Is a medical plan sponsored by a non-member of the controlled group co

[Guest friedbrain]

Company A has a flexible benefits plan where Company A employees can use "pre-tax dollars" towards the payment of premiums for a group medical and dental plan that is sponsored by Company B. Company B is not part of Company A's controlled group. Does Section 125 require that the underlying plans in a flex benefits plan be sponsored by the employer or a member of the employer's controlled group? Put another way, would Company A employees here recognize income and essentially lose the pre-tax benefit under Section 125 since the group medical and dental plan is not sponsored by the employer? Is there something in the regs and/or statute that covers this question?? ANY thoughts would be highly appreciated. :confused:

[GBurns]

I am surprised at how often I hear this question, but usually it has to do with PEOs.

Prop. Treas Regs 1.125-2 Q&A 3 defines a Cafeteria Plan as a plan maintained by an employer for the benefit of its employees.

If you do not like the rest of that Q & A because of either the fact that the Regs are Proposed or that there is a reference to section 89 there are many many other rules (DOL, IRS, state insurance law, insurance contract etc ) that dictate that there has to be an employer provided plan. I do not think that Company B could ever be the employer and if it is a PEO it most likely could not be the "common law" employer either.

Remember that if you deduct pre-tax under a section 125 the rules apply Proposed or not.

If you deduct pre-tax under another section of the IRC you most likely will see the IRS in court.

Also there are state insurance laws pertaining to List Billing by insurers to employers.

In general, the situation that you posed most likely would be disallowed as a pre-tax deduction by the employees.