Guest Stevecpa Posted February 14, 2012 Report Share Posted February 14, 2012 One of my clients has been approached by Benesmart, in which the insured employee makes a salary reduction election through a cafeteteria plan with the funds flowing onto a self-insured 105 plan. These same funds, or some resemblance thereof, enhanced by the tax savings come back to the employee as an actuarial equivalent defined benefit monthly advanced health expense. At the end of the year the employee reconciles their actual medical expenses to the advances, with any excess advances being declared at that point in time. I've been assured many times that it is only the excess amount is income. The employer is excited by the payroll tax savings and the employee by the additional cash flow. In addition, there is no cash flow or checks for these transactions, only notional accounts. I say that the advancement of medical benefit creates taxable income at that point in time, regardless of any year end reconciliation. Any medical expenses incurred would then become an itemized deduction on Sch. A, subject to the 7.5% limitation. Going back to Rev. Rul. 61-146 and the employer reimbursement of individual health policies, under method 3 and the joint check, the income exclusion applied since the employee could not divert the payments to any other use. Likewise in Let. Rul. 9513027, where the employee had the discretion to direct employer contributions into a profit sharing account or health account, the IRS determined under the assignment of income doctrine such contributions to the health account were not excludable income. I fail to see a difference between the proposed plan and other IRS determinations, that the advanced benefit is not income when received. Thoughts? Link to comment Share on other sites More sharing options...
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