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Medical Reimbursement


flosfur

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My spouse worked for a small company (15 or so employees) which had ususual Section 125 & Medical Reimbursement arrangment (s) which operated as follows.

The employee portion of the Medical, Dental and Vision insurance premium was treated as employee's deferral under Section 125 and appeared on the pay stubs as negative adjustment to gross pay as follows.

S125 Med -$M

S125 Den -$D

Vision S125 -$V.

The medical reimbursement plan would pay the medical/dental/vision expenses not covered by the insurance and worked like this.

The employee was not required to make an annual election to defer the desired amount as is generally the case for a S125 plan. Instead, when an employee submitted receipts for medical expenses (not covered by insurance) for $P, say, the pay stub would show the following two additional adjustments.

Med Reimb +$P (addition to gross pay)

S125 FSA -$Q (reduction in gross pay).

where Q was slighly higher than P (can't figure out the mathematical relationship between P & Q).

This has the effect of reducing income, FICA and other taxes.

The FICA and Medicare taxes would reduce by 6.2% & 1.45% of $Q, which indicates that the positive adjustment of $P to the pay did not affect the FICA (and other) taxes, yet the negative adjustment of $Q "did affect the taxes".

The claims were submitted to a TPA who would then advise the payroll service of the adjustments to be made (i.e. it was not done by the employer's in house staff).

We never got to find out what would have happened if the amount claimed far exceeded the periodic gross pay - say claim of $2,500 Vs semi-monthly gross pay of $1,500?

How does this work and what are the relevant Code sections providing for such arrangement as I would like to utilize this for my personal use (a small incorporated company in the pension plan industry). Where can I get a plan document for such arrangement?

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I think that you should review the pay stubs and any other explanatory material again. I suspect that you misunderstand the plan and I could not follow your arithmetic in particular:

"Med Reimb +$P (addition to gross pay)

S125 FSA -$Q (reduction in gross pay).

where Q was slighly higher than P (can't figure out the mathematical relationship between P & Q)."

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 had reviewed & re-reviewed those stubs and many times.

Having been an employee & a participant in a Cafeteria plan in the past, I was very surprised to see this unsual arrangement.

Let me give you some actual numbers (instead of $P & $Q).

One month a reimbursement claim for $230 was submitted.

The pay stub after the claim was processed showed the following two additional "adjustments" to pay.

Med Reimb +230.00

S125 FSA -244.50

Comparing the FICA withholding shown in this pay period's pay stub with the amounts shown in the pay stubs with no Med reimbursement involved, showed a reduction of $15.16 in the withheld FICA (6.2% of $244.50). Similarly there were reductions in the withholding for the Medicare taxes (1.45% of $244.5) and in the Federal and State Income taxes.

Does this make it any clearer?

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Nope, it only makes the figures less understandable. Maybe someone else will comment. It might help if you told what the paystub looks like when there is no Med Reimb.

Medical Reimbursements do not usually appear on a pay stub because they are usually paid by a separate check.

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 said previously, when there is no re-imbursement involved then these two adjustment items are blank for the "current pay period" but the "year to date" column has numbers if there ever was a claim during the current yr.

I could spend hours reproducing the pay stub ...

Believe it or not, the reimbursement plan works the way I described it and my spouse's ex-employer still has the plan. So let's leave it at that.

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The usual section 125 and/or FSA arrangement has a predetermined salary reduction which appears on a regular basis whether or not there are medical expenses.

In your scenario there is no regularly scheduled salary reduction A salary reduction being a pre-tax amount). Therefore this arrangement is not being operated as per the rules usually used for section 125 plans or FSAs.

However, there have been and are, a number of plans that the IRS has tried to stop by issuing Revenue Rulings 2002-3, 2002-80 and 2003-43 but without much success. The main reason is that these plans have been sold almost exclusively to small employers who did not ,or could not afford, to seek competent legal advice.

Many of these plans operate as you state wherein whenever and only whenever the employee incurs a medical expense, the employer re-characterizes a portion of salary as being pre-taxed for medical expenses and the employee's paycheck is adjusted by this non-taxed addition which is claimed to be medical expense reimbursement.

In the 1970s this was popular for a brief while until IRS Announcement 84-22 and Notice 84-24 (I think or reverse the numbers) which notified that these "Zero Balance" or ZEBRA plans were now outlawed pending the issuing of Section 125 which then prohibited this as part of the IRC. The Proposed Treas Regs that cafeteria plans and FSAa are operated under expand on the prohibition of these types of arrangements.

Since the August 1999 ECFC Annual conference at which Mr. Harry Beker explained that these arrangements do not meet the requirements of the IRC and Treas Regs, there have been numerous articles by about everyone putting out a Tax or Benefits newsletter warning about these "Double Dipping" and similar arrangements.

Probably the only reason that this employer still has this plan is because they have not seeked legal advice and have not done even the most basic research. The IRS has already announced that they will be taking serious action against the promoters and users of these plans. ALL the clients of the largest promoter were disclosed as part of the discovery related to other illegal insurance products that that promoter also sold (for which they are now according to the newspapers facing long sentences and large fines). The names of users were given to the IRS. It will only be a matter of time before the IRS comes a calling and both the employer and your wife will have a tax liability with harsh penalties if they are using one of these arrangements.

You might want to do a Google search using the name of the TPA in " .." and "Double dip arrangement" , and "Health Incentive Plan" "HI Plan" plus the name of the TPA. Also go to the EBIA.com website and do a search for "Double dip arrangement".

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 should also have pointed out that a number of these promoters have changed either their company name, the name of the plan or even both, in addition to shifting their legality rationale each time the IRS issues a statement or Revenue Ruling and or the negative articles become a problem to sales.

Check to see what the previous names etc were, and use those in your search also.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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