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Does Employer payment of President's health insurance violate IRC 125


panther
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Employer pays the President's family coverage under group health insurance plan per an employment agreement.  For other employees, employer only pays for employee-only coverage (employees pay for any more on their own.  This clearly is discriminatory under IRC 105(h).  But does it violate the IRC 125 cafeteria plan rule against discrimination as to contributions and benefits?

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Need more facts.  Just because the employer pays the premium it doesn't mean that the employer is treating the amounts paid as not includable or reportable on the employee's W-2. Are you sure the entire premium, both the regular and the family coverage, is being run through the 125 plan and not showing up as taxable on the W-2?

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3 hours ago, Chaz said:

If the President is not paying any portion of the premiums, he or she is not participating in a cafeteria plan.  Therefore, this arrangement, by itself, does not violate the cafeteria plan nondiscrimination tests.

I recognize that this seems counterintuitive.

Agree with Chaz except regarding being counterintuitive. It's not. Section 125 is just a tax rule that gives you a pass on constructive receipt/assignment of income issues if you follow it's rules. If the company gave the president the choice between taking the premium as additional cash or having the premium paid by the company, then that would be a 125 issue. But paying the premium for him or her, without giving him or her a choice, means it's not part of the 125 plan. I assume it is not written into the 125 plan document that the President automatically gets free coverage, but even if it was you would have same result.

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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The requester does not mention if the company is an S Corporation or an LLC which have rules for reporting most owner's health insurance premiums as taxable income on W-2 or K-1 and the self-employed owner then claims a deduction on their individual income tax return.  that might be happening here.  Agree - not part of the 125. 

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Good point, MPLSLAW, but then you'd have another problem, because 2% S corp shareholder employees are treated like partners for Section 125 plans and most other "fringe benefits," so can't participate.

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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One additional option for Section 125 Premium Only Plans, so avoid Non-Discrimination Testing

NOTE: A safe harbor exists where the POP will be deemed to satisfy all nondiscrimination tests if it "satisfies the safe harbor percentage test for eligibility." For example, a POP that might fail the Key Employee Concentration Test would be deemed to pass all tests if it passed the Eligibility Test. See §1.125-7(f) for more information

Nondiscrimination Testing Guidelines Pre-Tax Premium Only Plan 2017- 2020 - Infinisource.docx

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On 5/18/2020 at 5:52 PM, Luke Bailey said:

Agree with Chaz except regarding being counterintuitive. It's not. Section 125 is just a tax rule that gives you a pass on constructive receipt/assignment of income issues if you follow it's rules. If the company gave the president the choice between taking the premium as additional cash or having the premium paid by the company, then that would be a 125 issue. But paying the premium for him or her, without giving him or her a choice, means it's not part of the 125 plan. I assume it is not written into the 125 plan document that the President automatically gets free coverage, but even if it was you would have same result.

I agree wholeheartedly with your analysis. 

I call it counterintuitive because if, in the above scenario, the President has to pay $1 for coverage (i.e., pre-tax), that would violate the nondiscrimination tests but if he or she has to pay $0, that wouldn't. 

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Right. Basically, for many reasons, including history and chance, our system has painstakingly complex rules for qualified retirement plan nondiscrimination, but a crazy-quilt when it comes to health.

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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The company does not give the president a choice about the payments and they therefore fall outside of the cafeteria plan (that is my argument) so I do not think the IRC 125 cafeteria plan rules are triggered and that seems to be the consensus here.  Thank you for the comments. 

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