Taxation of Retiree Medical/Life Insurance Premiums

[J. Bringhurst]

Employer pays premiums on retiree medical/life insurance for certain retired executives and will continue to do so for 9 years.

Such premium payments are considered imputed income for purposes of FICA/Medicare withholding in each year that the premiums are paid.

Is there any argument for determining the present value of the 9 years of premium payments (9 years of imputed income) and applying FICA/Medicare on that present value in 2004 (the year of retirement)?

I think the argument for this approach is similar to that of a SERP ("pension-like" deferred compensation), in which FICA/Medicare are withheld in the year of retirement based on the present value of the lifetime stream of retirement payments (under Code section 3121(v)), but I don't really know if a parallel can be drawn (i.e., I don't believe we can withhold for FICA/Medicare on the imputed income for life insurance and medical until the imputed income is actually incurred).

I know this sounds crazy, but any ideas would be greatly appreciated!

[Guest jfp]

Why is it subject to FICA/Medicare tax at all?

My experience is that it is just the opposite: it is tax-free for both FICA/Medicare and income tax withholding by virtue of Section 106 of the Code.

[Guest jfp]

Oops; I was only talking about the medical insurance component. For life insurance, I like your deferred comp. analogy, but I've never looked at the issue.

[J. Bringhurst]

It was my understanding that 106 only applies to employees....not retirees.

[Guest jfp]

Employer-paid health insurance for former employees - provided by virtue of their past employment - is excludable under 106.

[mbozek]

Employer provided health ins to retirees and surviving spouses is excluded from gross income. See Rev. Rul 82-196. I dont understand why retiree health ins is taxed as FICA wages.

[J. Bringhurst]

I believe that amounts attributable to employer contributions for highly compensated employees (or retirees in this case) under a discriminatory self-insured medical plan are taxable under 105(h). I mentioned that plan only covered executives, but I may not have mentioned that the plan is self-insured.

[Guest jfp]

You also said the Employer "pays premiums;" that's what threw us off.

If it is discriminatory under 105(h), I'm not so sure that the "premium value" is the amount taxable. I think the actual amounts paid to doctors and other providers are taxable. This employer better be careful.

[J. Bringhurst]

Yes, the facts in this particular case are a bit slippery....I was just told that the employer paid the premiums for retiree medical/life and they wanted to know if the present value of the stream of premium payments could be taxed currently rather than as incurred.

[Guest jfp]

They're slippery all right. Which is it: premiums for insurance or self-insurance?

[J. Bringhurst]

The medical plan is self-insured but, as I am told, the retirees have imputed income based on the COBRA rates regular terminated employees would pay under the plan. The company pays the premiums for the retiree life insurance portion of this problem.

Although providing retiree medical to only a select group of executives under a self-insured plan is discriminatory, the retired executives are paying FICA/Medicare on the imputed income...so I'm not sure what the penalty for the discriminatory practice actually would be (i.e., the penalty above and beyond the taxes they are already paying).

They are trying to find out whether they can pay the FICA/Medicare on the present value of the stream of these "premiums" in 2004 (the final year of employment)...which, based on final compensation, is when they'd max out on the FICA (and the employer would no longer have to match on its portion of the FICA).

Does this make sense?

[Guest jfp]

I will suggest to you, again, that if there is a 105(h) problem the amount taxable to the retirees is not the "premium value" or "COBRA value" of the coverage. The amount taxable will be the the amount actually paid to doctors and other vendors for covered expenses. (In other words, if a retiree has a catastrophic illness and his covered medical expenses for the year are $500,000, he has taxable income of $500,000.)

Also, the amount taxable is taxable for income tax purposes as well as FICA/Medicare.

[J. Bringhurst]

Point taken, but we're using an argument similar to the one used for imputing income to employees for the coverage of a domestic partner who is not otherwise a dependent of the employee (see Private Letter Ruling 9603011)...by charging the retiree the "value" of the coverage (i.e., some kind of fair market value), then it's as if the retiree had paid for the coverage himself with post-tax dollars and the actual benefits would not be taxable. So, assuming that we have no issue with imputing the fair market value of the coverage, is there any argument for taking the present value of this amount over the next nine years and applying FICA/Medicare currently. I'm not saying I think this can be done....I'm just trying to see if there is any logical argument for it (such as some kind of argument that the imputed income is not wages under 3121, etc.). It's a long shot...but we're just curious... =)

[Kirk Maldonado]

How do you overcome the statute and the regulations? In other words, what are you going to say to the IRS for them to justify ignoring their own regulations and what Congress enacted?

Why won't the IRS just say, if you think your theory is compelling, go tell it to Congress and get them to rewrite Section 105(h)?

[J. Bringhurst]

We are not saying that it is not discriminatory. But, because the former highly compensated employee is paying taxes on the value of the benefits (rather than on the actual benefits provided, by using the argument for the taxation of domestic partner benefits that is described in the PLR that I mentioned earlier), we don't know what additional penalty would be involved. Obviously, they could come in and say that the tax should be on the actual benefits provided or that the entire group of highly compensated (rather than just the retirees) would be effected....but, that is not the question....the question is whether we can make an argument for currently taxing the present value of the future "premiums"...as in the case of a SERP where FICA/Medicare can be withheld in the year of retirement based on the present value of the lifetime stream of retirement payments....

[mbozek]

Why not just buy individual policies for the employees or reimburse them for policies they own on a non taxable basis?