Declining Health Insurance

[Guest jason]

If an employee is covered elsewhere and declines coverage by employer, can the premium be reallocated? For example, could the employer use the $$'s to increase the employee's wages?

[Linda]

Yes but the arrangement falls within Code Section 125. It's a type of cafeteria plan.

[Guest BENEFISH]

Linda knows. Any informal arrangement you make linking health insurance and compensation will result in taxable income for all employees regardless of whether they choose the health insurance or the cash. The IRS requires that such elections be made under a cafeteria plan (IRC Section 125) to avoid constructive receipt of income.

[Guest Charlie Stevens]

I agree. The interesting thing is that the constructive receipt issue is applicable to all the OTHER employees. That is, since the employee declining coverage is receiving taxable cash, constructive receipt is not an issue for him. Nevertheless, the IRS may take the position that, because all the other participants had the opportunity to take cash instead of benefits, THEY constructively received the cash and must recognize it as income and pay tax on it.

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Charlie Stevens

Michael Best & Friedrich LLP

[GBurns]

Benefish. What section of the Regs makes such a choice affect ALL or OTHER employees? What about "formal" arrangements as opposed to "informal" ?

[Guest BENEFISH]

Three competent professionals answered the original question citing the issue of constructive receipt. The cite is Section 125 and accompanying regulations. Maybe what you mean by "formal" arrangement IS a Section 125 Plan. The "informal" arrangement by its nature cannot be a Section 125 Plan if it does not satisfy written plan requirements and therefore likely results in constructive receipt. Read Charlie's answer again.

[Guest batgirrl]

can an employer offer cash in leui of health insurance? If so, do they need to make sure that the employee is covered elsewhere? Do they have to offer it to all employees?

[Greg Judd]

Batgirrl,

cash can be offered in lieu of health benefits (see previous posters' remarks), and to my knowledge an employer has no official obligation to confirm an employee electing cash has coverage elsewhere.

As to whether the option must be offered to all employees (all who are covered by benefits, I'm supposing), Benefish's comments tell you the answer--"no", if you aren't concerned about the tax consequences, "yes" if you want to preserve the tax favored treatment of the benefits. I'm leaving aside ERISA issues for the present.

Basically, in the context of a group plan, your plan needs to behave equitably to preserve the federal, and usually state/local, tax benefits and to enjoy ERISA protections. Naturally, an employer CAN do a wide variety of things with its resources to compensate employees that are inequitable and would not satisfy ERISA standards. The problem, if it's a problem, from a business perspective is that the cost of doing so vs playing by ERISA and/or IRS rules makes such strategies unattractive to most businesspeople.

[EGB]

How is this technically handled under a cafeteria plan? One way to do this would be to have the employer contribute the, say $100, to the employee's medical reimbursement account or dependent care account, which allows the employee to use those dollars on a pre-tax basis for unreimbursed medical bills or qualifying dependent care expenses. But, what if the cafeteria plan does not contain unreimbursed medical or dependent care? How do you handle the $100 payment under the cafeteria plan, both from a tax standpoint and from a documentation standpoint? What literally happens to the $100?