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Single Employee Loophole that allows tax-exempt premiums?


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@zbenefits

You are grossly misreading the USC.

  1. IRC Section 105: Section 105 allows tax-free reimbursements from a self-insured medical reimbursement plan if the reimbursements are for expenses incurred for “medical care” as defined in Section 213(d).Section 105(b) Amounts expended for medical care, states that "gross income does not include amounts referred to in subsection (a) if such amounts are paid .... to reimburse ... ... for expenses ... for the medical care (as defined in section 213(d). It does not mention reimbursements, tax free or otherwise, from a self-insured medical reimbursement plan. Subsection (a) states that, "Except as otherwise provided in this section, amounts received by an employee through accident or health insurance .....shall be included in gross income to the extent such amounts (1) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (2) are paid by the employer.
  2. IRC Section 213: Section 213(d) defines “medical care” for personal deduction and Section 105 distributions, which includes amounts paid for insurance. Section 213(d) has no bearing or relation to section 105. Section 213 is under "Deductions from income", a Form 1040 item whereas section 105 is under "Items specifically excluded from income". There is no exclusion (pre -taxing) under section 213.
  3. IRC Section 106: Section 106 allows the value of the self-insured medical reimbursement plan to be tax-free to employees. Section 106 is titled "Contributions by employer to accident and health plans". It states that " ...gross income of an employee does not include employer-provided coverage under an accident or health plan." It says nothing about self-insured medical reimbursement plans. It relates to "coverage"., so that we are not taxed on the value of the benefits received, such as a heart transplant and the employer payment of premiums, which are contributions. That is why employee salary reductions under a section 125 cafeteria plan are "treated as employer contributions' by section 125.
  4. IRC Section 162: Section 162 allows reimbursements to be tax-deductible to the employer as a business expense. Only if allowed by other sections. An item is only deductible if ordinary, reasonable and customary and not otherwise prohibited by another section.

There is no specific section of the IRC that allows tax free reimbursement to an employee for individual health insurance premiums. Such reimbursement was and is only made possible by the Treasury Regulations (CFR) and supplemental Written Determinations. Regulations and Written Determinations are subject to change at the discretion of the Treasury Dept. Revenue Ruling 61-146 allowed tax free reimbursement along with a part of the Proposed Treasury Regulations for section 125. At their discretion, as allowed by law, and in keeping with ACA, these have been withdrawn. Treasury gave it now Treasury stops it. It is solely at the discretion of the agency.

All of your citing of PHS 2711 and 2713 etc is gobbledygook. If most, if not all, of the relevant Preventive Services are provided under the Health Insurance coverage, there is nothing that the patient will pay and therefore nothing that you could reimburse.

If you were to provide these medical services your Premium Reimbursement arrangement (or whatever you choose to call it) would no longer be an excepted benefit and would have to comply with the same requirements of other health insurance plans.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Is any BenefitsLink reader aware of any U.S. law firm that has risked its owners' reputation and liability by delivering a written opinion that supports the zbenefits view?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I am confused by all the criticism of zbenefits' tax analysis. Where in Notice 2013-54 or any subsequent guidance did the IRS revoke Rev. Rul. 61-146? If it didn't, why can't you still have a 61-146 arrangement if it covers only a single current employee as of the first day of the year?

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The criticism of @zbenefits' analysis is not related to cases with "only a single current employee" since most laws, including ACA, ERISA, HIPAA, and sections 125 would not be applicable.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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So, then, GBurns, do you agree that a "one-person" 61-146 arrangement that is exempt from the ACA market reforms is (a) legal, and (b) can be tax-free?

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See the early post by Bill Presson.

Also see IRS Notice 2015-17

http://www.irs.gov/pub/irs-drop/n-15-17.pdf

From the Notice:

"Code § 9831(a)(2) provides that the market reforms do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year. Accordingly, an arrangement covering only a single employee (whether or not that employee is a 2-percent shareholder-employee) generally is not subject to the market reforms whether or not such a reimbursement arrangement otherwise constitutes a group health plan."

Also note the wording used by TASC for their section 105 plan which is used to reimburse individual health policy premiums. This has been in place for years BEFORE ACA and has not yet been updated. Note their restrictions on eligibility:

https://www.tasconline.com/products/agriplan/section-105-plan-2/

So, yes , a "one person" 61-146 arrangement can be exempt from ACA market reforms and be tax-free, BUT, it would violate the individual health insurance policy which prohibits reimbursement by the employer, in any form. As I have repeatedly tried to point out, the issue involves more than the iRC.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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I haven't analyzed the questions and have no view in either (or any) direction.

Rather, I ask about whether a law firm has delivered a written opinion because in my experience the presence or absence of such an opinion sometimes might convey a little indirect information about how comfortable or uncomfortable a view is. I confess that I'm searching for a shortcut on a question I don't have time to think about.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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jpod. Almost every major insurer has wording that asks the applicant to certify that they will not be reimbursed by the employer, for the premium, in any way. The Application becomes part of the insurance policy. So signing that they will not be reimbursed, when they know that they will be, would be insurance fraud and since it was a condition for coverage, would violate the terms of the contract/policy.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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I haven't analyzed the questions and have no view in either (or any) direction.

Rather, I ask about whether a law firm has delivered a written opinion because in my experience the presence or absence of such an opinion sometimes might convey a little indirect information about how comfortable or uncomfortable a view is. I confess that I'm searching for a shortcut on a question I don't have time to think about.

Peter, I haven't seen it and, frankly, don't expect to. This just has the feel of the 419 plans where the sales people always swore there was tons of legal backing and if you would only sign a 20 inch stack of agreements, they would be happy to provide it to you.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070
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GBurns, I don't know enough to know whether you're right or not, so I will happily assume you are right. Thanks. Do you know why the issuers require that? Was the individual insurance "world" different in 1961 when the IRS issued its revenue ruling? Are you saying that for many years the 1961 has led possibly millions of people to commit insurance fraud, or is this something new since ACA?

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The world was certainly different in 1961. Section 105 was enacted in 1954 but the Treas Regs took some time. Section 106 was different. Section 125 was not enacted until 1978 and we are still waiting on the Treas Regs. So the tax law was very different in 1961.

The state insurance laws and the insurance contract prohibitions have been in place for years and has nothing to do with ACA. You do not need to know if I am right or wrong, all that you need to do is to look at the Individual Application for the major insurers. You can access the Forms Library of Aetna, Anthem and any of the larger BCBS entities by going to their website and scrolling to the index at the end of the page and look or yourself.

Why do they do it? The state insurance law prohibits reimbursement in any manner in keeping with the IRC.

I think that the bulk of people affected, were recent and as a result of a few who saw an opportunity to mislead. Older providers such as TASC learned to restrict the eligibility as a result of IRS action in cases such as Shelito and other BizPlan cases. Most others closed shop, but, a few served time. So since the providers are recent, it would not be millions affected.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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