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LTC and comp agreement


Guest ladycpa2
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Guest ladycpa2

Does anyone have experience with an employer reducing compensation to pay long term care premiums pursuant to a comp agreement for physicians that says the employer may reduce salary to pay "expenses." The employer wants to deduct the premiums for the long-term care for the physicians and doesn't want the benefits to be taxable to the physician. This doesn't seem right to me and sounds like a cafeteria plan election, which long-term care is not a qualified benefit under 125(f). I'm afraid if the IRS interpreted that way that they would also run afoul of the nondiscrimination rules under 125. Any help would be appreciated!

Thanks

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Sec 125 provides an exception to the constructive receipt doctrine. If under all the circumstances, the situation would not show that individual physician was making the decision to have part of his or her pay used instead to pay for long term care premiums for that physician, then constructive receipt (and sec 125) should not be problematic. However, if there are patterns that show that the decision is not being made by the ER, but truly deferring to the wishes of the individual physician, then yes constructive receipt and sec 125 are problematic.

Comp agreements that give the ER the right to reduce salary to pay "expenses" could also be problematic if the physician is an owner. Does such a clause blur the distinction between compensation and dividends? It makes what is paid to the physician look like a share of net profits, not a measurement of the value of the physician's services to the employer. If the employer is a C corp (necessary for an owner/employee to be eligible for tax-free LTC premiums), then the Service would have a two-tier taxation motive to recharacterize part of the "compensation" to be dividends--not deductible by the C corp but taxable income to the owner/employee. If the physician is not an owner, then why would he or she agree to such a reduction clause in his or her comp agreement?

Another possible theory to tax the LTC premiums to the physician would be for the Service to assert the assignment of income doctrine. The physician would be taxable on the entire, unreduced compensation called for in the agreement. The employer would simply be reduced to the physician's agent for effecting payment of the premiums for LTC on behalf of the physician.

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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