GBurns

How can the reimbursement be the same for all participants?

Why do you think that it is even an HRA? It probably is just a section 105 MERP, which have been around for decades. They probably did not mention any tax advantages because the tax advantages might be different for each employer depending on corporate structure, plan design etc.

That is a most fascinating definition of tax- free.

That is what most of us are accustomed to, but in this case, the money (the Benefits Credit) does not go to the FSA but instead goes to the paycheck as taxable income. How do I show them what he standard practice is? By the way, the way that it is being done was put in by one of the large CPA/Consulting firms, so there is a bit of Who are you to say that...? involved.

In my humble opinion, this seems like a very typical section 125 plan. However, I am concerned by how the OP describes the arrangement and I suspect that the payroll dept is not told that the employee's salary is $39,000 rather than $40,000. I suspect that the OP has this opinion as a result of having been given a simplistic explanation by someone trying to help. Although, the OP does seem positive that there are no payroll salary reductions, but I still wonder. Aside from whether or not section 125 is an issue, this seems exactly the same as in Express Oil Change and other such cases where the Courts decided that a section 125 plan was not needed to do this.

I am still getting more details and some more actual pay stubs. The pay stubs seen so far makes it a wash as far as FICA is concerned, but this also seems coincidental based on the particular pay stubs already seen. The "Benefits Credit" is not used in computing 401(k) comppensation etc nor OT. However, one of their labor people has now pointed out to them that the amount might be includable in base earnings for OT calculation, so they are now seeking legal advice. Their Benefits enrollment form and SPD uses wording that actually states " This credit must be applied to a ...... benefit program, and can not be taken as cash." This wording, to me means that the amount should not be appearing as taxable income on the pay stub in this manner but should be treated as described by taxesquire. I do not see anything wrong with how they are doing it, from a tax point of view, but I find it an unusual method and one fraught with potential problems whether it be OT or other calculations, or just difficult to change whenever needed as pointed out by masteff.

If an S Corp pays the health insurance premium for a 2% or more shareholder it is not tax free to the employee but is reported as income to that person. As far as I can recall it has always been that way. http://www.irs.gov/businesses/small/articl...=107451,00.html http://www.irs.gov/businesses/small/articl...=157049,00.html Does anyone know if the Ruling requested by the AICPA on IRS Headliner Volume 163 above, was issued?

I am seeking examples of how Benefits Credits are explained to employees. It would be helpful if there were sample figures or examples. I have a prospective client whose use of Benefits Credits has me asking questions. For example, the Benefit Credit is $500 per month, the Health Insurance premium is $650 of which the employee share is $150. This employer pays the $500 to the employee as Taxable Income then has the employee do a section 125 Salary Reduction of $650. The logic is that the employee is paying the difference which happens to be the same as what is the employee share of the premium. My experience is that the $500 should not be paid but should exist as a "notional" amount which is spent down with any amount needed becoming the amount of the Salary Reduction amount. I would greatly appreciate some input and enrollment forms with examples which I can use to explain what should be done.

Don, If "The premiums paid to the VEBA cannot be used by the participant", How does money get into "his individual account"? If "The premiums paid to the VEBA cannot be used by the participant", How is it that "the dollars in his individual account can be used by the participant" ? This seems contradictory. If unused dollars are returned to the VEBA they cannot be "deferred compensation" since the participant has no means of getting the funds. Maybe I am just not understanding what you are trying to describe.

Split dollar is not a life insurance program or plan. It is a method of paying premium whether for life insurance, Disability insurance or otherwise.

Aren't the salary reductions under section 125 for the FSA regarded or treated as premiums by the Treas Regs.?

The supplemental plans from AFLAC, Colonial, Allstate American Heritage etc can be either Group or Individual and most of either/both can be paid through a section 125 plan if desired.

The threads will probably be found if you search for Exec-u-Care.

Mel I assume that the individual policy is a health insurance policy. Why individual and not group? What do the other employees who are in the same class get? Who is getting billed by the insurance company? Is the employer going to pay directly to the insurance company or will the employer be reimbursing the employee what the employee paid? Is an HRA the only available payment channel? Also I wondered why cases were important rather than regulations etc, since it is quite likely that most conflicts involving this issue were settled without litigation.

Didn't DOL Technical Release 92-01 say that there would be no enforcement of the Trust requirement for Cafeteria Plans and certain other Welfare Plans?

DAHO So that we are all on the same page: What do you mean by "full cafeteria plan"? What does it matter that some employees opt out of the employer's offered coverage and get no compensation for making that choice? What does management hope to, or think that they can, achieve by having a "full cafeteria plan"? Or, as leevena so aptly puts it, What is the objective?

Have a look at what was done in PLR 199915054. As for the insurance company's objections, I would request them in writing along with their legal rationale and forward the matter to the state dept of Insurance regulation and/or DoL. I bet that once they hear that you will be seeking such advice, they will drop the matter, unless there is some such prohibition in the Provider contract. This could be a Provider issue rather than an employer/employee issue, especially where the employees of other medical practices are involved. Of course, if there is a reciprocal arrangement with the other medical practices that might also be a mitigating factor.

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 ?

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.

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

Many companies do many things very frequently that fall into these broad categories. I doubt that it would be easy tind a "pure" employer anywhere. I do doubt that this is the first or only moral or legal issue that she has faced since starting to work there. And I would expect that if she elaborates, she will point out that this is a relatively minor issue when compared to the many other moral or legal issues that she let slide by. Assuming that she even thinks that this bears classifying as a moral or legal issue. In the grand scheme of life, I would think that most would not think of this as being even a moral or legal issue but more of a simple lapse in judgement, or lapse in business acumen.

Isn't "paid by the employer" the same as "deliver funds to the individual"? How does one pay without delivering? The Prop. Regs state incurred as the basic requirement for substantiation. I doubt that we can add anything to that.

Are there any employment contracts or CBAs involved?

swwwnyc, Have the employee do the actual calculation of the reduction in potential SS benefits. Then have them calculate the tax benefit of nat pre taxing the premium. If they do so and compare the scenarios, they should see that there most likley is no benefit to not pre-taxing the premium. As pointed out by jmor99, the plan could actually require that all premiums must be pre-taxed in order to get any health benefits coverage.

Yes, that might happen, but even if they start with her company, what is her liability anyhow? Many times employees have to do whatever the boss wants. I do not think that it is ever wise to challenge the boss's decisions especially if the regulatory or other penalties will not be the employee's burden. Changing employers does not ensure that the next employer will not have a similar situation.