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Flex Credits with Individual Premiums and Cash out option


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This is a new animal for me... an employer wants to provide flex credits that can be used towards individual health / dental insurance (they have no group policies) as well as have the flex credits be available for standard FSA expense (such as RX, and copays, etc)... as well as have a cash out option for the flex credits. To spice it up a bit, they want to award the flex credits to the tune of $2 per hour worked.

It seems quite complicated and I'm not sure if it is doable. How do employees make elections if they're work hours change week to week? What if their individual insurance premiums change in July, but the plan year starts in January? The individual health insurance thing and the varying flex credits earned on a week to week basis is problematic for me... I can't quite think it through and how they would fit in the framework.

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Guest Ric Joyner
This is a new animal for me... an employer wants to provide flex credits that can be used towards individual health / dental insurance (they have no group policies) as well as have the flex credits be available for standard FSA expense (such as RX, and copays, etc)... as well as have a cash out option for the flex credits. To spice it up a bit, they want to award the flex credits to the tune of $2 per hour worked.

It seems quite complicated and I'm not sure if it is doable. How do employees make elections if they're work hours change week to week? What if their individual insurance premiums change in July, but the plan year starts in January? The individual health insurance thing and the varying flex credits earned on a week to week basis is problematic for me... I can't quite think it through and how they would fit in the framework.

We do these all the time. The per hour thing is easy to do if you are familiar with Davis Bacon Act Davis Bacon Act"]Davis Bacon Act[/post]. But let's break this down as there is quite a bit here.

1. The fact that they don't have health insurance tells me that it may indeed a DBA program. SO assigning benefits per hour can be tricky but you can do this if there is money to cover your time. I specialized in Project Management in my MBA and you can use the "smoothed" out hourly rate to cover anyone in your company that had to do manual work for this at $135 per hour. So factor that in to your costs.

2. What is the opt out for? And do you know that the opt out does not have to be exact or 1:1 with the employer contribution? Meaning that the regs are mute about the ratio. So for example, if the employer is giving eveyone 12,000 per year for the employer contribution and employees don't wish to put money into the FSA or buy insurance (stated in your comment) you could design it to be say 50% or if they choose cash that is taxed it could be 25%.

3. And do you know that individual premiums is not the correct definition? It can be any 213d premium so a good way to name this account is Premium Reimbursement Arrangement.

Ric Joyner, MBA, CEBS, GBA, CFCI

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Guest Ric Joyner

One slight correction. Any 213d premium. It cannot be life insurance or even group, or premiums from this employer that are group.

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It could turn out to be somewhat problematic to call it a "Premium Reimbursement Arrangement" when it will be used not only for premiums but also ." (See OP).

What you want seems to be a simple 105 Medical Reimbursement Plan with premium reimbursement included. However, it would be better to have 2 separate plans, 1 for the eligible expense and the other for the eligible insurance premiums.

I would not have a cash-out option. The option to receive cash could invalidate all the arrangements. Normally when Flex Credits have a cash-out, the cash-out is not payable in cash but contributed to a 401(k) etc.

I urge you to only implement any such plans after seeking competent legal advice from an independent source. I would not rely on vendor opinions even if it seems that they have done these plans before. The devil is in the details and fine print. Your facts and circumstances etc etc will not be exactly the same as someone else's.

There is also the problem of State Small Group health insurance laws in some states. These laws which apply to small employers with less than 55 employees. usually prohibit or discourage the reimbursement of premiums, in many cases.

There is some smell of Davis-Bacon, or other Prevailing Wage Act, if this really is a PWA scenario, seek guidance from those with extensive actual experience. The Rules are not the same.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest Ric Joyner
It could turn out to be somewhat problematic to call it a "Premium Reimbursement Arrangement" when it will be used not only for premiums but also ." (See OP).

What you want seems to be a simple 105 Medical Reimbursement Plan with premium reimbursement included. However, it would be better to have 2 separate plans, 1 for the eligible expense and the other for the eligible insurance premiums.

I would not have a cash-out option. The option to receive cash could invalidate all the arrangements. Normally when Flex Credits have a cash-out, the cash-out is not payable in cash but contributed to a 401(k) etc.

I urge you to only implement any such plans after seeking competent legal advice from an independent source. I would not rely on vendor opinions even if it seems that they have done these plans before. The devil is in the details and fine print. Your facts and circumstances etc etc will not be exactly the same as someone else's.

There is also the problem of State Small Group health insurance laws in some states. These laws which apply to small employers with less than 55 employees. usually prohibit or discourage the reimbursement of premiums, in many cases.

There is some smell of Davis-Bacon, or other Prevailing Wage Act, if this really is a PWA scenario, seek guidance from those with extensive actual experience. The Rules are not the same.

Here are the cafeteria regulations that explicity show cash out isn't what George was saying. Please note page 8 and yellow note I made comments on.

small_business_and_the_cafeteria_plan.pdf

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Guest Ric Joyner
It could turn out to be somewhat problematic to call it a "Premium Reimbursement Arrangement" when it will be used not only for premiums but also ." (See OP).

What you want seems to be a simple 105 Medical Reimbursement Plan with premium reimbursement included. However, it would be better to have 2 separate plans, 1 for the eligible expense and the other for the eligible insurance premiums.

I would not have a cash-out option. The option to receive cash could invalidate all the arrangements. Normally when Flex Credits have a cash-out, the cash-out is not payable in cash but contributed to a 401(k) etc.

I urge you to only implement any such plans after seeking competent legal advice from an independent source. I would not rely on vendor opinions even if it seems that they have done these plans before. The devil is in the details and fine print. Your facts and circumstances etc etc will not be exactly the same as someone else's.

There is also the problem of State Small Group health insurance laws in some states. These laws which apply to small employers with less than 55 employees. usually prohibit or discourage the reimbursement of premiums, in many cases.

There is some smell of Davis-Bacon, or other Prevailing Wage Act, if this really is a PWA scenario, seek guidance from those with extensive actual experience. The Rules are not the same.

George I am stunned by this advice. Please forgive me but I hope the person on here does not follow your advice. It is not close to accepted practice and experts in the field would comment after reading this that there is a basic lack of understanding of how cafeteria plans operate. I am not trying to belittle you but hope you will get some deeper training.

Here is my experience from training lawyers, agents and CPAs:

1. First line. I laid out a strategy that is high level. Facts and circumstances will dictate more exploration of what will be offered. To have a cash option you will need a cafeteria plan installed with appropriate documents not a 105 plan. See later post where I put the regs and comments up.

2. Second line is misleading. You only need one plan if you have a cafeteria plan. A 105 is not needed.

3. Third line is false. This tells me that knowledge of basic cafeteria plans is limited: The option to receive cash could invalidate all the arrangements. Normally when Flex Credits have a cash-out, the cash-out is not payable in cash but contributed to a 401(k) etc.

A. I don't even want to comment on the receiving cash as invalidating cafeteria plans because it is inherent as a feature of a flex plan. Cafeteria plans are "Cash (which is taxed) or a qualified benefit (safe harbor from constructive receipt aka tax free)”. Thus, when designing cafeteria plans a normal benefit strategy is to tell employees that if they have other insurance and can prove it, they should move to the other insurance and we will give you $1,000 (example) in which to purchase other benefits OR TAKE IN CASH (taxed). If the money is used to purchase a qualified benefit such as FSAs (Health FSA, Daycare or PRA), insurance then it is used tax free. And the employee can even CHOOSE (elect) to mix and match cash with benefits which is tax free. NEVER should a 401k be offered into a cafeteria plan. Why? Because 401k is another qualified plan and you cannot mix qualified plans together. IF the 401k is under the cafeteria plan, the cafeteria plan discrimination tests take over, and add another layer of testing that the 401k already has. The regulations state that a 401k plan is available as an option under a cafeteria plan but the Service (IRS and Treasury) strongly mention it is never a good idea to put a 401k plan into a cafeteria plan. And anyone that tells you to do so is not advising you correctly.

B. Cash Outs are used on a regular basis. Make sure you get an expert to help you.

4. The small group reforms laws are varied in how each state chooses to interpret the small group reforms and individual insurance. I have a great deal of background in helping states and agents work in this arena. It is also called Defined Contribution approach which is a misnomer because there is no such thing in health insurance, it is only defined benefit. Be that as it may, it is nothing more than a strategy for budgeting or financing health insurance. When ACA goes into effect and there is no longer underwriting for individuals, small group reform laws will go out the window and NAIC (national insurance commissioners) will have to redo their rules. There are a few states (Texas) that are rabid about no individual premiums under any circumstance but they are far and few. The best way to play by the rules in most states is indeed with a Premium Reimbursement Arrangement (PRA) through section 125, but do not allow the employer to list bill the premiums.

5. How does it work then? The employees select an individual premium and pay for it at home. They seek reimbursement from a TPA such as eflexgroup.com each month. This satisfies most state laws of not list billing. The employees still get tax free health insurance and the employer also receives tax free benefits as well. Win Win.

6. Well how does the cash out work in the above scenario? Easy. The employer decides that some employees are double dipping with the employer health plan and the employee's spouse. So the employer says "I will give you $1,000 to spend towards health insurance if you can prove you have other insurance care you can get. So the cafeteria plan operates like this:

-Cash Out Option: We will give you $1,000 if you can go on another policy. If you would like to purchase your own at a cheaper rate we can give you the $1,000 as well. Then you can select to put any premiums from the purchase of insurance and election into a PRA, and while we are at it we will also offer you a Health Flexible Spending Arrangement (HFSA) to put your unreimbursed by insurance health expenses into an account to draw from. Or you could put money into the DCAP program (daycare FSA) or mix and match. Any money you don't spend can be taxed. (I just described a true cafeteria plan...A choice between cash or a qualified benefit)

I hope this helps you.

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