PrePaid Legal Service

[Guest Carolynn]

Is it possible/legal to run prepaid legal service thru employee's payroll on a pretax basis?

Thanks in advance for your help.

Carolynn

[papogi]

Group legal services can be offered in a cafeteria plan, but only as a taxable banefit (can't be pre-tax).

[Lisa Hand]

The authorization for qualified group legal services plan elections to go pre-tax terminated June 30, 1992 per Section 120(e) of the IRC.

[Guest FAQ]

Taking this a step further, is it correct that the participant would pay taxes on the amounts deducted from his or her pay to pay for the legal plan coverage, but the benefits themselves would not be taxable?

For example, an employee pays $20 per month for pre-paid legal and has a will drawn up that would otherwise cost $1,000. The employee pays nothing for the will. Would the employee be taxed on the $20/month taken from his or her pay, but not on the $1,000 value of the will?

This feels like the correct result, but I can't find support for the exclusion on the usage of the benefit (other than analogies to long-term disability and other insurance coverage).

[Guest FAQ]

Here's another issue.

ERISA §3(1) states that a plan "established or maintained by an employer" that provides prepaid legal services is an ERISA welfare plan. However, the regulations at 2510.3-2(j) exclude from the definition of employee welfare benefit plans "certain group or group-type insurance programs" under which no contributions are made by the employer; participation is completely voluntary; the sole functions of the employer are to permit the insurer to publicize the program, to collect premiums, and remit them to the insurer; and the employer receives no consideration.

Would the typical pre-paid legal services arrangement be akin to this type of "insurance program" (assuming the above requirements are met)? I believe it would be.

Thanks in advance for any thoughts.