Outside Insurance Premiums in Cafe.Plan

[Guest SueR.]

Our company has a Cafeteria Plan with benefits of Insurance Premiums (Medical and Dental company sponsored), Medical Flexible Spending and Dependent Care.

My question - if an employee has an individual outside insurance plan (such as Cancer policy) can he/she have the annual premiums withheld via payroll ded. as pre-taxed.

If so, would he/she turn the premium notice in to the administrator for the administrator to pay directly to

the insurance provider or could he/she pay premium and turn in premium notice to administrator for reimbursement to him/her?

I have searched many places and cannot find a definative answer for this question of outside insurance premiums. Any help or guidance anyone can provide will be most appreciated.

Thanks,

SueR.

[401 Chaos]

Sue,

I am not a cafeteria plan expert but my understanding is that Section 125 cafeteria plans can be designed to permit coverage of certain individual or non-employer sponsored insurance policies. Specifically, cafeteria plans can cover certain individual health / medical insurance policies and individual life insurance contracts that are provided to a group of employees. In no event, however, can such policies provide for "deferred compensation" so a cancer policy that provided some payment several years down the line in the absence of a cancer claim, etc. could not be covered but a supplemental disease / cancer policy providing additional benefits for particular claims would be ok. That said, the coverage of such individual policies can raise unique tax, HIPAA, and other compliance issues for employers plus administrative issues along the lines you highlight with respect to payment / reimbursement. As a result, many plans are not drafted to permit such coverage and many employers will refuse to expand their plans to do so.

For what it is worth, I believe you could design the plan to handle premium payments / reimbursements in either of the manners you note if you desired to cover these benefits under a cafeteria plan.

Again, cafeteria plans are not my thing so I'm interested in seeing if others have different thougths. Good luck.

[Guest TXCafe]

I wouldn't call myself an expert but I'm a Cafeteria Plan Administrator for a TPA. We offer an Individual Insurance Reimbursement Account as part of our Cafeteria Plans. It's essentially a hybrid FSA. Individuals may purchase health insurance (health only) through an individual provider (not a group health plan) and enroll to have pretax salary reductions made for the same amount. They then may submit the expense for reimbursement. It must have already been incurred and they may only be reimbursed what they have contributed up to that point. There is no uniform coverage. I have seen/heard some debate about this type of plan but my company subscribes to the EBIA Cafeteria Plan Manual and it provides documentation that such a plan is permissable under IRS Code Seciton 105. I recommend looking into some resources such as EBIA or the BenefitsLink website or other benefit administration resources for more information about Section 105 plans. You may find some resistance here about this sort of thing....I seem to remember seeing some old threads on here about it. I hope that at least gives you a direction in which to look!

[Guest SueR.]

Thanks so much 401 Chaos and TXCafe for your response. They were both very insightful and helpful.

It's really great to have an avenue of assistance such as this message board.

Happy New Year to you both,

SueR.

[GBurns]

TXCafe

Are you saying that the amount that was pre-taxed is then submittted as an expense which is then reimbursed?

[Guest TXCafe]

TXCafe

Are you saying that the amount that was pre-taxed is then submittted as an expense which is then reimbursed?

It's just like a Medical Reimbursement account. Where the money is taken out of their check pre-tax and then the expense that they pay to the insurance guy down the street with their after tax money is reimbursed. I wouldn't be posting about it if I didnt' feel confident that it's totally legit and legal. I do know that there are a lot of other issues to watch for if you have this type of plan: HIPAA, ERISA etc but most of the compliance issues are things we already cover for our other FSA plans. And you're very welcome, original poster! Glad to help!

[KJohnson]

Just wondering how you cover hipaa discrimination and COBRA with such an arrangement.

The EBIA manual says not to do this if you are offering major medical coverage. "Bottom Line Don't Include Individual Health Policies That Provide Major Medical Coverage Under a Cafeteria Plan" (p. 247). This is a HIPAA discrimination issue (individual policies will cost employees different prices based on health status) I don't know how you "cover this" with an FSA or any other plan.

If you are not dealing with major medical but are dealing with an excepted medical benefit under HIPAA, such as stand alone dental, you still have COBRA concerns. The EBIA manual then advises to contact the individual insurer to make sure that the individual policy has COBRA rights (which I would bet it doesn't) pp. 247-248. Again, don't know how you cover offering COBRA for this type of coverage.

[Don Levit]

KJohnson:

As Reagan said to Mondale in their debate, "Well, there you go again!"

EBIA is a well-respected source, but they do seem to err on the side of conservatism.

Let me give you an update on my discussion with Bill Bingham at the TX DOI regarding this very issue.

Bill was mentioned as one of the contacts in the Commissioner's Bulletin which warned against this type of activity.

I am wondering if TXCafe is aware of this bulletin? If not, I can provide the link to him, and this discussion board.

There was a very relevant case which addressed the issue of whether or not individual policies met the definition of being part of a group plan. This case took place in the Fifth Circuit, where Texas is located.

The case is Hansen v. Continental Insurance Company. Only one of the factors in whether an individual policy was part of a group plan is the employer subsidy for the premiums. In no case am I aware of is this the sole factor. Rather, the employer must have more involvement than this, particularly if the individual policies were already in force before coming to the employer. I would be happy to fax this case to anyone who wishes to read it.

By the way, Bill Bingham was not in interested in reading this case, due to a perceived lack of time.

Don Levit

[KJohnson]

I have not doubt EBIA is a conservative source. I was just questioning a prior post which cited EBIA in support of the practice where they clearly advise against it espeically for major medical benefits.

Also, I think that making arguments that individual policies are not goverend by ERISA (as well as HIPAA and COBRA for medical-type policies) because they are not "employer plans" may come back to shoot you in the foot for purposes of Code Section 106. I have yet to see any authority thay says such an individual policy is not an ERISA plan but is still "employer-provided coverage under an accident or health plan" for puposes of the pre-tax advantages of Code Section 106.

FYI Here is DOL's take (or rather non-take) at a 2005 ABA JCEB meeting where they refused to accept a "proposed answer" proffered.

Question 27: An employer adopts a cafeteria plan under I.R.C. §125 offering both group benefits and individual voluntary policies. One of the individual voluntary policies is a cancer benefit policy. The employer does not contribute to the insurance premiums associated with this policy and the cafeteria plan document clearly indicates that it is exclusively the employee’s decision whether to elect the cancer benefit policy. The employer does not comment on or tout the merits of the policy. In fact, the employer’s sole involvement in the program is to (1) choose to include it among the cafeteria plan benefit options, (2) process and pay over to the insurer the employees’ pretax salary dollars that the employee elects to use to pay the premiums. (The employer does not make any contributions to the cafeteria plan.) The policies themselves are mailed directly by the insurance company to the employees who enroll in the cancer insurance policy. 23

Does the fact that the employer (1) has selected this cancer insurance policy to be a cafeteria plan benefit option and (2) obtains the benefit of not having to pay its share of FICA payments in connection with the pretax dollars an electing employee spends to pay the cancer policy premium, necessarily cause the employer to be deemed as “endorsing” the program for purposes of 29 CFR §2510.3-1(j), thus causing the policy to be an ERISA-regulated plan?

Proposed Answer 27: No. The determination whether an employer has endorsed a particular benefit arrangement in a cafeteria plan is an inherently factual question, that will vary based on the cafeteria plan and the level of employer involvement. The mere decision by an employer to include an individual voluntary policy in an I.R.C. §125 will not, without more, cause the plan to be endorsed by the employer and, thereby, subject to ERISA. Moreover, the economic benefit to the employer stemming from its savings on FICA payments is an incidental benefit caused by the employee’s decision to participate, and does not by itself cause the employer to be endorsing the arrangement. To hold otherwise would necessarily cause all benefit options in a cafeteria plan to be ERISA plans (assuming the benefit is of the type that is a welfare benefit set forth in § 3(1) of ERISA). Such a rule would sweep too broadly and would dissuade employers from using cafeteria plans as vehicles for employees to obtain welfare benefits that the employees, in the absence of the Code § 125 tax advantages, would not be able to afford.

DoL Answer 27: DoL staff noted that the broad question of the circumstances in which offering a product under a cafeteria plan will automatically result in the product falling outside the group and group type insurance safe harbor in 29 CFR 2520.3-1(j) might currently be anan issue before the U.S. Court of Appeals for the Fourth Circuit in the case of Cassleman v. AFLAC. DoL staff thus declined to address the question because of concerns regarding JCEB publishing informal staff views on an issue when DoL staff was aware that the issue could be pending before a U.S. Circuit Court of Appeals. Note: Subsequent to the meeting, the court issued its decision at Casselman v. Am. Family Life Assurance Co. of Columbus, No. 04-2370, 04-2378, slip op., 2005 WL 1492208 (4th Cir. June 24, 2005).

Here is the opinion in Cassleman (which can be used to support arguments on either side).

http://pacer.ca4.uscourts.gov/opinion.pdf/042370.U.pdf

[GBurns]

TXCafe

Maybe I am just not understanding what you are describing. Let me try again.

What is "the expense that they pay to the insurance guy down the street with their after tax money is reimbursed."?. In other words What expense would be paid to "the insurance guy"? The only thing that I know that is paid to "the insurance guy" is insurance premium, but you said in your first post that was paid pre-tax through "salary reduction".

The way that I understand the OP is that it is regarding choosing between either pre-taxing the insurance premium or getting reimbursed by the employer if the premium is paid after tax.

Old Revenue Ruling 61-146 is probably the main guidance on what I think the OP is considering:

http://www.irs.gov/pub/irs-drop/rr-65-146.pdf

Bear in mind that there might be some state insurance law issues if it is a small group and also the ERISA, HIPAA and COBRA issues pointed out by other responders.

[Guest TXCafe]

Wow. I'm sorry to stir the pot as it were. I guess maybe it would be better to describe what we offer as a Premium Reimbursement Arrangement. If I stated that the premiums were paid through pre-tax salary reductions, I apologize as that's not a correct statement. The participant elects the amount they anticipate spending on their insurance premiums (outside of any group policy associated with an employer) which is typically equal to the premium quoted to them (x12 if a monthly premium). This amount elected is deducted from their paycheck on a pre-tax basis. The participant then pays the premium directly to the insurance company and then submits proof along with a claim form (this has the I won't claim this anywhere else language on it) for reimbursement out of those funds set aside. It is not a double dip arrangement as would be suggested by the presence of paying a premium through salary reduction and then being reimbursed. I have studied what I can find on this type of arrangement and it would seem it remains controversial but allowable. It seems to me that some of the guidance posted on this thread refers to a different type of premium payment arrangement than the one which I'm describing. I really wasn't trying to hold our plan design up for scrutiny but rather suggest a course of action and place to look for guidance for the original poster. I would never pretend to know or understand everything in any portion of Cafeteria Plans and especially not in regard to a plan design which has been questioned and is not widely accepted or offered like a Dependent Care or Medical Flexible Spending arrangement. I was just trying to be helpful.

[GBurns]

Again you say that "This amount elected is deducted from their paycheck on a pre-tax basis."

BUT, if it is deducted "on a pre-tax basis" which, of course means payroll salary reduction, then How can "The participant then pays the premium directly to the insurance company."

In any case, you have stated more than once that it is the pre-taxed amount which is used for payment of the insurance premium and which the employee "then submits proof along with a claim form (this has the I won't claim this anywhere else language on it) for reimbursement out of those funds set aside."

This seems exactly like the "double-dipping" that was addressed in Revenue Ruling 2002-3 and subsequently succesfully prosecuted in http://www.usdoj.gov/opa/pr/2006/December/06_tax_842.html

Either I am not understanding (maybe too much eggnog) or your explanation needs some clarification.

I think the confusion probaly starts where you state "The participant elects the amount they anticipate spending on their insurance premiums.." Maybe you meant the amount they anticipate spending on out of pocket expenses ?

[Guest TXCafe]

"This seems exactly like the "double-dipping" that was addressed in Revenue Ruling 2002-3 and subsequently succesfully prosecuted in http://www.usdoj.gov/opa/pr/2006/December/06_tax_842.html" I checked out this page. The only reference to reimbursing insurance premiums is through a Medical Flexible Spending Account. We do not allow our clients to set up plans that would reimburse ANY premiums through the Medical Flexible Spending Account. The premiums are reimbursed only through the Premium REimbursement Account. It is essentially a POP where the participants decide the insurance. It is NOT double dipping. The money used to pay the premium is out of pocket money that the participant has already been taxed on. The money reimbursed to them is the only money that is pre-tax.

"I think the confusion probaly starts where you state "The participant elects the amount they anticipate spending on their insurance premiums.." Maybe you meant the amount they anticipate spending on out of pocket expenses ?" No. I meant the amount they anticipate spending on their insurance premiums. Their non group non employer sponsored insurance plan premiums. Maybe it's a state/regional thing? Most of our clients are in Texas (as you can tell I'm in TX by my name) and there is a pretty big individual insurance market here. Many people are not insured through their company/employer for various reasons and buy individual policies through various insurance companies. They also purchase supplemental policies on the individual market. It's worth pointing out that the plans are also designed not to allow any benefit not already allowed under Section 125. The money they use to pay for those premiums has been taxed. It is out of the participant's pocket. They are reimbursed with money which was a pre-tax salary reduction.

I checked further into what EBIA had to say about it. It would seem that this would fall into a voluntary plan and be under the ERISA safe harbor. I also did read all the risks and suggestions set out in the EBIA book. I concur with the poster who pointed out that EBIA is a very conservative publication. Maybe unfortunately, these plans were part of the practices that were already in place when I came into my company's employment. I'm not sure our clients could handle the shock of my getting EVERYthing under strict and conservative compliance all at once but we are making strides to make sure we can inform our clients how to be as compliant as possible. Unfortunately, the Cafeteria Plan world is far from perfect and I've observed MANY situations on this board and through other resources where Cafeteria Plans are administered far from perfectly compliant. Perhaps I shouldn't have been so hasty to recommend our arrangement to the original poster but in my opinion, I was suggesting she look further into ONE existing option. Not withstanding the issues raised by other laws (ERISA, HIPAA, COBRA etc), I have found substantiation that a plan similar to those in place with our clients has been given something of a green light from the IRS. (SEE Rev. Rul. 61-146) And that's basically what EBIA says from what I've read: Under the IRS, it's basically ok (although as most things in Cafeteria Plans, more guidance would be great). However, other related laws should be watched for and most likely are triggered.

I'm hoping I did a better job explaining myself and our arrangement. I also hope that I explained that I have a pretty good understanding of the situation these plans COULD create and am working to do my part as a TPA to give my clients an understanding as well. I am NOT a Plan Administrator so I can of course only recommend things to my clients and as I said these were in place before my employment began.

[Don Levit]

Wow, this is starting to look like a soap opera with different stories!

K Johnson:

I want to address our issue presently.

Thanks for providing the Casselman case.

Here, the employer did more than just collecting premiums, or even paying the premiums for the employees.

The employer researched which companies would be appropriate, and required the employees to choose between 1 of 2 companies. In addition, the employer selected the employees who would be eligible.

That is quite a bit more involvement than say the employer paying premiums on individual policies selected by the employees before even arriving at their present employer.

By the way, Hansen v. Continental was mentioned, so maybe this is a type of bellwether case, particularly for Texas.

Don Levit