Employer reimbursement of medical plan deductibles

[Guest DHarris]

Employer has a high-deductible insured medical plan for its employees ($1000 individual; $3000 family). Employer intends to reimburse employees for $750 of the individual deductible and $2250 of the family deductible. Employees will submit EOBs to employer showing how much of deductible has been met, and Employer will start reimbursing once employee mets $250 of individual deductible and $750 of family deductible. Payments will be on employee's paychecks.

Are these reimbursements taxable to the employee? Does the employer have to set up a 105(h) plan? Can such a plan be limited to providing reimbursements for deductibles only? If such a plan is created, is the insured plan and the 105(h) plan treated as one plan or two, for purposes of 5500s, SPDs, etc?

[KIP KRAUS]

Why not just amend the plan to have $250/$750?

What is the difference? The only advantage I can think of is that by doing this it is cheaper than the additional premium for the lower deductibles, but then if the plan is experience rated it shouldn’t make a difference.

What is the rational behind this decision?

[Guest DHarris]

I have suggested this, but the Employer feels it will save money to go with the higher deductible insured plan and pay cash to the employees to make up some of the difference. Back to the original question: does the cash reimbursement piece have to be part of a self-insured 105(h) plan for the reimbursement to be non-taxable? If so, is the 105(h) piece considered a separate "plan" for ERISA purposes, such as 5500?

[Guest PDDeBoy]

Clients I have that use this approach make the reimbursement on a taxable basis. I have other clients who set up their flex accounts to allow for employer funding, which allows you to "reimburse" the employees pre-tax per se. However, it creates employer exposure that you don't want.

[MGB]

Before doing this, I STRONGLY suggest they talk to the insurance carrier. Part of the pricing of the high-deductible plan makes assumptions of how much people use health care which is dependent on how much they individually have to pay. If I were the pricing actuary at the insurance company, once I found out the plan sponsor was doing this, I would increase the rates. Alternatively, if they find out later without being informed, they may retroactively rescind the policy because it really wasn't the high-deductible situation that the insurance company was pricing for and there are probably clauses in the contract that they could rescind the coverage under such a scenario.

[mbozek]

Why not set up a flex plan and channel the employer contributions into each employees account. As the employees incur out of pocket expenses they can be reimbursed from the account. Making the reimbursement on a taxable basis reduces the value to the employee, e.g, at a 20% income tax rate $750 payment is worth only 600.