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Imputing Income for Discriminatory Premiums Under 105(h)


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Say an employer has a self-insured group health plan. The same plan coverage, waiting period, benefits, etc. are offered to all employees.

If HCIs paid, say, 10% of the cost of coverage and non-HCIs paid 50%, we would violate 105(h). 

If the premium payments by employees remained the same (10% and 50%), but the employer imputed taxable income to the HCIs equal to 40% of the premium, does this solve the 105(h) problem? I know the typical solution in post-termination or COBRA subsidization is to make the premium payment or subsidy taxable. Does this same solution carry over directly to the continuing employment scenario?

Alternatively, the HCIs' base salary could be increased, but the employer wants to avoid having to increase base salaries for optics and other reasons. 

Appreciate any input.

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Self-Insured Medical Plan is discriminatory as to benefits, the amount included in gross income is the amount reimbursed to an HCI for the discriminatory benefits, referred to as the “excess reimbursement.” If a benefit is available only to one or more HCIs and not to all other participants, the total amount reimbursed to the HCIs for that benefit is includible in gross income (it is all excess reimbursement). 

 

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5 minutes ago, leevena said:

Self-Insured Medical Plan is discriminatory as to benefits, the amount included in gross income is the amount reimbursed to an HCI for the discriminatory benefits, referred to as the “excess reimbursement.” If a benefit is available only to one or more HCIs and not to all other participants, the total amount reimbursed to the HCIs for that benefit is includible in gross income (it is all excess reimbursement). 

 

I think I'm asking a slightly different question. For example, the standard method to provide HCIs subsidized COBRA post-termination (on a discriminatory basis) is to pay the subsidy as taxable income or impute income for the amount paid.

I'm asking whether the same concept can apply to ongoing employees.

To take a more stark example, say the employer paid nothing in premiums for any employees (allowing employees to pre-tax entire cost) but then paid the HCIs only a taxable supplement in the exact amount of the premium.

Do you have a 105(h) discrimination issue at all in that case?

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3 hours ago, EBECatty said:

I think I'm asking a slightly different question. For example, the standard method to provide HCIs subsidized COBRA post-termination (on a discriminatory basis) is to pay the subsidy as taxable income or impute income for the amount paid.

I'm asking whether the same concept can apply to ongoing employees.

To take a more stark example, say the employer paid nothing in premiums for any employees (allowing employees to pre-tax entire cost) but then paid the HCIs only a taxable supplement in the exact amount of the premium.

Do you have a 105(h) discrimination issue at all in that case?

Self-Insured Medical Plan is discriminatory as to benefits, the amount included in gross income is the amount reimbursed to an HCI for the discriminatory benefits, referred to as the “excess reimbursement.” If a benefit is available only to one or more HCIs and not to all other participants, the total amount reimbursed to the HCIs for that benefit is includible in gross income (it is all excess reimbursement). 

This is not the best way to communicate, so please bear with me.  Believe you may be confusing some issues.  When an employer subsidizes COBRA there is no legal discrimination issues because it is not a prohibited action.  It is a taxable event because it is not technicallly a premium payment.

The example you described, the CEO, is discriminatory and will result in a penalty, as I described above.  I see no way around it.  

As for your “stark example” above, yes there are many discriminatory issues.  Additionally you will have participation issues.  

Keep in mind, I am addressing Section 105 issues.  You will almost certainly have discrimination issues with your 125 plan.

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Appreciate the thorough response. I'm still not seeing any difference between the COBRA subsidy and the ongoing employee subsidy.

In the COBRA situation, paying the premium is okay under 105 because it's not providing a health insurance benefit, it's just a taxable cash payment. 

In the ongoing employee situation, the executive pays the exact same premium and gets the exact same benefits as every other employee, but also gets a separate taxable payment in each paycheck in an amount equal to the premium amount. Isn't that the same as the COBRA fact pattern?

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48 minutes ago, EBECatty said:

Appreciate the thorough response. I'm still not seeing any difference between the COBRA subsidy and the ongoing employee subsidy.

In the COBRA situation, paying the premium is okay under 105 because it's not providing a health insurance benefit, it's just a taxable cash payment. 

In the ongoing employee situation, the executive pays the exact same premium and gets the exact same benefits as every other employee, but also gets a separate taxable payment in each paycheck in an amount equal to the premium amount. Isn't that the same as the COBRA fact pattern?

Believe we may be confusing how the amount of penalty is being calculated, or maybe I am not understanding the question.  Btw, I would be that I am not understanding the question.  Lol.

In COBRA the penalty ( if you will) is the added tax that is incurred.  By way of example, if the COBRA cost is $500 and the employee tax is $50, the penalty is $50, which is included in their payment to make them whole.  Correct?

Failure of the Benefits Test the plan calculates the excess reimbursement by determining the benefit available to HCIs that is not available to non-HCIs. For example, assume a plan has a new hire waiting period of 90 days for most employees, but coverage for executives is effective on the date of hire. The excess would be 3 months of premium.  The penalty in your scenario would be the value difference the HCI received.

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I think we may be talking past each other on the question. Maybe a clean start will help narrow the issue.

How about these facts:

Employer has a self-insured group health plan. All eligibility, benefits under the plan, premium amounts, coverage, dependent coverage, limits, etc. are the exact same for all employees. From a group health plan standpoint, there is no distinction whatsoever between any employee (HCI or not). Say coverage is $500/month.

The question is this: If the employer gives a group of HCIs a taxable supplemental payment of $500/month if they are enrolled in the group health plan, is this impermissible discrimination under 105(h)? 

In other words, if the employer treats all employees identically in the health plan, but pays each HCI a taxable payment in the same amount as they paid for health insurance, is this permissible under 105?

I view this the same as the taxable COBRA payment, just for active employees. (Alternatively, the employer could always just increase each HCI's base salary by $500/month with no question, but we would prefer to avoid raising base salaries for other purposes.)

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To the best of my recollection, last time I had to look at this, I could not find anything in the regs that actually said it was discriminatory if you charged HCIs less, because all of the discussion in reg of discrimination was linked to eligibility and "benefits," and nothing specifically made employer subsidization of cost a "benefit." Seems like it would be discriminatory, but the closest I could come to finding anything in reg that addressed this was 1.105-11(c)(3)(ii) (nonspecific prohibition of "discriminatory operation"). I think I looked at EBIA as well and they may have confirmed the lack of guidance.

Generally, the way around any 105(h) discrimination issue is to include in income, because 105(a)(1) conditions the operation of 105 on attribution of benefits to a contribution paid by employer and excluded from employee's income. No exclusion from income, no 105 (including 105(h)), so I agree that after-taxing the discriminatory portion of premium would likely fix.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Thanks Luke. I also have never seen any explicit reference to different premium levels being per se discriminatory, but have always taken it as a given in the circumstances.

After some more research, my final thought is to have all employees treated the same for purposes of the group health plan, then to reimburse the executives with a taxable amount equal to the premiums (or some portion thereof) they paid.

The supplements clearly will be taxable, which is fine. 

Even if the taxable supplement is considered a discriminatory "benefit" offered to HCIs under the plan, the only result is the excess reimbursement (here, the same taxable supplement) is taxed, which it already is. 

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Hi Guys.  I understand your skepticism.  Over the years I have used Cornell law as my main source of information, as well as a variety of legal/consulting sources.  See below.

Lee

 

https://frenkelbenefits.com/frenkel2015/wp-content/uploads/Compliance-Update-9-4-2018-Cafeteria-Plans-Section-105h-NonDisc-Rules.pdf

https://www.law.cornell.edu/cfr/text/26/1.105-11

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  • 10 months later...
On 10/20/2018 at 7:31 PM, leevena said:

Hi Guys.  I understand your skepticism.  Over the years I have used Cornell law as my main source of information, as well as a variety of legal/consulting sources.  See below.

Lee

 

https://frenkelbenefits.com/frenkel2015/wp-content/uploads/Compliance-Update-9-4-2018-Cafeteria-Plans-Section-105h-NonDisc-Rules.pdf

https://www.law.cornell.edu/cfr/text/26/1.105-11

Thanks for sharing the link. It is very useful.

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