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ExecuCare Executive Reimbursement Plans


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Guest benefitsnerd

New Small Group company (C Corp) is offering FSA for the first time but the plan is top heavy. The top 2 executives significanly exceed allowed pre-tax contributions. As an alternative, ExecuCare Executive Reimbursement plan would provide these two employees the ability to receive benefits for unreimbursed medical expenses on a tax free basis and in addition, the employer will be able to write off the claims payments (110% of claim amount) as an eligible business expense.

Question: Can the employer make itself whole by reducing the two participants annual income comensurate to the dollar amount the employer paid in benefits?

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Just because the promoter of a plan claims that the plan has certain tax benefits does not make it so. Have you read the current opinion letter? Wondered why the old opinion letters were withdrawn or replaced? But most of all, read the disclaimers and caveats in the opinion letter.

For there to be the purported tax benefits, the plan has to be an insured plan, doesn't it? Does it qualify? Because something comes from an insurance company does not make it insured? What does the opinion letter say about it qualifying as insurance?

Re your Question:

If the employer pays the benefit, wouldn't this be a self insured plan? If self insured and covers only the executives, Why would you need Exec-u-Care? If self insured and covering only the executives why would 105(h) not apply?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Over the years they have used an opinion letter from a Big 4. However, the opining Big 4 keeps changing for reasons not disclosed. All the opinions read roughly the same with the same caveats basically saying they think that the plan is... but if... then.... and mainly that it depends on whether the plan qualifies as insurance but they are not saying that it does etc.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Exec-U-Care is sponsored by a reputable company. Their brochure states that "premium contributions may qualify for a tax deduction" and includes the disclaimer, "As with any tax matter, you should discuss this with your personal tax advisor."

This is not adequate to make me feel comfortable. The opinion letter, from Ernst & Young, goes all the way back to 8-1-2000, almost the dark ages for this type of opinion. I would expect a post-230 contact with Ernst & Young to yield a response that the opinion letter has been withdrawn.

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I agree with the skepticism voiced by vebaguru.

The first generation of product that Exec-u-care produced (that I saw) clearly violated the 105(h) regulations. I can't imagine anybody being able to make an argument that it worked with a straight face.

Their second generation product (that I saw) was a lot less aggressive, but it still wasn't clear that it worked.

I think that, in the final analysis, it will depend on the client's risk level tolerance.

However, I've not seen any of the opinions supporting their product, but I'm skeptical that they would change my viewpoint. I've read many opinions in over two decades in private practice, and I've yet to read one that changed the point of view that I held before I read the opinion.

People have to read opinions very carefully. Many of them actually say nothing.

I saw one in which a major law firm opined that something worked. But if you read the opinion, it was based upon facts that were the exact opposite of what happened. Thus, the law firm was able to issue the opinion and generate a ton of legal fees, yet had no exposure, because nobody could rely upon it.

Kirk Maldonado

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Why do you think that the benefits would be taxable? There are recent cases where shareholders of personal corps have been permitted to exclude medical expenses paid by their employers under a written plan approved by the corporation.

mjb

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Can you give some examples of these recent cases so that we can see if there is any similarity to the Exec-U-Care type arrangement?

In general, since the benefit is the reimbursement of eligible medical expenses, for the benefit to be not taxable it has to be a benefit paid under an accident and health plan whether insured or self insured.

Since it is discrminatory (for certain executive) it should have to be fully insured.

The question is whether this arrangement constitutes insurance. This is an issue that none of the opinion letters used, have been willing to address.

Look at the "premium" arrangement and you will see why many would question the ability to qualify as insurance absent a risk factor etc. The fact that an insurance company is involved does not make it, and has nothing to do with a product or arrangement being, insurance.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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mbozek:

For the reimbursements under a discriminatory medical expense reimbursement plan benefit to be exempt from income tax, they must provided under a fully insured arrangement.

The first generation of the Exec-u-care plan ("First Generation "Poduct") provided that that the amount of the premium was (something like) 120% of the costs. Thus, there was no shifting of risk to the insurer, so that those arrangements wouldn't survive even the weakest level of scrutiny.

I don't recall exactly how their Second generation Product works, but I distinctly recall that it was tweaked to address this problem, although I thought that the risk that the insurer might actually incur any losses was pretty attenuated. Thus, I felt it was not clear whether it work or whether it didn't work; it was a grey area.

Gburns:

Set forth below is the pertinent language in the regulations under section 105(h) regarding when an arrangement is fully insured. I which that it were more expansive than it is, but it is all we have to go on. At least I'm not aware of any court decisions, revenue rulings, or private letter rulings on this issue:

A plan underwritten by a policy of insurance or a prepaid health care plan that does not involve the shifting of risk to an unrelated third party is considered self-insured for purposes of this section. Accordingly, a cost-plus policy or a policy which in effect merely provides administrative or bookkeeping services is considered self-insured for purposes of this section. However, a plan is not considered self-insured merely because one factor the insurer uses in determining the premium is the employer's prior claims experience.

Thus, the First Generation Product clearly flunked this test, because the amount of the premium was determined under a "cost-plus" formula.

Everyone:

Somebody posted a message on the Message Boards a long time ago saying the Jefferson Pilot and Security Financial offered products that were similar to that offered by Exec-U-Care. Does anybody know anything about how those insurers structured their plans?

Kirk Maldonado

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In RD Weeldreyer, 86 TCM 622 and R. Schmidt, 86 TCM 631 (2003) Tax ct held that reimbursement of employee medical expenses was excluded from employee's income under IRC 105/106 and deductible by employer under IRC 162. No mention was made of application of 105(h) to reimbursements. See also RW Tschetter 86 TCM 639 and Waterfall Farms, 68 TCM 648.

mjb

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I have not seen any that did not have that same financing structure nor have I seen any without an opinion letter that had a caveat (or sidestepped) regarding the qualifying as insurance issue.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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It is now currently underwritten by Jefferson Pilot. In the past there have been Monumental Life, Guarantee Life and others. Why the insurance companies and the writers of the various opinion letters get changed every now and then is a question that should be answered.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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  • 2 weeks later...
Guest nobletorch

;) Hello All

Anohter raging discussion on the board - great.

Here is my 2cents worth.

Back to the orginal facts -- I am going to restate them.

We have a new group. They have an FSA program. Two of the Highly Compensated Employees over contributed to the plan. Thus it is top heavy and the employer wants to know what the options are.

First and foremost - I am not sure an FSA can be top heavy in the same sense that other benefit plans - specfically pension plans -- can be. Even if they can be - your plan adminstrator/enrollment process should limit their contributions automatically. Incases where that does not occur - refund the excess over the plan limit.

Now back to our highly compensated employees. ----

They apparently don't mind paying the medical bill out of their pocket but object to paying the taxes on those dollars. The employer doesn't mind paying the employees but also wants to avoid the taxes. ---------- This is really strange because the taxes are the smaller portion of the total expense.

So here are some options.

1. The employer pays the medical bills. Treats the money as a bonus to the employee which increase the employees gross income. He become liable for the taxes but even in the highest brackets this is less than 35-40% of the total bills. Additionally, the employee can then apply those dollars towards the 4.5% floor went he itemizes his taxes at the end of the year. At the same time the employer gets to take that expense as a business expense which reduces the business' taxable income.

2. The employer buys the employee an individual fully insured policy (no gimmicks) that would cover these expenses. To avoid discrimination issues, I would recommend that the premium for this policy be treated as compensation in the same manner as in #1. Again the benefits of this is that the employee gets the coverage for the price of the taxes.

3. The first two options assume that the employer thinks that these folks are "keepers" and that they are worth the hassle and risks of jumping through all the hoops to keep them. (This would include other executives and regular employees getting frustrated at the special treatment these two are receiving. If they are not worth that then don't jump through the hoops.

Like a lot of things - the more complicated it gets, the more likely things are going to get messed up. Every time you have to jump a hurdle you run the risk of tripping. The finshline better be worth it.

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The problem is with option 2. Where would the employer get such "an individual fully insured policy (no gimmicks) that would cover these expenses" that would not create problems?

As previously pointed the question of whether any of the named or available products qualify as being insurance is unanswered. This issue is skirted and avoided in all the Opinion Letters related to any of the available products.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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NT: If you had taken the time to research prior posts you would have discovered that employer reimbursement of an employee who pays for individual health ins policy is not taxable income under Rev Rul 61-146 and is not discriminatory under IRC 105. Alternatively an employer purchased individual policy is excluded from taxable income under reg 1.106-1. Excluding employees who are covered by insurance from a FSA avoids discrimination issues under 125.

mjb

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Guest nobletorch

:D

Good point. The answer is your friendly insurance agent. Mutual of Omaha used to have a policy that would cover just the deductible, or the deductible and the 20% co-insurance on your medical plan. If the employer's plan has other thresholds individual indemity polices may provide the anwer. If one cannot be found - then option two is not vaiable.

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Guest nobletorch

MB - I understand your point. My assumption was that these policies would be supplemental to the employer plan. I will review the citations. Thanks

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Guest taylorjeff

This may be too late, but its' been awhile since I've reviewed this board. I thought I'd take a stab since I've used the product from Security Life for myself in the past. The product I had was insurance and Security Life was at risk. They were on the hook for claims per person up to $100K. The billable amount to the employer (me, in this case) was max'd at $30K if one enrollee, $20K per if two, $15K per if 3-5, and so on. The premium was the submitted claims + 9%. Before I used it I checked with a few other benefits consultants more familiar with the plans and all agreed if there was an "at risk" feature it qualified and was a way to provide a discriminatory plan for higher comped employees. And of this date, I have never heard of any of these plans (either security Life or Jefferson pilot) being disallowed. But, if I was to sell this product to a client I would add the caveat that this is an "on the edge" product and that while unlikely, it is possible that it could be disallowed as a business expense, income could be attributed to the beneficial parties, or both. For my protection, I'd ask the insurance company for an updated disclosure as to whether they had been challenged on the product.

As to the second part of your question, the only way I've ever seen this plan used is to provide extra benefits to the firms' key employees, and the employer paid the full cost (claims and surcharge).

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Did the supporting legal documents, such as the Opinion Letter used, claim that Security Life was "at risk" or that the product was covered by an insurance policy?

All the OLs that I have seen, caveat this issue by stating that an opinion is not being expressed as to whether the Plan qualifies as insurance. The issue being the "at risk" question.

Why do you think that Security Life is "at risk" and why was it "insurance"?

Being "underwritten by" is not the same as being "insured by" or being "at risk". Insurance products have a state Dept of Insurance approval. Do you know what state approved it and either the approval number of the approved policy form number?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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GBurns:

First, I want to state that I know absolutely zero about getting insurance products approved by the applicable state insurance commmissioner, so this may be a dumb question.

Second, I agree with the comments in your most recent post.

Third, I am wondering why you are asking if the insurance commissioner has approved the policy. Would the insurance commissioner refuse to approve a policy if there was no risk to the insurer (on the ground that it would be misleading to consumers to label it as "insurance?")

Kirk Maldonado

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In many of the posts the connection is being made with an insurance company as if the item was being provided by that insurance company rather than by the marketing company. The assumption seems to be that because the marketing material uses the term "underwritten by" it means the same as "insured by".

I asked the question because many people think that because an item comes from or is associated with an insurance company, it is automatically insurance. This is a problem that surfaces quite often with self funded health plans and ASO contracts etc, but also comes up with other items as well.

There are promoters of various "plans" who will use the administrative services of an insurance company or just "name drop" so as to imply a relationship that is not full disclosed to nor understood by the consumer. Legitimacy by association, if you will.

1 of the ways of determining whether or not an item is "insurance" is to see if the item is approved by any state regulator. All insurance products have to be approved either by the regulator in the state of domicile (group and association products) or by the regulator of the state of residence of the consumer. Also in most states items that are approved in another state (usually group products only) must also be filed for informational (and monitoring) purposes. Individuallly underwitten (non group) products have to filed with and approved by the state of residence of the consumer.

This approval includes, rates, policy form, marketing materials and market conduct etc.

To answer your question, Yes many insurance commissioners would not approve for those and other reasons. Misleading is good, but not meeting reserving requirements or loss ratio etc calculations should also be considerations. Having monitorable items is always a consideration, and in this case the monitoring should be so unusual as to cause them concern.

Aside from the insurance aspect from the state regulatory point of view, there still remains the "at risk" requirements of the IRC. This aspect is what is evaded in the Opinion Letters.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest taylorjeff

GBurns,

It is a insurance policy. Security Financial has filed the product and is licensed to do business in 46 states.

The insurance company is at risk. As noted in my previous post, the maximum benefit is $100K per emp per benefit period. For 1 employee, the maximum premium is $30K, for groups of 11+, the maximum premium is $12K per emp.

They considered purchasing an opinion letter from Ernst & Young 12 years ago. The cost at the time was $50,000 and they elected to pass. Since the policy was licensed for sale as an insurance product, approved by the state departments of insurance, in their opinion that was really all that was required. Based on what I've been reading in this post regarding the caveats contained in these opinion letters, this sounds like a sensible approach.

FYI, I found out about the policy and the company through reading the HIU publication of the NAHU.

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taylorjeff:

I don't think that their risk exposure is anywhere near the level that people would assume with the $30,000/$100,000 amounts you mentioned.

Basically, all that the insurance is going to cover in most cases is the deductible and the co-payments. That's because the employer's Out Of Pocket Limit ("OOPs Limit") will kick in at some point and in most cases cover everything that the executive incurs.

Also, executives tend to be healthier than the general public, as evidenced by the favorable rates available to them for life insurance policies.

I would be very skeptical that any of the insurance companies ever lose any money on those products. By that, I mean if you treat all of the policies issued by that insurance company to all of the different employers that purchased policies from it.

Kirk Maldonado

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TaylorJeff: is this an underwritten product where the ins co reviews the applicant's medical history before issuing the policy or does the co do little or no medical review before issuing a policy? I dont think the standard is whether the ins co makes money on all health policies since ins co. dont lose money on group life policies. The question is whether risk of loss for medical expenses has been shifted to an unrelated third party under the policy. If the ins co can be required to pay up to 100k in benefits under the policy for med care for 30k in premium then there has been a shifting of risk. The probability that the carrier will incur a loss on the policy is not relevant. If it was then ADD issued to airline passingers would not be deemed ins proceeds under the tax law exempt from income tax for those few passingers who die in airline crashes. I dont think any ins co loses money on an ADD policy but ADD is still ins because the risk of loss has been shifted to the insurer.

mjb

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