Reimbursement of Health Plan Deductible

[Guest LaurieL]

We have a small group of employees who live out of state who are enrolled in a POS and will only receive the out-of-network benefits since the plan is not in their area. We would like to reimburse employees for the deductible since they do not have the opportunity to use in-network providers. Is there a way to reimburse them without the reimbursement being taxed?

[mroberts]

Yes and no. If you just want to reimburse them every time they incur an expense, the amount is going to be taxable. Your best bet is to set up a section 105 plan. This is very similar to a section 125 plan except that the employer puts the funds into the account for the employee to use. The one problem with this is that you will not be able to determine how the employee uses the funds in the account. Meaning, the employee could decide to use the funds in the account for vision or dental benefits just as much as health benefits. The important thing to note when setting up this plan is to not be discriminatory.

If you would like to discuss further, please feel free to send me an email!

[Guest LaurieL]

Thank you for your response. I was afraid that would be the answer. We only want to reimburse what expenses they incur on the deductible. The company doesn't want to pay out the full amount especially if they don't incur any expenses so I guess we will have to tax it at this point. I was hoping there was some way with a medical reimbursement account we could do it but it is only for the select few in this predicament. Thanks again!

[mroberts]

I just had one of my clients want to do this and you can run into all kinds of discrimination problems, so be careful regardless of what you do.

[Larry M]

If the out of network group is not highly compensated, why not establish a medical reimbursement plan for that group which would be limited to the deductible or higher co payments?

[Guest taylorjeff]

You should be able to set up a 105 plan that is designed specifically to cover the deductible expense. I've done it with a couple of TPAs and the benefits were written into the plan document. In a self-funded plan you will need to run it through a discrimination test. If you run into problems with highly comped, make their payments taxable. If needed you could also do a fully insured section 105 medical reimbursement plan and then you don't have to worry about the discrimination issues.

You might also check with the POS plan about revising the out of area benefits. Its pretty common now for POS plans to set the out of area employees up with "out of area" benefits so their benefits are paid in-network. There's usually a higher charge, sometimes significant and you don't have the balance billing protections you get with "contracted" providers.

[mroberts]

taylorjeff:

i'm wondering if this varies from state to state. i just went through this process and from what i was told was that if you set up a section 105 or 125 plan, you can not indicate what the funds could be used for. now, you can decide whether or not you want to include dependent care reimbursement, but when it comes to health, i was told if it was on the list of covered expenses in the regs, it can be reimbursed.

let me know if you have some backup.

thanks!

[GBurns]

mroberts

You need to clarify your statement.

What is the relationship or connection between any 105 plan and Dependent care?

How would any state law affect section 105 or section 125 as far as FWT, FICA etc go ?

What list of covered expenses do you find in any regs that are applicable to sections 125 and 105?

.........

The solution to the original post is to simply set up a self insured medical expense reimbursement plan as per Treas Regs 1.105-11.