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Reimburse COBRA for new employee


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We will be hiring a new employee who will pay COBRA premiums to hhis previous employer during our pre-ex period. We are considering reimbursing the employee for the COBRA premiums. It appears that Rev. Rul. 61-146 allows this to be done on a non-taxable basis. Correct? Anything else I need to know before we say we're going to do this?

Thanks,

Ken Davis

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You may wish to check further into the regulations and other authorities under Sections 105 and 106. I think you may need some sort of written "plan" that becomes enforceable before the COBRA premiums to be reimubursed become due. However, I think you can satisfy this by having a very short and simple letter agreement with the new employee whereby the employer promises to reimburse him/her for the premiums upon receipt of appropriate substantiation.

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Guest lmccormick

I've done a lot of research on this very same topic and have come to the conclusion there is no plan document required when you provide premium reimbursement but many have suggested it's "nice to have". Frankly, I like the idea of no document and just having an agreement between each employee you wish to extend the benefit to.

Here is one of the more recent and better written explanations:

http://www.albertsonlaw.com/news.asp?actio...&article=81

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I would be a little more careful here. I agree with the tax analysis. However, to do this on a tax favored basis you are basically stating that reimbursing these premiums falls l under Code Section 106 for the new employer which is "employer provided coverage under an accident or health plan."

Then to avoid ERISA, COBRA, HIPAA, FMLA issues etc you have to turn around and argue that it is not an employer plan under those statutes.

Arguments can be made that you have a plan for 106 purposes but not for other purposes. But, I know that many advise not to do it because you could have real ERISA, COBRA, and HIPAA problems. In your favor, I know of at least one case where a court rejected the arugment that reimbiursement of COBRA premiums by a new employer created its own health plan which then entailed COBRA obligations for the new employer when the employee was let go while premiums were being reimbursed. While successful in the litigation, the employer did get sued.

I would go into this knowing that the ERISA, COBRA and HIPAA issues are unresolved. If you just increased the employees pay and did not claim that you were paying premiums on a tax free basis then you would not be asserting that there was an employer plan under Code Section 106. Then, I think the COBRA, HIPAA and ERISA issues go away. The employer would still get the deduction, the employee would simply have to recognize the income.

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Guest taylorjeff

Just wondering. You say you want to pay his COBRA during your pre-ex period. Since he's coming from a HIPAA credible plan, wouldn't that satisfy your pre-ex waiting period?

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  • 3 weeks later...
Guest JKonsult
We will be hiring a new employee who will pay COBRA premiums to hhis previous employer during our pre-ex period. We are considering reimbursing the employee for the COBRA premiums. It appears that Rev. Rul. 61-146 allows this to be done on a non-taxable basis. Correct? Anything else I need to know before we say we're going to do this?

Thanks,

Ken Davis

The better, and far less costly, alternative is to get them an individual, temporary insurance policy for their health insurance. See http://www.d2insurance.com

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What makes this "better" and How much less does it cost?

How does it get around the ERISA, COBRA and FMLA etc issues that were raised?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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