Health Incentive Plan (HI Plan)

[Guest JohnPay]

Our payroll processing company, The Business Office, has been asked by a number of clients who want to install a program referred to as the Health Incentive Plan or HI Plan.

We are aware of the warnings put out by many benefits and tax experts against using the version of the HI Plan that is marketed by the Redwood Group (TRG) and are lead to believe that the IRS and state Depts. of Insurance will be taking action against that plan.

However, these clients want to use the HI Plan from Burns & Assoc. and not the TRG version and further indicated the Burns plan is the original HI Plan and has a patent pending.

Has anyone had any feedback or opinions from legal advisors on the Burns HI Plan? Our clients have favorable opinions from their legal advisors and we have not been able to get any negative responses from the sate DOI that we contacted nor the IRS.

[IRC401]

What exactly does the Burns version do that the Redwood version doesn't do? In particular, is it a tax idea or is it a data processing product?

If the idea is supposed to save the client payroll taxes, it probably doesn't work. I'd recommend that your clients understand all of the penalties associated with failure to withhold and report taxes.

If whoever is selling the Burns idea wants your clients to sign confidentiality agreements, find out whether the product has been registered as a tax shelter, if not why not, and what the consequences are if the product turns out to be a tax shelter. [if there is no confidentiality agreement, I would love to get a copy of the opinion letter or at least some understand as to why any legal advisor thinks that the idea works.]

[GBurns]

The Burns HI Plan provides an actual benefit from actual accident & health and medical reimbursement plans, whereas the TRG "version" does not usually qualify as either and only reimbuses the premium that was previously deducted on a pre-tax basis.

This has been pointed out by many tax and benefits experts in various newsletters and reports. William M. Mercer in their June 2001 Grist Report named the TRG "version" as the one that they were referring to. The IRS has done the same regarding their investigation into all the plans.

What do you mean by "a tax idea or a data processing product"?

Re saving payroll taxes: the reason for the use of a section 125 Cafeteria Plan is to cause a reduction in payroll taxes so as to mitigate the employee's premium deduction. To suggest that any idea that saves payroll taxes probably doesn't work suggests that health and welfare benefits are not the area of your experience. A look at the sales presentations that are given by the promoters of section 125 plans and voluntary benefits under a 125 plan, such as AFLAC, Colonial/Unum, American Heritage or any of the health insurers will show that the emphasis of the presentations is the saving of payroll taxes thereby freeing up money to be used to purchse other benefits etc. Are you saying that you know that this probably doesn't work and they do not?

The Burns plan does not require the Confidentiality Agreement that the TRG "version" does. However, a Non-Compete Agreement is required. A confidentiality agreement would be of no relevance to the Burns plan for a number of reasons. The IRS and Treasury Dept and the majority of state DOI are not only aware of the Burns plan but are very knowledgeable of its structure. The USPTO is required, by law, to publish the Patent applications. A number of clients and prospective clients are public entities who fall under various Public Records disclosure laws. In addition, prospective clients are advised to seek outside legal counsel. In other words, there is no way for a confidentiality agreement to be applicable to the Burns HI Plan.

The Burns HI Plan is not required to be registered as a Tax Shelter and it is exempt from the Reporting and Disclosure requirements, whereas the TRG "version" should have been registered and should be subject to the reporting and disclosure requirements as an Other Reportable Transactions. The exemption from registration etc was provided by the Treasury Dept and the Tax Policy Division would be your best source of information regarding this position. I also suggest that you at least familiarize yourself with the Treasury Dept requirements in this area before you make assumptions about matters on which you have no detailed information.

An opinion letter issued to any entity other than the client is of no legal value. I suggest that you look at Treas. Regs 1.6662-2, 1.6664-4 etc and Proposed Circular 230 for the current position regarding opinion letters. You might also want to look at the AICPA Ethics Rules and the ABA position papers on the subject. Information is also available on the Treasury Dept's website in the Tax Policy section that is devoted to Tax Shelters. If you were familiar with the subject you probably would not have found it relevant to have made the reference.

Rather than purchasing an opinion letter from a friendly source that would have no legal value to the client, the Burns HI Plan prefers to rely on material of "substantial authority" such as the IRC, the Treas. Regs., Revenue Rulings, PLRs, Tax Court and District Court cases, that exist in support of the various plan designs.

One user has already received a favorable PLR and another has been verbally informed of such approval. There is no opinion letter that has more value than a PLR.

The Burns HI Plan has already been accepted by the legal advisors for 3 Fortune 500 companies, so far, and is under review by over 20 others currently.

I have been around long enough to have been here when people used to say that a section 125 Cafeteria Plan was not legal, and even with a distinct lack of rulings that allow these section 125 plans they are certainly in popular use. I was also here in the benefits and insurance industry when the experts etc said that a 401(k) plan could not be legal. I have also seen numerous financial services industry products supported by high priced legal opinion letters and Big 5 research etc that turned out to be wrong and illegal, for example most COLI designs, many VEBA designs, Reverse Split Dollar and Split Dollar techniques etc etc. The lack of value of opinion letters that are used as marketing tools by promoters was highlighted in the many recent COLI and Tax Shelter cases and also by the Senate Finance Commitee in their 1999 hearings on The Problem of Corporate Tax Shelters also available on the Treasury Dept website.

In any case the decision as to whether or not any plan or concept works, legally, for any client is a decision that each client is advised to make after taking the facts etc into consideration and seeking competent legal counsel.

In the end if any prospective client feels that there are any questionable areas, it is suggested that they do get their own Private Letter Ruling from the IRS. This is cheaper than any opinion letter and has much more value. Some of the prospective users have decided to do so whereas others decided that it was not necessary. The choice will always be that of the client and our opinion is of little consequence.

[IRC401]

You gave a very long response that said virtually nothing. I'll try phrasing the question in the form of an example:

Suppose that a 28 year single employee works for an employer with a well run cafeteria plan. He elects (under the 125 plan) to have his salary reduced by $100/mo in exchange for medical coverage and $10/mo. in exchange for $120 per year of FSA benefits. His medical expenses for the year which are not covered by insurance equal $120, all of which are run through the FSA plan. Therefore, technically, the employee spent nothing for medical benefits for the year.

How does the Burns HI plan benefit either the employee or the employer?

A. Is the HI plan just a proprietary form of a cafeteria plan?

B. Are you taking the position that the amounts of the salary reductions may be "reimbursed" to the employee without being taxable as wages?

C. Are you saying that you have found a way for the employer to get the benefits of a cafeteria plan without the formalities of one (relying on old rulings)?

If the answer to A is yes, you don't have any idea that produces tax savings in comparison to a 125 plan (but it still may be worth implementing).

If the answer to B is yes, your clients would appear to be engaging in illegal tax evasion, but you can point out that I haven't been able to get an offical explanation of the idea.

If your answer to C is yes, you may have found away around the "use or or lose it rule" and enabled employers and employees to save money that way. A client would need to weigh the litigation risk and implementation costs versus the benefit.

If your answers to all three quesitons are "no", I have no idea what the HI plan is and still have no evidence that the idea actually saves anyone any money (in comparison to a 125 plan).

If there is a PLR supporting the idea, please feel free to post the cite.

[GBurns]

The answer to ALL the questions is NO.

As you stated "you have no idea what the HI Plan is" . How would you have evidence that something "actually saves anyone any money (in comparison to a 125 plan)" if "you have no idea what the HI Plan is". But, as usual, that does not stop you from having an "expert" opinion.

Re c) what old rulings could you be referring to re Cafeteria Plans? Pre 1986?

What "use it or lose it rule" has a litigation risk?

Re a) If you have no idea what the HI plan is how can you so expertly decide that I don't have any idea that produces tax savings in comparison to a 125 plan. As per your question if it was a proprietary form of a cafeteria plan, it would be producing savings in comparison to itself because it would be a 125 plan. The comparison would therefore be to itself, a 125 plan to a 125 plan. That was your post not mine.

A PLR that might give you some better understanding is PLR 200007021, pay particular attention to the "Healthcare Reimbursement Account".

[KIP KRAUS]

G:

What is an HI Plan and why would an employer want one? Was some other threads in the past that explained this concept?

[GBurns]

There have been a number of threads, but the main ones were:

"Company reimbursement of pre-tax employee contributions- Redux (Originally posted by Garnett)" started on 10/05/01 which continued the original thread from January. Other threads such as "Section 105 Plans" on 10/12/01 were much shorter.

The purpose of the plan is mainly to reduce the net cost of providing employee health benefits by between 25% and 45%. Higher % are possible in some plan designs that additionally redesign the level of benefits thereby reducing the premiums payable.

[KIP KRAUS]

Thanks