Health Ins vs 403(b)

[Guest Dick Boever]

A nonpprofit wants to allow the ee's that have health ins through spouses etc. and that don't take advantage of the fully paid individual coverage to contribute those dollars to a 403(B). (They currently require proof of coverage elsewhere to not be covered by the np's health plan.)

Since they can't use Benefit Dollars under the Section 125 plan and allow the unused dollars to be directed to the 403(B) plan, the option most employees would prefer, what options are available that would allow the funds to be contributed to the 403(B) pre-tax?

They could offer cash in the amount of the premium, but if the ee takes the cash, the ER is on the hook for the FICA /Medicare and so it costs them more for those not electing health ins or 403(B).

Can you offer either health insurance or 403(B), and if neither are elected, a cash amount less than the premium amount?

What about automatically enrolling all eligible ee's in the 403(B) for the amount of the individual premium, allowing those wanting the health ins to waive participation in the 403(B) and use the dollars to purchase health insurance?

Any suggestions would be appreciated.

[mbozek]

Why not just make a larger er contribution for those ee who decline coverage in health ins.? As long as there is no dispropornate participation by HCEs earning over 90 k there will be no discrimination. Otherwise the er could pay additional comp to HCEs who could make contributions to the 403(B) plan or a 457 plan which would be taxed at the 1.45% FICA rate for comp in excess of 87k.

[IRC401]

The IRS takes the position that if an employee is given the choice between pension benefits (under a qualified retirement plan) and medical benefits, the employee is taxed regardless of which he takes. See PLRs 9104050, 9406002, and 9513027.

The IRS is probably wrong, and, of course, PLRs are not binding. Is your client willing to take a contrary position and risk litigation to find out?

[mbozek]

There is no choice in my answer. The employer makes a contribution automatically for all employees who do not have health ins. The ee cant elect cash in lieu of the contribution. Also this is not a qualifted plan. Finally what is the audit risk in a 403b plan?

[Kirk Maldonado]

I don't think that the fact that it does not involve a tax-qualified retirement plan is determinative.

[mbozek]

K:While 2 out of 3 aint bad, I think I can go for the hat trick by taking your advice and agreeing that PLRs on qualified plans are determinative- See PLR 200247050- exchange of unused sick leave by ee of np for er contribution to 401(k) plan is a nonelective er contribution and not an elective deferral if ee do not have the right to elect a cash payment for the sick leave.

[Kirk Maldonado]

I agree that if the employee can't elect to receive cash, then you don't need to comply with Section 125 plan, regardless of whether the money goes into a qualified plan or a 403(B) annuity.

[Guest Kathleen Odle]

I recently learned that a client is doing exactly what PLRs 9513027 and 9104050 say that an employer may not do, which is to offer a choice between health insurance coverage and contributions to a 403(b) plan. Is anyone aware of any IRS enforcement in this area, either currently or in the recent past? Thanks.