cafeteria plan and health insurance

[eilano]

Company A's health insurance is run through their cafeteria plan. They have a new employee that doesn’t want to participate in the cafeteria plan, but wants to be part of Company A's health insurance plan. This new employee wants a company that he formerly owned, but is now owned by his former company’s employees to reimburse Company A for the employee’s share of the health insurance premium. There would be no withholding.

Can Company A allow this type of arrangement? Does this effect the cafeteria plan?

[KIP KRAUS]

I’m not an accountant, but it would seem to me that there are more issues here than running the payment through the cafeteria plan. And I assume that what you mean by running it through the cafeteria plan is that you mean you allow employees to pay premiums on a pre-tax basis? If so, I assume also that an employee may pay premiums on a before tax basis as well.

How is Company A going to treat the payment to the plan from the employee’s former company?

How is the employee going to treat the payment from his other company, taxable income? It sounds to me like he wants to get free nontaxable benefits using taxable income for which he doesn't want to pay taxes. Even though the former company is paying the premiums, because there is no longer an employer/employee relationship I would argue that such a payment would be considered income to the employee.

My solution, tell this employee to make arrangements with his former company to pay him directly and then have his premiums deducted from his paycheck. Let him worry about the tax consequences if there are any. Why should the company get involved in his personal business?

I may be totally off base, but I smell a rat.

[SLuskin]

Also, you have to look in the plan document. Some plans are written so that you have to be in the cafeteria plan if you want to be in the health insurance plan.

Some plans are written that the employee has a choice.

In either case, what this guy wants to do doesn't look right.