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ExecuCare Executive Reimbursement Plans


Guest benefitsnerd
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mbozek:

I agree with your statement that the test is whether risk has been shifted to the insurance company.

My point is that there is no risk to the insurance company if there is no possibility of loss. For example, if the premium per person was $10,000, but the OOPs limit was $7,000, how could the insurance company lose money? Even if every participant incurred the maximum amount of claims, the insurance company would still make at least $3,000 per participant.

Stated in a different fashion, there is no shifting of risk in that arrangement because the insurance company has no risk; there's no way that they could lose money, even in the worst case scenario they make money.

Kirk Maldonado

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Here is a possible scenario:

There is an insured medical plan covering all employees and the HCEs have a supplemental medical insurance plan.

The basic plan may be one which has a deductible, some co-payments and, most likely, an out of pocket maximum ("OOPM") per individual, and an overall maximum limit of $2,000,000 per individual per lifetime. For the sake of argument, let's assume the OOPM is $10,000.

The supplemantal plan insures the HCEs for any coverd medical expenses which are not reimbursed by the basic plan (the maximum is the $10,000 OOPM plus any other covered expenses which may exceed individual limitations - e.g., mental health limitations or expenses in excess of the $2,000,000 maximum, but, in total, no more than $100,000 per year (or lifetime?).

So, for $30,000 per year, the supplemental policy will insure the employee for a benefit which has a most likely net (expected claim cost) cost of much less than $10,000 per year.

Well, this supplemental plan is considered "insurance". It definitely can get approval by insurance departments as a valid group insurance policy (and, if presented properly, as an individual policy).

The question I have is why would an employer would pay the carrier an annual surcharge of $20,000 to $25,000 per employee for this supplemental coverage as opposed to no more than $5,000 to $10,000 as a combination of self funded beneifts plus the additional taxes on an occasional basis?

Oops, I forgot. Many employers will pay thousands in fees and other expenses to avoid paying hundreds in taxes.

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taylorjeff

There are 2 different requirements to be insurance. The state DOI and the IRS. Even if the state approves a product that does not mean that it meets the IRS "at risk" requirements etc. This point is made in the caveats of those products that do have an Opinion Letter.

Here is a link to the 200 E&Y Opinion Letter for Exec-u-Care:

http://www.benico.com/PDF%20files/EYLong.pdf

Note the wording and the argument regarding premium structure especially the mention of "a cost plus arrangement" on page 10.

So the question still is, Whether the premium arrangement meets the IRS requirements for "at risk" and "insurance" etc, or is it just "a cost plus arrangement"?

I also, like Larry M, wonder why any employer would do it anyhow?

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

The insurance policy can and does pay more than the premium. Any section 213 expense is eligible. Non-covered, over U&C, non-network charges, etc. In my case, my family has a $0 deductible 100% policy. But, my submitted charges were approx. $4000 (orthodontist, Rx/OV copays, Er copay, eye care, etc.). There is a $10,000 limitation in the policy for infertility, so that is a possibility, as would mental health, private duty nursing, chiropractic, tmj, phys/speech/occ. therapies or any services with inside maximums. There is also an AD&D bnefit.

The employer is not going to pay "$25000" in premium for $2000 of benefit. the policy has an annual premium of $200 and an additional premium equal to the submitted claims plus 9%. As stated earlier there are premium "caps" based on group size.

I've seen this product often in professional service firms, engineering, architects, etc.

It is not licensed in NY.

I read pages 10 & 11 of the E&Y letter. Maybe i'm going blind (its 2am), but I didn't see the section on the "cost plus" premium arrangement, though I'm sure its there somewhere. It did seem like E&Y was saying based on all the relevent criteria, the Jeff Pilot product was insurance, had risk, and was not a self insured product.

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See PLR 200007025 where IRS held that a self funded plan in which risk for health benefits for employees and partners was shifted to the plan from the partnership that sponsored the plan is an arrangment having the effect of accident or health ins in which payments are excluded from the income of the partners of the plan sponsor. The IRS views insurance as the shifting of the risk from the insured to the insurance program and the risk of loss is distributed among the participants in the program. The payment of additonal premiums to cover unexpected losses incurred by the plan does not prevent the arrangement from being treated as accident or health ins.

mjb

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taylorjeff:

In the clients that I've had look at the Exec-U-Care Policy, there was no way possible that the insurance company could lose a penny. There is always a theoretical risk that it could happen, but it is a lot less than the risk of the executive being hit by a meteor in the next twelve months.

You wouldn't by any chance be affiliated with one of the insurance companies or help them market that product by any chance, would you? Your arguments are a bit too impassioned for somebody who doesn't have a financial interest in the marketing of these products.

I have no financial interest in whether my clients buy those policies. I just don't want them to get involved in something that may not produce the tax results that they proffer.

Also, I'd like to see a current opinion from a major accounting firm or law firm. I'll bet that the new restrictions in Circular 230 will effectively preclude any favorable opinions on these contracts.

Furthermore, if it was clear that these contracts work, why would somebody pay $50,000 to $100,000 to get an opinion on them if you could get a private letter ruling on them for one-tenth the price? (Assuming that is a topic on which the IRS would rule.)

Kirk Maldonado

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I thought that insurance under IRS rules was based on whether there was a shifting of risk from the employer to another entity (See PLR 200007025) not whether the insurance co was likely to incur a loss. There was a federal case about a year ago where a ct held that the remoteness of the risk insured against had no effect on whether the risk was insured under the IRC.

mjb

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Guest taylorjeff

Hi Kirk,

I'll answer your points.

taylorjeff:

In the clients that I've had look at the Exec-U-Care Policy, there was no way possible that the insurance company could lose a penny. There is always a theoretical risk that it could happen, but it is a lot less than the risk of the executive being hit by a meteor in the next twelve months.

Answer - I haven't looked at the Execucare Product, so I can't agree or disagree. I did call the contact at Security Financial Life and they said they have paid out claims in excess of premiums on some individual accounts, approximately $250,000 last year.

You wouldn't by any chance be affiliated with one of the insurance companies or help them market that product by any chance, would you? Your arguments are a bit too impassioned for somebody who doesn't have a financial interest in the marketing of these products.

Answer - No, I'm not in any way affiliated. As I said in my first post, I bought the product for myself. I haven't marketed to any of my clients. I am involved with two groups who had purchased the plans previously and have had them for many years. I don't think I was "impassioned" at all. I was simply giving my own experience dealing with one company and addressing statements about the product I had. Ie. It wasn't insurance. It wasn't filed as insurance. It was self-insurance. People were paying premiums grossly in excess of whatever benefit they could receive.

Answer - It does look like a self insured plan but so does a retrospectivle rated health plan. It seems to me that since this was filed with the DOI in 46 states, and insurance is a state regulated issue, that should settle the matter.

I have no financial interest in whether my clients buy those policies. I just don't want them to get involved in something that may not produce the tax results that they proffer.

Answer - Fine.

Also, I'd like to see a current opinion from a major accounting firm or law firm. I'll bet that the new restrictions in Circular 230 will effectively preclude any favorable opinions on these contracts.

Furthermore, if it was clear that these contracts work, why would somebody pay $50,000 to $100,000 to get an opinion on them if you could get a private letter ruling on them for one-tenth the price? (Assuming that is a topic on which the IRS would rule.)

Answer - As I stated previously, Security Life considered getting the opinion from a firm, but didn't feel it was necessary as their contract had been reviewd by the DOI in the states it was marketed. And why bother with a private letter ruling? I just don't understand how or why the IRS would have any oversight authority over a state DOI approved insurance product (designed to cover eligible, ie section 213 expenses) sold in their respective states. Do you or anybody else on this forum know of any consumer who has bought one of these products and had their premiums disallowed or had to pay a penalty?

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I don't think that the IRS views the actions by the insurance commissioners as binding on the IRS on this point. Nor can I imagine a court taking that position.

Your arguments might sell well to unsophisticated listeners, but I doubt that they will be considered persuasive by most of the readers of the Message Boards.

Kirk Maldonado

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Isnt the issue whether there is risk shifting from the insured to an insurer under the insurance contract - Under PLR 200007025 risk shifting "will occur when the insurer agrees to protect the insured against direct or indirect economic loss arising from a defined contingency involving an accident or health risk... The risk shifting occurs because the insurer assumes another's risk of economic loss in exchange for the payment of a premium by the insured or other payor." "If the premiums represent the actuarial cost of transferring risk then they will be deductible as insurance not withstanding that the premiums may be subject to a later adjustment depending on the taxpayers actual loss experience." TAM 9540001.

If the economic risk insured against is transferred to the insurer and distributed among its insureds then the policy is insurance whether it is provided under an insurance policy approved by a state ins dept or under an arrangement having the effect of insurance. The creiteria for insurance does not include the likelyhood of the insurer incurring a loss. The representations regarding the policy provisions appear to provide for payment for certain illnesses in excess of the premium.

mjb

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taylorjeff

Do you know how many states the Security Life or any of the other plans, are approved in? And what size groups are any of them approved for?

From my recollection, very few states have approved any of them and those that have any sort of approval, have size restrictions 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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Guest taylorjeff

GBurns,

When I called, I was told their SML Select & BeneComp product is filed and available in 46 states. The company itself (Security Financial Life) is licensed to do business in 49 states and several U.S. territories.

In the material I have, there is no minimum or maximum group size. I've seen plans of this type used primarily with business owners, executives, and key employees so, in reality, the group size tends to be small.

Jeff

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  • 1 year later...
Guest Dolores
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?

Fast forward 2 years, and a client that is an S corporation is being offered the Exec-U-Care program for its over 2% shareholders since they cannot participate in the Company's Section 125 plan and related FSA plan. The website for Exec-U-Care doesn't specifically address S Corp tax issues, especially the question of whether reimbursements will be taxable to the S shareholders or whether the Company payments for "insurance" would be added to S Corp shareholders taxable income. The representation by the broker selling the plan is that the Company would get the deduction for the 111% it pays to Exec-U-Care and that reimbursements of medical expenses to the owners would not be taxable income to them.

Any comments on the S Corp tax issues or undates on opinion letters for the program?

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Folks:

This has been a fascinating discussion on the differences between self insured and fully insured plans.

Ostensibly, the rationale is that fully insured plans are not subject to discrimination issues, while self insured plans are.

While literally factual, the practicality is that both arrangements are subject to discrimination issues.

Self insured plans are not subject to state regulation.

Therefore, the federal government needed to pass discrimination provisions.

Fully insured plans are subject to state regulation, including discrimination issues.

Therefore, federal laws, supposedly, are not necessary.

Don Levit

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Guest Dolores
Folks:

This has been a fascinating discussion on the differences between self insured and fully insured plans.

Ostensibly, the rationale is that fully insured plans are not subject to discrimination issues, while self insured plans are.

While literally factual, the practicality is that both arrangements are subject to discrimination issues.

Self insured plans are not subject to state regulation.

Therefore, the federal government needed to pass discrimination provisions.

Fully insured plans are subject to state regulation, including discrimination issues.

Therefore, federal laws, supposedly, are not necessary.

Don Levit

How do I get more information on state (Missouri) regulations pertaining to discrimination issues?

The latest opinion letter provided to me by the broker is from KPMG, dated October 2005. It still looks like the conclusions on tax impact are still based on the assumption that the plan is an insured accident and health plan. There are a number of reasons presented to support it being considered an insured plan, but no definitive finding that it is an insured plan. it still seems clear that it this presumption is subject to future challenge. So we would have to advise a client considering this plan that there is some risk of a future challenge to the plan's insured status.

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Dolores:

I think you are asking the proper question.

If the plan is an insured plan, it will be regulated by the insurance department of Misouri.

Why not ask the broker which licensed insurers in Missouri are offering the plan?

What hoops did they have to go through to be able to offer the plan?

Don Levit

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Don's question about

What hoops did they have to go through to be able to offer the plan?
seems appropriate, but the inquiry should not stop there.

To be non-taxable, the product must be 'fully insured'. For those federal income tax purposes, the question of 'fully insured' is a matter for the IRS and ultimately federal courts. The IRS has indicated there must be risk-shifiting to, not just an ASO contract arrangement with, the third party company.

State insurance commissions regulate the selling of insurance. There is certainly an overlap with the tax issue. In the state I practice, a product is not insurance that must be registered/regulated as such unless it "is a contract whereby one undertakes to indemnify another or pay or allow a specified or ascertainable amount or benefit upon determinable risk contingencies." I take that to mean risk shifting as well.

If in the registration process, the state's insurance commission undertakes a qualitative analysis of whether the product as to which registration is applied is in fact 'insurance' as so defined (rather than merely assuming all applications are made regarding what amounts to insurance, on the premise the applicant wouldn't go to the effort and expense of application if it wasn't), then the qualitative determination by the state insurance commission could be persuasive on the tax issue.

The IRS could yet challenge the product as not meeting the tax definition. The question for tax purposes is who is relieved of the financial risk? It must not only be the employee, but also the employer for the nondiscrimination rules not to apply.

The state may consider the Exec-u-Care product to be insurance for state regulatory purposes simply because Exec-U-Care is undertaking to indemnify the individual covered, regardless of whether it is Exec-U-Care or the employer that actually bears the brunt financially.

In the tax scenario, whether Exec-U-Care or the employer that actually bears the brunt financially is critical as to whether the arrangement is fully insured and no discrimination rules apply (i.e., Exec-U-Care bears the financial brunt) or it is not fully insured and nondiscrimination is required (i.e., the employer is bearing part or all of the financial risk).

If the arrangement between Exec-U-Care and the employer is that the employer will pay in 'premiums' to Exec-U-Care the entire claims costs (with or without an admin fee) experienced, then it is the employer that is self-insuring and Exec-U-Care simply administering the arrangement. If that is the reality of the product, then it 'looks, walks and talks' like an ASO contract, and the arrangement is self-insured and subject to the nondiscrimination rules for tax purposes.

If the Exec-U-Care arrangement with the employer calls for the employer to pay a fixed premium, but also that employer will pay all or a part of claims up to or over a certain point, then you have the employer having retained some of the risk. That's partially self-funded, for tax reasons, and subject to 105h nondiscrimination.

If on the other hand the amount the employer pays to Exec-U-Care is fixed, based for example on underwriting results factoring in prior claims experience, and Exec-U-Care takes it, financially speaking, from there entirely, then you have a fully insured product from a tax perspective.

Either way, it might be 'insurance' for state law purposes and regulated as such because the risk is shifted away from the individual. But the tax inquiry is whether the risk is also shifted away from the employer. That may be something the state regulators are not concerned with.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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John:

Yes, the tax issue is significant, for if the plan is discriminatory, and it is fully insured, the executives will be taxed on all of their reimbursed medical expenses.

It was stated previously that the Execucare plan was a supplemental policy.

I assume there is a valid group policy available, and the 2 executives are participating in the supplemental plan.

Here is how Reg. 1.105-11©(2)(ii)(2) reads. "Other Rules. The rules of this section apply to a self-insured portion of an employer's medical plan or arrangement even if the plan is in part underwritten by insurance. For example, if an employer's medical plan reimburses employees for benefits not covered under the insured portion of an overall plan, or for deductible amounts under the insured portions, such reimbursement is subject to the rules of this section."

Is this regulation pertinent to our discussion?

Don Levit

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Hi, Don,

Yes, that regulation is most pertinent to the discussion, and is the basis of the following paragraph from my earlier post

If the Exec-U-Care arrangement with the employer calls for the employer to pay a fixed premium, but also that employer will pay all or a part of claims up to or over a certain point, then you have the employer having retained some of the risk. That's partially self-funded, for tax reasons, and subject to 105h nondiscrimination.
That relevance is why in this thread various posters have used the term 'fully insured' to describe the situation that must exist to be free of the nondiscrimination requirement. If only partially insured, then the remainder of benefits to EEs as reimbursed by the ER 'out of its pocket' is subject to the nondiscrimination rules, and if not observed, a portion or all of such reimbursements to the 25% highest paid EEs will be taxable income to them.

Only if the plan is entirely, 'fully' insured can you ignore nondiscrimination under 105h and the benefits received by those 25% highest paid EEs be tax-free to them. In my view, that means that once a fixed premium is paid for a coverage period (CP 1) by the ER to the third party insurer, there can be no additional amount due from the ER for CP 1 based on the claims during CP 1. If the ER can be further obligated for payments for claims made during CP 1, then the arrangement is partially if not fully self insured and subject to 105h nondiscrimination.

In determining the premium to charge for the next period of coverage (CP 2) the third party insurer can take into account prior claims experience (including those from CP 1) without causing the arrangement to be self-insured, even partially, provided the ER is not obligated legally to the third party insurer to continue the policy into CP 2.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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  • 2 years later...
Guest ftaormina

Would you happen to have a copy of this letter you mentioned below. I have seen the Ernst and Young letter but have been unable to find any additional opinion letters on the subject. If you do not have a copy do you have any idea how I could obtain a copy. Thank you so much in advance.

The latest opinion letter provided to me by the broker is from KPMG, dated October 2005. It still looks like the conclusions on tax impact are still based on the assumption that the plan is an insured accident and health plan. There are a number of reasons presented to support it being considered an insured plan, but no definitive finding that it is an insured plan. it still seems clear that it this presumption is subject to future challenge. So we would have to advise a client considering this plan that there is some risk of a future challenge to the plan's insured status.

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  • 6 months later...

Does anyone have any updated information about ExecuCare (Exec-U-Care? Execu-Care?) plans? I have clients telling me that Principal Financial has been telling them that the arrangement is fully insured and that the clients don't have to worry about the nondiscrimination rules because the arrangements are grandfathered under PPACA.

Thanks.

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I would answer your question, yes and no. Assuming the plan was started prior to 9/23/2010, and is grandfathered, it is true that the the non-discrimination rules do not apply.

However, as of 9/23/2010, annual and lifetime limits are not allowed on ANY plans, grandfather or not. Assuming that your clients' plan has a limit, it does not matter if it is grandfathered.

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I would answer your question, yes and no. Assuming the plan was started prior to 9/23/2010, and is grandfathered, it is true that the the non-discrimination rules do not apply.

However, as of 9/23/2010, annual and lifetime limits are not allowed on ANY plans, grandfather or not. Assuming that your clients' plan has a limit, it does not matter if it is grandfathered.

Thanks for the response. I am really looking to see if there is any new information about whether these plans are truly fully insured.

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