Cancer Ins. in Cafeteria Plan

[Guest tcunagin]

I have a client who wants to know if they can include premiums paid for a cancer policy which requires premium to be paid for 10 years and then if not used a full refund of the premiums paid. Is this a type of coverage that can be offered in a cafeteria/health care reimbursement plan?

[QDROphile]

What is the plan going to do with the premium refund? Who is effectively paying the premiums?

[papogi]

Cancer insurance was addressed in IRS Technical Advice Memorandum 199936046. This case is a bit different. I think there will be problems with deferred compensation.

[Guest tcunagin]

The premiums are being paid by the employee pre-tax through the cafeteria plan. The refund of the premiums would go to the employee.

[SLuskin]

I do not believe that you can include cancer policies that have the return of premium feature in a Cafeteria Plan. Certainly the premiums cannot be pretaxed.

[QDROphile]

Return of premiums is very risky. Once premiums are paid, any assets are plan assets and generally, plan assets are to be used to provide benefits under the plan. Generally, benefits under the plan do not include cash payments to participants. Cash payments under a reimbursement plan simply cover the benefit that the plan provides, e.g. medical services; they do not provide "windfall" cash. Plan assets can be used to give a premium holiday, but I have doubts about whether you can give a premium holiday only to the person who paid the premiums. Depending on the the scope of the "plan," the assets might be used to provide benefits other than what was covered by the original policy. The Department of Labor has been surprisingly flexible with use of demutualization proceeds, but I am wary about treating that as a guide.

If you client wants to do this, competent legal advice is needed.

[Kirk Maldonado]

I don't think that a cafeteria plan can permit the purchase of insurance, the coverage of which extends beyond the current plan year; I think that violates the prohibition against deferred compensation in a cafeteria plan (other than a Section 401(k) plan).

[mbozek]

I dont see it as deferred comp- more likely it is a dividend on the premium- check the terms of the policy. The insurer may be required to return the policy as a condition of state approval. Anyway it is only a problem if the policy is in the 125 plan for 10 yrs. If the ee leaves can the policy be continued on an AT basis by the ee? If so then there is no harm to the plan because no cash value will accrue if the ee leaves before 10 years. This may be irrevalent but why would an er allow a cancer only policy in a 125 plan? There are better uses for the funds unless it is assumed that the ee will remove the policy from the plan before 10 yrs are up allowing the ee to bag the cv without paying taxes.

By the way how doe insurer enforce the 10 year premium payment requirement?

[Kirk Maldonado]

Mbozek:

My assumption was that it required a single lump sum payment (upfront) to provide coverage for the next 10 years. Otherwise, how could you enforce the requirement to pay premiums for 10 years?

[mbozek]

k: I dont think 10 yr prepayment would be permitted under State ins. laws and further who could afford to make 10 yrs of premium payments in one year to a 125 plan.

[Guest kwn]

Maybe this might help with some of your questions.

http://www.irs.gov/faqs/page/0,,id=83301,00.html