Benesmart - health plan

[Guest Stevecpa]

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?

[GBurns]

Can you provide more info, such as a link to their website or a copy of a brochure etc?

I cannot believe that they are offering what you are explaining, but have to think that you misheard or probably the person explaining it to you misunderstood.

See Revenue Rulings 2002-80 and 2002-3 in the meantime.

See also www.justice.gov/tax/prtax/txdv06842.htm

[Guest Stevecpa]

Can you provide more info, such as a link to their website or a copy of a brochure etc?

I cannot believe that they are offering what you are explaining, but have to think that you misheard or probably the person explaining it to you misunderstood.

See Revenue Rulings 2002-80 and 2002-3 in the meantime.

See also www.justice.gov/tax/prtax/txdv06842.htm

Below is the best link available, which provides a superficial level of information under the Gemini and Endeavor labels.

http://www.mytexasfinancialplanners.com/gemini.html

The program only gets better from what I've described by making corporate owners, including S corp shareholders, employees of the applicable program, complete with a job description to manage their health benefits, to avoid the 2% shareholder rule. This sounds like a spin on the old PEO arrangement for S corp shareholders.

[GBurns]

Unfortunately, their website does not give much information. There also seems to be some question as to who, or what, is Benesmart.

If they are recharacterizing rank and file employees as 1099 employees or randomly including the shareholder as an eligible employee, they should shortly get a rude awakening from the IRS and Dept of Justice. But whatever it is that they are doing is not very clear.

There is a proper way that is applicable to some situations, but it requires spousal employment in most cases or does not involve employee pre-taxing in others. There is no catch-all that fits all theses scenarios nor the 2 categories that they are promoting. The best sales explanation is probably this one : tasconline

If you Google "agriplan" and "bizplan" you should find links to many of the cases that the IRS used to try and clean up this issue years ago. Tasc is probably the lone survivor of that debacle and seems to be able to keep a tight rein on its compliance.

Also take note of Rev Ruling 71-588 and PLR 9409006 which seems to be their basic guidance. I would also take guidance from the actual court cases. Note that the guidance and the majority of the court cases require eligible spousal employment NOT rank and file employees and mainly in a SOLE PROPRIETORSHIP. They also do not address pre-tax employee contributions. Extending the treatment to other forms of corporate entities is a whole nother issue, which is probably why they use such cautious wording and different criteria for S, C and LLCs.

NOTE: They do not seem to use employee contributions pre-taxed or otherwise, for funding. There is not even a passing reference to section 125. There is no payroll recalculation involved. There is no advancing of money in any form.

It should be interesting to see what happens if a client or prospective client called Harry Beker's office at the IRS with some details and asked. The last telephone number that I had was 202 622-6080.

[Guest ScottTTFG]

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?

[GBurns]

I just came across the Willis Compliance Manual and decided to browse through. To my great surprise they had a section, Chapter 3 pages 17 and 18 addressing the old MR106 Plan. This scheme was marketed way back in 1998-2000 and subsequent variations on the theme, was the main reason for Rev Rulings 2002-3 and 2002-80. This manual is dated February 2011 so I guess that the issue must still be alive other than with the Bene$mart version.

https://welcome2.willis.com/compliance/Will...%20Benefits.pdf

[Guest Stevecpa]

Thanks George. I've attracted the attention of another agent and we will see where it goes. You can also checkout benesmart.org.

[GBurns]

If you look at the filings in the before mentioned Dept of Justice lawsuit, you will see mention of some of the employers who used that plan. Those were mainly the larger ones. You will notice that, as a rule, they did not get a

legal opinion nor sought legal advice regarding the legal merits or tax law compliance etc. They instead seemingly relied solely on the representations made by the salesman, who in turn relied on the promoter.

These plans were successfully sold because the targets were small businesses who had neither in house counsel nor traditionally used outside legal advice. A small employer with 20 covered employees with potential savings of probably $30,000 per year probably would not readily spend $5,000 just to find out if the proposed plan was compliant etc, much less spend more for a formal opinion etc. Most small employers would not even have the initiative or the knowledge, to even call the Branch of the IRS that handles Employee Benefits and ask a few questions.

So they prey on the small and uninformed, who erroneously trusts the agent.

I bet that they do not have any clients who sought legal advice from a competent independent lawyer.

I wonder how quickly they would drop a prospective client, who insisted on getting legal advice and also calling the IRS.

[Guest ScottTTFG]

If you look at the filings in the before mentioned Dept of Justice lawsuit, you will see mention of some of the employers who used that plan. Those were mainly the larger ones. You will notice that, as a rule, they did not get a

legal opinion nor sought legal advice regarding the legal merits or tax law compliance etc. They instead seemingly relied solely on the representations made by the salesman, who in turn relied on the promoter.

These plans were successfully sold because the targets were small businesses who had neither in house counsel nor traditionally used outside legal advice. A small employer with 20 covered employees with potential savings of probably $30,000 per year probably would not readily spend $5,000 just to find out if the proposed plan was compliant etc, much less spend more for a formal opinion etc. Most small employers would not even have the initiative or the knowledge, to even call the Branch of the IRS that handles Employee Benefits and ask a few questions.

So they prey on the small and uninformed, who erroneously trusts the agent.

I bet that they do not have any clients who sought legal advice from a competent independent lawyer.

I wonder how quickly they would drop a prospective client, who insisted on getting legal advice and also calling the IRS.

Hi George,

We actually encourage our prospective clients to get legal advice and contact their CPA before doing business with us. Please feel free to contact me directly and I will be happy to discuss our plan with you.

[masteff]

The benesmart website says that persons named Michael Purr and Chris Peck are principals in the company.

A simple google search reveals that these two individuals have a history of being investigated for violation of insurance regulations. For example: http://www.floir.com/siteDocuments/ifogreencross.pdf

Draw your own conclusion.

[GBurns]

Scott

One of the purposes of the Benefitslink Message Boards, is to discuss issues, such as this, in public so that there can be input from various sources. Sometimes that input provides another perspective, sometimes additional inforrmation and sometimes it just exposes the truth.

Discussing this issue with you would keep valuable information from the public.

Regarding your claim that " We actually encourage our prospective clients to get legal advice", I have to ask you a few obvious questions:

Have any of them sought legal advice?

What was the legal advice that was given?

Regarding Bene$mart:

It is expected that you would have done some due diligence investigation into BOTH the promoters AND the plans, especially since you are a licensed insurance agent, and probably might also hold other licenses.

Did you really do any due diligence or did you just take your boss's word ?

Have you even read the "technical" support material and checked to see if it was accurate and relevant?

Did you call the TEGE EB Division of the IRS to get even a cursory opinion?

Did you, or anyone that you know, get a legal opinion from an independent source regarding compliance with tax law etc? If you encourage prospective clients, I would expect that you would do the same first.

Have you evaluated the merits and proven the accuracy of "recalculating" the payroll?

Have you verfied with both the life insurance carrier and your state dept of insurance that life insurance can be written legally in this manner?

There are many many questions that need answers.

[masteff]

1) benesmart.org claims to have been in business since 1998 but their domain registration is dated 1/31/2012. And tools like the Internet Wayback Machine have no history on them.

2) BeneSmart is a trademarked product of a company calle BeneSyst in Minneapolis MN and appears to be totally unrelated to benesmart.org http://www.benesyst.net/Services/Enrollmen...enesmart50.aspx

Draw your own conclusions.

[Chaz]

A client just contacted me asking about a product marketed by an outfit called "Benemax." I am waiting for the details, but the brief description he gave me and the similarity in name made me think of this thread.

Anyone have any experience or knowledge of Benemax?

[GBurns]

It looks like a different concept especially since Benemax does not pre-tax the employee contribution (it seems to use employer only funding) and only reimburses actual claims made. However since not all the details are disclosed, I guess we will have to wait and see what they provide.

[GBurns]

I do not really want to give more publicity to these schemes, but the fact that they have been presented to enough people to cause postings to be made here on the Board, means that there is probably a significant size group of affected employers and their employees.

Has anyone heard of or received any more info?

Chaz,

What was the outcome with Benemax? Was it similar?

[Chaz]

Chaz,

What was the outcome with Benemax? Was it similar?

The circumstances were similar but not exactly the same. We scared the client enough so that he dropped the whole matter. I didn't have the opportunity to talk to a Benemax representative, which I definitely would have liked to do.

[Guest matthew222]

Some parts of their website sounds as if they are a broker, while other parts sound like they are pitching a deductible reimbursement product. Smaller employers can typically benefit from a deductible remibursement plan, but you have to always be cognizant of exactly what's being reimbursed and the whole communication process.