I have worked with employers who have established "opt-out" or "cash-out" programs under their cafeteria plans to make sure that those employees who actually elect coverage under their employer's plan are not subject to constructive receipt concerns by the IRS. One of the challenges of that approach, however, seems to be that the employees getting the stipend amount rather than coverage under the employer palnn must recognize the stipend in income and pay taxes on it while employees covered under the company's plan basically get the stipend on a pre-tax or "tax free" basis. The "fairness" rationale then leads the business owners to consider providing a tax "gross-up" or additional amounts to the non-electing employees in order to make up for the different tax treatment.
Also, as I understand it, having the employer contribute the stipend as an employer contribution or flex dollars to a health FSA for those employees not electing employer plan coverage poses big problems because the health FSA rules do not permit participants to use the account to pay for health insurance premiums.
All of this has me wondering if the better approach is not be to establish a simple medical reimbursement plan whereby the employer agrees to reimburse all eligible employees for amounts spent on health insurance premiums up to a maximum monthly stipend amount. For example, if an employee is willing to give each employee up to $300 per month to cover the cost of major health insurance premiums (whether under the employer's group health plan or through other coverage), as long as the employer requires proof that the amounts are essentially being paid in arrears to reimburse the employee for legitimate health insurance costs, shouldn't those payments be tax free?
Would this vary if the amounts being reimbursed were premiums paid by a spouse on a pre-tax basis under a cafeteria plan sponsored by a spouse's employer? Would this potentially be discriminatory if the reimbursement formula provided for payments of 50% of monthly health insurance premium costs up to a maximum of $300 per month? Perhaps that depends on which employees are getting the maximum reimbursement amounts and which are not.
Granted requiring a receipt / proof of premium payments would be a real pain but it seems to me it's preferrable to having the stipend treated as taxable income to those participants that do not elect coverage under the employer's plan. I don't see many folks with these sorts of reimbursement plans these days--at least not outside the very small company / nonprofit sector. Admittedly, I also don't see many employers who are willing to pay a stipend or otherwise make a contribution to the cost of health insurance coverage outside of the employer's own plan but the interest in such programs seems to be on the rise.
I would be grateful for any thoughts on the best or most tax-efficient way to make these sorts of programs work. Thanks.
Edited by 401 Chaos, 29 March 2007 - 05:55 PM.