are only 2 ways:

1. An employer can "pay" the premium and employees have an exclusion from income under IRC 105 (and this is explained below in more detail - bear with me).

2. An employee can pay the premium (with after-tax dollars) and claim a deduction (subject to the 7 1/2 % threshold).

Option 2 is not a good solution - the compensation is subject to payroll taxes (e.g., FICA, FUTA) and you have to meet the 7 1/2% threshold.

So, the question is how do we fit under option 1. And, let's put $$ to it. The employer will only pay a total of $100,000 in comp and benefits and the premium is $1,000.

The direct method - employer pays the entire premium to the insurance company. Employee gets $99,000 as cash and employer pays $1,000. As pointed out earlier, an employer can pick who it will pay premiums for. Section 89 is long gone so the only issue is state insurance laws. Also, as pointed out, it doesn't have to be a group or employer sponsored policy. Rev. Rul. 61-146 allows the policy to be an individul policy.

The "reimbursement" method - Employee pays premium with after-tax dollars. Employer then "pays" or "reimburses" employee for the premium. Thus, the individual is getting additional funds from the employer over and above the regular pay that was already taxed to the employee. But, this additional reimbursement is excludible from gross income - per Rev. Rul. 61-146. Here, the employer pays the employee $99,000, the employee pays taxes and pays the premium (so the premium is paid with over tax $). The employer then pays (reimburses) the employee an additional $1,000 for the premium but this additional $1,000 is not subject to taxes.

The "cafeteria plan" method. As we know, this just converts what would have been taxable compensation to a tax-free employer provided benefit (i.e., a benefit the value of which is excluded from income because it becomes an employer provided benefit excludible under 105). Employer offers $100,000 and employee elects to reduce that through the cafe plan by $1,000. So, employee gets $99,000 net. Employer takes the $1,000 that the employee gave up and pays the premium -- using either of the above two methods (direct payment or reimbursement method).

I don't think it's rocket science here.

Perhaps the bigger issue is why do you even need a cafeteria plan? You only need it if you want to give employees a choice. If the IRS can prove that you gave the employees a choice of $100,000 in cash or $99,000 in cash plus a $1,000 fringe benefit (don't get hung up on the terminology), then the $1,000 is taxable b/c the employees had constructive receipt.

#17 GBurns

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Posted 16 October 2004 - 01:03 AM

While a good summary, you might want to make a few corrections.

"1. An employer can "pay" the premium and employees have an exclusion from income under IRC 105 ." [COLOR=blue]No, it is IRC 106[COLOR=blue]

"a benefit the value of which is excluded from income because it becomes an employer provided benefit excludible under 105"[COLOR=blue]Also IRC 106[COLOR=blue]

Premium is IRC 106.
Benefits received from the health plan is IRC 105.
George D. Burns
Cost Reduction Strategies
Burns and Associates, Inc
www.costreductionstrategies.com(under construction)
www.employeebenefitsstrategies.com(under construction)

#18 g8r

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Posted 17 October 2004 - 03:06 PM

Agreed. 106 is for premiumes and 105 is for benefits received.