Reimbursement for medical expenses

[Guest aem2]

Due to the rising costs of health insurance, a public school district changed insurance plans to a plan with a $1,000 deductible. The school district is considering reimbursing administrators up to $3,300 for out-of-pocket expenses, such as co-pays and amounts paid toward the deductible. The district is wondering if they have to set up some sort of separate plan for this reimbursement arrangement or if they can simply W2 the employees for the amount they are reimbursed.

[mroberts]

It would seem to me that increasing the deductible to $1000 on a health plan, but then giving employees $3300 to spend on medical would offset any gains from the action.

I'm not sure if a separate plan needs to be set up, but if the school does decide to do this, it should the money in a Section 125 Plan. That way, any unused portion will go back to the employer rather than just cutting employees $3300.

[GBurns]

You most likely will have to set up a separate Self-Insured Medical Expense Reimbursement Plan.

The fact that you even posted the question suggests that you might not currently have an FSA and so do not have a Claims Administrator. Setting up the new plan will require a Claims Administrator although it is very possible to self administer the plan with appropriate software.

If you set up the MERP the amounts reimbursed to the employees will be tax free.

If you W2 the employees it will be included in their gross income and could be taxable etc. In fact, it might even be subject to FICA etc as payroll amounts.

[Guest Dick Boever]

The key issue which has not yet been addressed is this "plan" would be only for "administrators", as I read the question. So the question is, can you set up a MERP for one class of employee while excluding rank and file employees. Would those benefits be taxable or tax free?

In most school districts there are very few key employees even among the administration, so could you set up a MERP on a tax free basis, maybe by excluding the key employees?

[GBurns]

In most school districts the plans are already set up with different benefits for different classes.

The Administrators get different benefits from the Educators (Teachers) who get different benefits from the Custodians and Food Service personnell etc.

There should be no issue following the same "class" structure.

[Guest Kathleen Meagher]

Code section 105(h) governs the tax treatment of self-insured medical reimbursement benefits. Such plans may not discriminate in favor of "highly compensated individuals" with respect to eligibility or amount of benefits. For a school district, highly compensated individuals would be employees in the top 25% of employees by pay.

If the top 25% in this district has a lot of administrators, you may have a discriminatory plan, which would require taxation of "excess benefits" paid to the highly compensated individuals. Even if the various employee classifications are ok for other types of benefit plans, they could present a problem under 105(h)

I suggest that the district seek advice from someone who is knowledgable about the 105(h) rules.

I hope this is helpful.

Kathleen

[Joe Priselac]

One question no one asked was whether the school district employees were unionized. I work with many school districts here in New York and they are all unionized which means that some of Kathleen's analysis would not be applicable. I recently was invloved in a contract negotiation where the unionized administrators negotiated for a 105(h) plan in which they would have $2,500 available. The other unions representing the teachers and support personnel did not have a similar provision in their contracts. The administrators make more money than the teachers and the support staff, BUT because all these employees are covered by a collective bargaining agreement the discriminiation rules do not apply. In addition, ERISA doesn't apply to governmental employers. For example, the 5500 filing requirement for welfare plans does not apply to school districts.