Health Plan?

[chris]

Employer who got government contract some time back was required to provide $.25 of health benefits for every 1 hour of work performed by its employees. Thus each employee has $X of health benefit dollars. E/er has been allowing for reimbursements for medical expenses out of the said $x set aside for each employee. Employer has been allowing said amounts to be cumulative on an annual basis. Thus, no "use-it-or-lose-it" rule. Employer has also been allowing employees to take the cumulative amount of $$ in their "account" upon termination of employment. E/er has no written plan document and has been operating as described above for some time.

Tax-wise, there's no requirement that the plan be in writing assuming it were a straight 105/106 plan although ERISA would require a written plan doc. Given the ability of the e/ee to take the cash on termination of employment it would seem that the issue of whether or not the arrangement involves a cafeteria plan arises. I believe that a cafeteria plan is required to have a written plan doc. for tax purposes.....

Any suggestions on how to cure this thing going forward, e.g., get rid of e/ee's ability to take cash, and get a document in place for prospective benefits....?

[E as in ERISA]

Is there any question of whether the contractor has satisfied its obligation to the government? Those employees who got cash at termination obviously didn't get $0.25 per hour of MEDICAL benefits. Does the contract allow that?

[chris]

Maybe it's a matter of interpretation but I don't follow your comment. If an e/ee has been there since the beginning of the contract period, e.g., 2000, and the e/ee terminates employment, then the e/ee receives the total amount of health benefit $ sitting in his account, e.g., $.25/hour (x) 2,080 hours/year (x) 4 years = $2,080.00. ???

I guess you're asking whether its permissible under the contract to pay out the $$$$ to the e/ee upon termination???

[E as in ERISA]

Yes. You allude to the fact that this isn't a straight 105/106 plan because there are these cash payments. So if this isn't a straight 105/106 plan, then maybe it doesn't satisfy the contractual obligation to provide $.25 of HEALTH benefits either? If not, then they probably better change the arrangement....

[GBurns]

This looks like some sort of Prevailing Wage Plan such as a Davis-Bacon or Service Contract Act and Related Acts situation, although it could also be a non-federal plan from a similar local or state PWP.

If Federal, in general as long as the employee get the required Total $ per hour it does not matter when it is paid as long as paid by the end of the project. It is neither a 105 or 106 issue it is a DBRA and DOL "bona fide" benefits issue.

If not Federal DBRA, then the taxation etc is different and it should be a 125 and 105/106 plan issue.

Some guidance might be found in PLR 200007025 regarding what happens when the money is not used for health & welfare benefits but is paid out as cash.

[chris]

GBURNS: I believe the contract is with the federal government. Thus, it most likely is a Davis-Bacon/Prevailing Wage type plan. Where can I find more info. on Davis-Bacon/Prevailing Wage plans? Assuming it is a Davis-Bacon/Prevailing Wage plan, wouldn't it still be subject to the 105/106 rules? Thanks for the help.

[chris]

Found the on-line version fo the Service Contract Act of 1965 on the dol website. It has a sub-paragraph describing that the e/er will provide certain fringe benefits as required.... The last sentence of that subparagraph states that "The obligation under this subparagraph may be discharged by furnishing any equivalent combinations of fringe benefits or by making equivalent or differential payments in cash under rules and regulations established by the Secretary." Have yet to find the Regulations, but the cash payment to the e/ee upon termination may not violate the contract terms. However, I'm back to the issue concerning the applicability of 105/106 of the tax code. I'll take a closer look at the Service Contract Act and try to find the Regs. to see if taxation of the benefits is addressed directly....???

[chris]

GBURNS: Regarding your post:

"If Federal, in general as long as the employee get the required Total $ per hour it does not matter when it is paid as long as paid by the end of the project. It is neither a 105 or 106 issue it is a DBRA and DOL "bona fide" benefits issue."

wouldn't IRC §105/106 still apply as to the taxation of the benefits when paid/provided to the participants? Thanks.

Also, take a look at Rev Rul 75-241 re taxability issue...

[GBurns]

Very little of 105, 106 and 125 applies. DBRA have their own rules and pre-empts anything else unless it states so.

A good place to start is with the DOL itself. This link should help although there is substantial additional guidance that they have issued in Departmental rulings etc.

http://www.dol.gov/esa/programs/dbra/index.htm

[chris]

Rev. Rul. 75-241 squarely addresses the issue of whether cash payments in lieu of health benefits under an arrangement mandated under the Service Contract Act of 1965 (McNamara-O'hara Act) are taxable, ie, not excludible, from the gross income of employees under Sec 105/106. It would appear that the only way the termination payments ($$$ in lieu of healthbenefits) would be excludible would be if they were made to reimburse the e/ee for health ins. costs or paid directly to the insurer. Where does the pre-emption come into play?

[GBurns]

If you blindly follow 75-241 then you could be also saying that it negates section 125. However, 75-241 was before 125 and also before even 105 and 106 as we now have them, thereby making most of, if not all of 75-241 obsolete for most issues. You also should note the facts of 75-241 and why 61-146 was distinguished.

Also I never said and DBRA also does not say that cash is not taxable. Cash payments for services rendered and paid on a payroll are always taxable. This also applies to the health benefits amounts that are converted back to cash whether periodically as in PLR 200007021 or on termination as in your original post.

The issues raised in your post were "the issue of whether or not the arrangement involves a cafeteria plan arises. I believe that a cafeteria plan is required to have a written plan doc. for tax purposes..."

In other words, as I read it, you were questioning the need for a section 125 Plan and whether or not a section 125 plan needs a PD.

To find out whether or not a DBRA health plan falls under section 125 you need to not only look at the Plan Document, you need to read 125 and 29CFR3.5. In a simplistic manner, Does the employee have a choice between cash and a qualified benefit? Not in a DBRA plan, therefore no section 125.

Pre-emption might have been a bad choice of words. What there is are plan designs that are not found outside of the Prevailing Wage segment. These plans have to meet not only the IRS and ERISA requirements but have to do so without running afoul of the Prevailing Wage requirements and DOL rules. To find where these exist you would have to read DBRA preferably with a specific item in mind. Just follow the links.

[chris]

To sum up, there are a number of issues at play:

1) no formal plan document other than gov't contract mandating a certain amount of health benefits per hour worked and possibly corporate minutes briefly outlining operation of how those amounts are accounted for, paid out, etc...

2) taxability of amounts paid out at termination as e/er not issued 1099's nor W-2's for the termnation payments

3) effect of 1) and 2) on the underlying govt. contract.

Initially sought to get a document in place prospectively which conforms to operation of the arrangement. Thus, trying to figure out what rules govern the arrangement. As you said, IRS, DOL all apply....

Looks like the course of action would be to: 1) determine if the particular govt. contract allows for the health benefits to be converted and paid out; and 2) if so, get the requisite 125 and 105/106 plan doc's in place on a prospective basis...

Thanks for the help.

[GBurns]

Why not just follow the time tested and well audited procedures, plans and PD etc as used by the larger servicers/providers of DBRA and SCA compliant plans, such as FIBI and AGC?

[chris]

FIBI and AGC...? I did a little searching on-line and I guess FIBI is Fringe Insurance Benefits, Inc. and AGC is Association of General Contractors of America?? Have you dealt with either group before? The e/er I'm dealing with is a non-profit that employs disabled individuals who provide services at a local military base. Thus, the Service Contract Act controls.

Thanks for all your help thus far.

[GBurns]

FIBI is Fringe Insurance and AGC is Associated.

I have dealt with both, and others who are minor players, but I prefer Fringe especially for their record of support in DOL audits. Do not like their compensation plan as an agent, but there is not much of a choice if you want something that will go smoothly in all areas. Fringe also has a broader portfolio and support materials etc. In the past they did not mind assisting the agent even if the agent wanted to use a Health Plan other than theirs. Now that they have their own, I do not know what their attitude is, but since their Health Plan is not all that good (and my knowledge of it is not current so I could be wrong) , they should still be willing to assist.