Third Party Medical Premium

[Guest phertzfeld]

Special Situation: An employee has medical insurance premiums through a third party provider and pays premiums quarterly directly to provider. We just instituted new FSP and know that premiums are not eligible for reimbursement. Question- may this employee pay the premiums monthly via salary reduction (pre-tax) and we (employer) submit payment direcly each quarter to the provider? Thanks for your help.

[E as in ERISA]

Under IRC Section 106, only "employer-provided coverage" in a health plan is excludable from income. So it has to be an employer program.

[papogi]

Rev Rul 61-146 allows for employers to reimburse employees for individual health insurance purchased outside the employer. It becomes employer-provided when the employer pays for it or reimburses the employee for it, thereby maintaining Section 106 protection from income.

[E as in ERISA]

I think that this case may be distinguishable from the revenue ruling (see www.taxlinks.com/rulings/1961/revrul61-146.htm ). I''m assuming that in the Rev Rul, the employer was paying the premiums in addition to the employees' full salaries (This was pre-125 and the employer paid part of the premiums for those who were in its health plan and part of the premiums for outside insurance for those who didn't qualify for the employer plan). In this case, they want to use "salary reduction" to pay the premiums. For example, if the employee is making $40,000 and is paying $4,000 to premiums out of that salary, they want the employee's salary to be reduced to $36,000 and then have the $4,000 of premiums paid by the employer. With the employee making that election to have a benefit instead of cash, the employee will be taxed on $40,000 unless this qualifies under 125 as premium conversion type feature. Since there aren't many discrimination issues with insured plans, you can probably find a way to do this. But I'd think that you'd want to make sure its a formalized program of some sort.

[papogi]

It is different from 61-146, but what is applicable is the concept that employers may pay for, or reimburse employees for, coverage purchased elsewhere (outside of a truly employer-sponsored plan). The dollars become employer-provided when the employer pays for it or reimburses the employee for it. Correct, in this case, they want to have the employer pay the premiums. As long as there is no additional subsequent reimbursement to the employee (Rev Rul 2002-3), this should work.

[jpod]

I theory this would work but you'd have to set up a premiump conversion cafeteria plan under Section 125 for this one employee, and if the employee is an HCE or a key, you're out of luck.