Section 125 deduction for employEE purchased individual health insurance policy.

[Guest mjmccormick]

Ohio S-Corp. doing business in Ohio.

Has a section 125 provided by his payroll company.

Does not have a group health plan or offer any other employee benefits.

Employees are allowed to have the cost of the premiums for individual health insurance policies to be withheld pre tax. Then on behalf of the employee the client then remits the premium payment to whichever insurance company the employee has purchased the policy from.

This seems inappropriate to me. Can someone shed some light on this for me.

Thanks,

Michael J. McCormick, CPA

Cincinnati, Ohio

[Guest BenefitsLawyer]

Regarding payment of the individual policy premiums through a caf plan, some courts consider this evidence of enough employer involvement that the arrangement no longer meets the requirements of the voluntary-employee-pay-all safe harbor, and therefore find that the employer has an ERISA plan. See 951 F.Supp.2d 997 (M.D. Ala. 1996). Other courts consider payments through a caf plan a factor in deciding whether the employer meets the safe harbor requirements. See 174 F.3d 1207 (11th Cir. 1999).

[Guest pbayl10]

This is an excerpt from an article by Robyn Morris of R.C. Morris Incorporated. I also contacted the I.R.S. because I felt the regulation was vague and was informed that individual health insurance payroll deducted does qualify under Section 125. However, as the attorney pointed out, it could bring up some other issues.

First things first. What is a cafeteria plan, and where does it come from? The section of the IRS Code that permits cafeteria plans is 125. This is a special code that allows a "safe harbor" from taxation of income for certain health-related expenses. Section 125 is unique in that it allows other sections of the IRS code to be included under its "umbrella," thus creating a choice between taxable (cash) and non-taxable (qualified) benefits; hence, the term cafeteria plan (pick and choose).

Other sections of the code that can be included under the umbrella of section 125 are:

SECTION 79: Allows for group term life insurance. The operating words are "group" and "term."

SECTION 105: Allows the creation of numerous pretax engines such as:

1. Premium Only Plans (POP) pretax health insurance.

2. The Health Flexible Spending Arrangement (FSA) that allows miscellaneous health expenses not covered by insurance to be excluded from taxes.

SECTION 106: Allows coverage under a qualified health or accident plan. This can be the employer's group insurance policy and it can also be an employee's individual policies.

SECTION 129: Dependent Care Assistance (DCA). Provides pretax childcare or elder care expenses.