Carry-over contributions

[Guest helenw]

An employer would like to do away with their health insurance and instead put money into the employees' medical spending account so they may purchase their own health insurance. The employees would then be reimbursed for the premiums from the medical reimbursement part of the cafeteria plan. The question the employer has is can an employees' unused employer money be carried over to the next plan year? I know employee money is always "use it or lose it" but what about employer money?

[Linda]

I think you can carry over employer contributions. While this is of course not a 125 plan, there is some troublesome language in the 125 regs purporting to interpret 105. However, see IRS Private Letter Ruling 200007021.

Would the employer fund this or would benefits depend on the financial security of the employer?

[GBurns]

I trust that you understand that the employees will lose the benefit of being able to pre-tax the premium through a Section 125 Cafeteria Plan.

Also be aware that even though it will be employer contribution only, there is nothing that says that you can or cannot roll over from one year to the next. However, be aware that this issue is one on which the IRS has refused to rule. It appears in Rev. Ruling 2001-4 in section 5.

I suggest that you carefully weight not only the tax issue but also the availability of insurance to the employees on an individual basis. There will be no guaranteed issue and there will be pre-existing condition exclusions (if not initially it will be on renewal). There is also the issue of group pricing versus individual pricing and of benefits caps or limits.

It might not be a good move and should only be done after careful extensive consideration.

[Guest AHayhow]

Are you saying that an employee with a health care FSA can use money an employer put into his/her FSA to pay for (or be reimbursed for) health insurance premiums? Thanks

[GBurns]

I do not see where anyone referred to or suggested an FSA.

The money would be put into a "Premium Reimbursement Account" or a similarly purposed account outside of a section 125 and set up under 105.