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Exclusion from Income Under 106


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Ignoring many other issues that the following scenario creates, would the following be excluded from an employee's income under IRC Section 106?

Employer X has new employees. Employer X does not maintain a group health plan. However, the new employees continue to be eligible to participate in their former employer's self-insured group health plan (not via COBRA; they simply continue to be eligible, even as non-employees). Employer X is going to pay a portion of the new employees' premiums directly to the former employer. Is the premium amount paid by Employer X to the former employer's group health plan on behalf of Employer X's new employees excluded from said employees' income under IRC Section 106?

I beleive the primary issue is what "employer provided" means under Section 106. Does it just mean "employer paid" or does the employer have to maintain the plan in some way? Of course, a similar issue is raised in the context of employers that pay premiums on individual policies for its employees, which I beleive has been held to be exempt under Section 106.

Any thoughts would be greatly appreciated.

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I have a short answer, which may provide some insight.

Employees include former employees.

Thus, section 106 could apply.

Don Levit

Don - Thanks for your input.

Though employees includes former employees under Section 106, in my experience these situations have involved inclusion of the former employees in the former employer's plan for COBRA or retiree coverage, with the former employer being the entity that is fronting the coverage (or a portion of it) for its own plan. In my situation, we have a new employer fronting coverage for its own employees, under another company's plan.

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Thanks for providing your experiences.

I can cite the regulation, but you seem familiar with it.

Former employees need not be retired or on COBRA.

They can be disabled, laid off, or merely those who formerly had an employer-employee relationship.

This provides an opportunity for creative health care planning.

For example, if an employee had a limited benefits plan with his prior employer, which provided benefits up to $50,000.

By continuing this plan, the former employee joins his new employer's plan, and if he has the full $50,000 of benefits, increases his deductible on the new employer's plan to $50,000.

Thus, he can save about 70% off of the traditional group premium.

Don Levit

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