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Taxability of employer paying COBRA premiums, etc.


Guest tonjer
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Guest tonjer

I have a few questions regarding the taxability of the employer paying for its employee's benefits in the following situations:

We have a situation where an employer has been giving an employee money to pay the COBRA premiums at the spouse's former employer. The employer has also been giving another employee money to purchase health insurance at the spouse's company. The employer has not been reporting the above as income to the recipient. In one situation, the employee did report the amount received as income. To fix this, does the employer need to pay the FICA tax for both itself and the employee?

We also have a situation where the emloyer has been paying for an employee's dental bills (up to $1,000/ year). Is this taxable income to the employee? There is no plan, the employer just does it.

Lastly, the employer has been paying Medicare supplemental premiums for 2 retirees. Is this taxable income to the retiree?

Any guidance would be appreciated on what the employer should do to remedy the above situations.

Thank you.

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  • 2 weeks later...

Since there was a purpose, other than gratuitousness or inheritance, for having given the employee the money, section 102 would not be relevant.

Applying 61-146 etc would show how to make the payments not taxable to the employees. Since retroactive adoption of a plan is not allowed, I suggest that you review When and How this practice was started and whether or not there was a Board resolution authorizing this.

A Plan does not need to be in writing (under many circumstances) but it needs to have been adopted by the company and communicated to the employees, see Treas Regs 105. The employer also needs to obtain verification that the money was and is used solely and totally for insurance premiums or medical (dental) expense reimbursement.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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RR 61-146 does not require a written plan or board resolution in order for the reimbursements to be excluded from wages, since the insurance program is not maintained by the employer. The employee must provide proof that the insurance is in force and is being paid by the employee or the employer may issue a check payable to the insurer.

mjb

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Guest Harry O

I'm not sure how section 102© would apply . . . but you may also want to make sure that the self-insured medical plan nondiscrimination rules are not violated where the employer is paying an employee's dental bills.

mbozek identified the critical issue -- most of these reimbursements will be nontaxable if the employer obtained evidence of that the employees incurred the medical expense.

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A Revenue Ruling is not and never will be the law nor will it ever replace the IRC or Treas Regs. It is simply the statement of the IRS position on the IRC and Treas Regs as they pertain to the specific facts and circumstances of the particular case or issue being addressed in that Revenue Ruling.

I suggest that you consider why 61-146 includes in its last paragraph the mention of the fact that "the employers had no accident or health plan of their own in effect" and what the statement means.

How does an employer put a "plan of their own in effect "?

What authorizes the officers of a company to start a plan or to even open a bank account?

The Answers.. A BOARD RESOLUTION and an ADOPTION AGREEMENT.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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GB- I employers do not adopt a welfare plan pursuant to a board resolution - welfare plan contracts are signed by corporate officers without board approval. I have not found anything in IRC provisions pertaining to welfare benefits that requires board approval to establish a group Life, health or disability plan for which the benefits are not taxed under IRC 79/104-106. I would be interested in what authorty you have found.

mjb

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There is a big difference between the signing of a contract and the decision to put any plan in place. A corporate resolution is required, according to most corporate by-laws, to take an action that is not part of the day to day operation of the company. Most of these by-laws also limit who can sign to the President only unless there is specific Board authorization.

There are specific stae laws that determine who can bind a company. It would be foolish to get an agreement or contract signed by someone with no power to bind the company.

The decision to start a plan just like the decision to open a bank account is not part of the day to day operation of the company and needs a Board decision. Board decisions are usually issued as Board Resolutions. Ask your local banker what they require for the opening of a bank account and you will easily see the requirement for a Board Resolution, A welfare benefit plan gets no different treatment.

The fact that you might have seen persons signing some contracts does not mean that they were not given the authority by the Board or that the Board did not issue a Board Resolution. They just might not ahve told you and you just did not know that it existed.

You might want to do something as simple as looking at the documentation that is required by Aflac, Colonial etc( for voluntary benefits) or Corbel or MHM (for Cafeteria plans etc). Among the documents is a Board Resolution, A a Certificate of Board Resolution and an Adoption Agreement. The reason why these forms are there is simply because they are needed so as to establish the plan and have the contracts be binding.

Kirk,

Look for authority to bind the corporation, but not limited to any context.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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I do not have any of my legal references online, so I just did asimple Google search, here is some of what I found that might help;

http://www.ncf.ca/ncf/execdir/2001/may/2001-03.txt

http://www.asands.com/wn_transactional.html

http://www.stoel.com/resources/articles/en...news-mar-2.shtm

http://www.reevesjournal.com/CDA/ArticleIn...5,80594,00.html

There are thousands of articles on the subject that are easily found

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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