Lump Sum Payroll Deduction

[Guest mmcgee]

We have a client who is in the process of offering supplemental insurance. Some of their employees has expressed interest in the insurance as long as their premiums for the year (or remaining balance of premiums) can be deducted from their bonus expected to be received a month after the beginning of the plan year. Can such an election be made? How about such an election for medical and dependent care flexible spending accounts?

[SLuskin]

While the elections are considered to be annual elections, the danger of taking the premium or election all at once is that a benefit could be purchased for a period of time when the participant is no longer an employee. Also, for the medical fsa, if the annual election is collected so close to the beginning of the plan year, the element of risk is essentially eliminated for the plan sponsor.

[Guest JerseyGirl]

I refer you to the recent post entitled "FSA COBRA Premiums" for an illustration of where this can lead.

[Kirk Maldonado]

I haven't researched that issue, but I thought that if you prepaid the premium but terminate employment before the entire period of the coverage had expired, the plan was required to refund the unused portion of the premium.

[Guest mmcgee]

Thanks for your assistance on this matter.

[Guest mmcgee]

If we are dealing with insurance premiums only, does this create any problems with the plan? If an employee were to terminate before the end of the plan year, they are allowed to take the insurance with them and continue paying the premiums. Is paying what amounts to COBRA premiums with pre-tax dollars something that is not allowed or just not recommended.

Thanks!

[E as in ERISA]

If they just want to manage their cash flow, they could consider increasing their income tax withholding out of that bonus and then decreasing their withholding for the rest of the year. Then you don't have to worry about the impact on the plan.