Pre-tax employee payments?

[Guest Keith N]

I have a client who has always filed one 5500 for their medical plan and one for their flex plan. As the preparer, we were told that the employees paid 25% of the medical "premium" (they are self funded) into the flex plan for the coverage in the medical plan.

There has been a change at the employer and the old HR person is replaced by a new HR director who just told me that the Flex plan is completely separate and used only for things like co-pays on drugs, eye care & dependent care.

They also said that the medical plan is in fact not one plan, but a series of separate plans all with their own SPD's and insurance contracts. What we thought was a medical plan that provided medical, dental, ltd & life turns out to be a self-funded medical plan, a fully insured dental plan, fully insured ltd plan and a group life contract.

The employees pay 100% of the ltd & life premium on a post tax basis. The dental premium is treated as pre-tax as well as the employee’s portion of the medical coverage. Apparently they determine the anticipated total cost of the plan, then split it 75/25 and then split the 25% to each employee. They do this calculation internally. These "premiums" are collected through payroll deduction and the money goes to a side fund administered by a local claims paying firm. They treat these employee payments as pre-tax contributions.

Can they do this? My exposure to medical plans is limited, but I didn't think you could collect premiums as pre-tax unless they were run through the flex plan.

Where is a good source for information?

[E as in ERISA]

You are correct. Employee contributions are pre-tax only if they go through a 125 arrangement.

But many people get confused about what they have. A 125 arrangement is just a choice of cash or nontaxable benefits. The existence of a valid 125 arrangement depends on the plan terms, not the funding. If the terms of the 125 plan provide for both flexible spending accounts and for pretax premiums on the health and dental plan, they may be okay.

The director may be getting confused because someone may be separately administering the flexible spending accounts in a separate fund or account. But the premiums do not actually have to "run through" that fund or account in order for them to be pre-tax. It is only necessary that the document terms cover the premiums.

Check the plan document.