Reimbursement of Insurance Premiums through Cafeteria Plan

[Guest Carly]

Is it permissible for employees to fund an account in a cafeteria plan on a pre-tax basis to be reimbursed for the following expense:

1) insurance for a dependent who is in college? I have read that the policy must be an "individual policy," however, I wasn't sure if because the expense is a Code Section 213(d) expense because it is a medical expenses of a dependent whether it could be reimbursed through a cafeteria plan if a separate account was established for the reimbursement of "other insurance"

2) I think I have read elsewhere that no Medicare insurance (Medicare Part B, Medigap, etc.) is NOT reimbursable through a cafeteria plan even if a separate account is established, is this so?

Any guidance/cites is greatly appreciated!

[GBurns]

Premiums that are pre-taxed though a Cafeteria Plan or otherwise are not reimburseable. Revenue Rulings 2002-3 and 2002-80 etc.

The medical expenses of 213(d) have nothing to do with what is reimburseable through an FSA or MERP etc. The only relevance of 213(d) is for the DEFINITION of medical care NOT for the expenses.

[g8r]

Actually, this is a very confusing area at best. You can't reimburse premiums from a health FSA per 125 regs. (even though I think the regs are wrong I would still follow them).

But, the reg doesn't prevent a separate "premium payment account." I think the insurance in your case is a legitimate medical expense. The key is if you had expenses over 7 1/2% of adjusted gross income, would the premiums be deductible. They are for a dependent and I think they would be deductible.

That means an employer can reimburse an employee or pay the premium directly on behalf of the employee and it would be excludible from income. I'm pretty sure the cite for this is Rev. Rul. 61-102.

If an employer can pay it outside of the plan, then it can be provided through a cafeteria plan. And, it can't be paid through a health FSA. So, you would have the employee elect to have salary reduced just for the payment of this premium (i.e., a premium payment account is set up). If the employee wants to drop the insurance mid-year, then unless you have a qualified change in status, money is still taken out of pay but the money can't be used for any other medical expenses (otherwise it would be an FSA).

I'm not sure about the Medicare insurance. I think you may be correct that you can't run those through a cafeteria plan, but it's not something I typically deal with so I can't tell you for sure.

[Guest b2kates]

I disagree with q8r, there is no insurance reimbursement permitted in a cafeteria plan under the health FSA rules.

would not be a problem if the employer, without having a cafeteria chose to pay for the coverage; but the regulations under 125 are clear that insurance can not be paid for through the FSA.

[GBurns]

q8r,

Will you explain what you mean by "If an employer can pay it outside of the plan, then it can be provided through a cafeteria plan. " Pay what? the premium or the reimbursement? If the employer pays the premium there is nothing to reimburse. If the employer is reimbursing, what are they reimbursing since pre-taxed premiums are not reimburseable?

Rev Ruling 61-146 has nothing to do with the issue. The post referred to the employee pre-taxing premiums and a Cafeteria Plan. 61-146 has nothing to do with pre-taxing premiums or Cafeteria Plans or section 125.

Insurance premiums are an expense under 213(d) but that is only applicable to Itemized Deductions and where the 7 1/2% limitation applies. Itemized Deductions cannot be pre-taxed. IRC section 213 is in Part VII of the IRC which relates only to itemized deductions, whereas sections 105, 106 and 125 are in Part III which relates to Exclusions from Gross Income. Exclusions are pre-taxable whereas Itemized Deductions are not. Deductible is different from excludible.

Also, "a separate "premium payment account." would have nothing to do with reimbursing premiums that were pre-taxed, anyhow.

Premiums that are pre-taxed through a section 125 cafeteria plan are treated as "employer contributions". This is necessary to meet the requirements of sections 106 and 105. If the pre-taxed amounts are now employer contributions, there is no employee expense. If there is no employee expense, then there is nothing that is reimburseable. See Revenue Ruling 2002-3 etc etc.

[KJohnson]

I think g8r acknowledges that you can't reimburse these premiums through the FSA however you can have a separate "premium reimbursement account" (PRA) through a 125 plan based on Rev. Rul. 61-146. There are a number of issues that make these difficult to administer. If an employer offers a PRA for major medical coverage there can be significant HIPAA issues. Major medical benefits are clearly covered under HIPAA's non-discrimination and speciail enrollment provisions while other benefits such as those that cover a specific disease (“cancer insurance”) as well as “limited scope” benefits (such as vision and dental) may not be covered (provided that a separate premium is charged for these benefits and a participant may “opt out.”) If HIPAA is implicated by individual insurance policies, it would be difficult to monitor or insist on compliance with such things as limits on preexisting conditions, certificates of creditable coverage, special enrollment etc. The most troubling aspect of HIPAA compliance for major medical coverage in individual policies is that the premium structure for such a policy would probably violate the non-discrimination rules based on health status. If individual insurance is purchased on the open market, sick people will obviously pay higher premiums for policies than healthy people – a probable HIPAA violation. Also each separate policy chosen by a participant may be treated as a separate group health plan for COBRA purposes. Even policies for excepted benefits (vision and dental) will probably be covered under COBRA as “group health plans” and the employer must be capable of providing COBRA continuation coverage (except for certain small employers) as well as COBRA notices. This could raise issues with policy language.

You might want to look at this link:

http://benefitslink.com/modperl/qa.cgi?db=qa_125&id=145

[Guest calcu]

My understanding has been that it is acceptable for an employer to reimburse individual insurance premiums through a cafeteria plan. The premiums cannot be reimbursed through the health FSA; the employer must establish a separate account to do so, but it can be done. See for instance http://www.irs.gov/faqs/page/0,,id=83301,00.html

under the heading "Individual Health Insurance Policy Reimbursement of Premiums." I guess the question is then, is it acceptable to seek reimbursement through a cafeteria plan for an individual policy of a dependent, not the employee?

Any thoughts?

[KJohnson]

I believe that Harry Beker from the IRSs stated informally that reimbursement may be allowed for a spouse's coverage under the group health plan sponsored by the spouse's employer or for an individual policy owned by the spouse. Of course you can't rely on these comments, but at least that was the view at one time of the Service's 125 Plan "guru".

[GBurns]

What you are all missing is that the premiums are paid on a pre-tax basis by the employee. The only time that Mr Beker or anyone at the IRs addressed the reimbursement of pre-tax premiums has been in connection with the "double dipping" arangements that caused Rev Rulings 2002-3 and 2002-80.

Reimbursement of premiums that were not pre-taxed through a cafeteria plan or otherwise is a different issue from that which was initially posted.

Rev Ruling 61-146 addresses premiums that were not pre-taxed. Premium reimbursement accounts are for premiums that were not pre-taxed.

The IRS link provided by calcu does not relate to premiums that were pre-taxed.

[KJohnson]

You can run a PRA where:

1) The employee has amounts withheld pre-tax and the emloyer then takes this money and pays the premiums to the individual insurer directly, or

2) You can have a PRA where the employee has amounts withheld pre-tax and then the the employee pays the premium himself or herself with post-tax dollars and receives a non-taxable reimbursement from the PRA.

In each of these situations, the employee is funding the account on a pre-tax basis but neither of these situations implicate prohibited "double dipping." What you cannot have is a tax-free employer reimbursement of amounts that were already purchased on a pre-tax basis (e.g. if in situatio (1) above the employer also took the position that it could reimburse the employee on a tax-free basis for the amount paid for the insurance premium).

[oriecat]

Gburns, the original does not say that the premiums were paid pre-tax. The funding of the reimbursement account is pre-tax.

[GBurns]

OOPS!

That's a BIG gotcha. I guess I missed a lot.

However neither Rev Ruling 61-146 nor what Mr. Beker said nor "Premium Reimbursement Accounts" involve any employee funding of the reimbursement, so none are applicable to the post anyhow.

KJohnson,

What you described in I) is not a PRA but rather a standard section 125 POP (Premium Only Plan), It pays premium, it does not reimburse.

Re 2) Where is your support for such a scheme?

[KJohnson]

I would not call the first a straight POP plan. At least in my mind a POP plan is a method of financing with employee salary reductions the group medical plan sponsored by the employer rather than an invidual insurance product selected by the employee. I agree, however, that the concept is the same.

The support the the second concept is Rev. Rul. 61-146, and Rev. Rul. 2002-3. The premium payments are made by the employee post-tax (the first step of 61-146). Then these premiums are reimbursed by the employer on a tax-free basis (the second step of 61-146). As 2002-3 makes clear when the amount of an employees' salary reduction are used to pay insurance premiums, those amounts are treated as paid by the employer.

[KJohnson]

Also, the following is from the IRS' publication "Introduction to Cafeteria Plans"

http://www.irs.ustreas.gov/pub/irs-utl/int...a_plans_doc.pdf

a. Employer-provided accident or health coverage under sections 105 and 106. This includes health, medical, hospitalization coverage, disability insurance and coverage under an accidental death and dismemberment policy. It also includes reimbursement for health care expenses under a health flexible spending arrangement (FSA). Individually owned accident or health insurance policies may be offered under a cafeteria plan provided that the employer requires an accounting to insure that the health insurance is in force and is being paid by the employees. See, Rev. Rul. 61-146, 1961-2 C.B. 25. Moreover, the plan may not reimburse the health insurance premiums under a health FSA.

[GBurns]

[i]"Individually owned accident or health insurance policies may be offered under a cafeteria plan " [/i]Both group and individual plans can be offered through a cafeteria plan, but that has nothing to do with the issue of reimbursement. Any plans that are through a cafeteria plan whether individual or group gets the premiums pre-taxed. That is it SOLE purpose of a section 125 cafeteria plan, the pre-taxing of premium. The difference is that while the employer has instant verification of coverage and premium payment in a group plan, the employer does not have the smae with individual plans, hence the IRS statement [i]"provided that the employer requires an accounting to insure that the health insurance is in force and is being paid by the employees"[/I].

I think that a problem might also be in your definition of reimbursement. Payment of premium through a cafeteria plan is not a reimbursement of premium to the employee. An employee getting money back from either an FSA or from an employer because the employee had an eligible expense, is a reimbursement to the employee.

A Premium Only Plan (POP) is a plan that has insurance premium only and no FSA or DCAP etc. It does not matter what the underlying plans are, it matters only whether there is Premium only or not. See and explanation given by any TPA, insurer such as AFLAC or Aetna, or document provider such as MHM, DataPath etc. It does not matter what you want to call it, this is what the industry as a whole calls it.

Re Rev Rul. 2002-3 and 61-146:

In 61-146, the premiums paid by the employee were paid post tax as you stated BUT the reimbursement was done by the Employer from the employer's general assets NOT from employee pre-tax funds.

In Rev Rul. 2002-3, the employee paid the premiums pre-tax and then was reimbursed by the employer on a tax free basis. Since pre-tax premium payment is not a reimburseable expense, the reimbursement should not have been tax free. In other words you cannot be tax free on the same thing more than once, hence no double dipping.

Rev Ruling 2002-3 went to the trouble of distinguishing 61-146. Why would you want to put them back together and contradict the IRS and the dozens of similar explanations of 61-146 and "Double dipping" that have been given by so many "experts" over the last 4 years? Try a Google search on "double dipping arrangement" , "Health Incentive Plan" and "HealthIER Plan".

[KJohnson]

Double dipping is tax-free employer reimbursement of premiums paid on a pre-tax basis There is no double dipping in the second arrangement because the premiums were paid post-tax. Pull out your EBIA cafeteria maual and look for the extensive dicussions regarding premium reimbursement accounts. 2002-3 distiniguishes 61-146 it in no way overrules it. To determine what is permissible, you have to "put them together". Of course, I would never recommend a PRA for major medical coverage because of the HIPAA and COBRA issues dicussed in a prior post.

[g8r]

Sorry for the delay in responding. I don't check these on a regular basis.

Thanks KJohnson, oriecat and calcu for providing the links, etc.

I was remiss in pointing out the items all of you raised. As far as being able to run an individual premium through the cafe plan, I'm confident it's allowed and will address (hopefully) GBurns' issues below.

There are 2 fundamental issues being raised. First, KJohnson pointed out quite a few issues - HIPAA, COBRA, nondiscrimination, etc. I have similar concerns and that's why, even thought it's allowed, I wouldn't normally advise someone to do it. If I'm not mistaken, some or all of the Blue Cross companies won't accept premium payments for individual policies if the employer pays the premium b/c of HIPAA. And, I don't know how they would know if an individual were reimbursed but they may ask on their applications. Under HIPAA - if 2 people with the same employer have the same policy, then the 3rd person can't be denied coverage. These issues arise b/c amounts that go through a cafe plan are treated as "employer" provided benefits for purposes of the Code. They aren't generally treated that way under ERISA (they are employee contributions). It's similar to the treatment of elective deferrals made through a 401(k) plan. But, that's irrelevant - the point is that you need to watch out for these issues b/c they can be a problem.

The second fundamental issue is that a cafe plan must generally be for employees. But, it's o.k. for others to benefit. So, is paying insurance that covers just the dependent, and not the employee, a violation of the 125 rules? I think Harry Becker has waffled on this one when referring to spouses. Personally, I think it should be o.k. b/c the employee is clearing benefiting by having coverage for a dependent.

As to GBurns' concerns --

I agree that it's very confusing. The issue I THINK you are raising is that if the emplyer reimburses the employee for the premiums (that were paid with after-tax dollars), then isn't that an FSA? And, the regs prohibit the reimbursement from an FSA.

I have the same concern (even though I don't think it's a problem). If you look at the stuff everyone cited above -- including the IRS training manual - they allow the payment or reimbursement of individual premiums.

I know this is preaching to the choir. But, on what basis can the IRS say that you can't do it? The 61 ruling says it's allowed under 105. 125 basically allows ANY benefit under 105 to be made available as a choice of cash or a tax-free benefit. So exactly what give the IRS the authority to restrict an otherwise permissible benefit under 105. There's no specific prohibition in the statute (such as the prohibition for long-term care insurance) and it's not a carryover of benefits issue. And the 61 ruling didn't say the reimbursement was a self-funded health plan subject to the provisions of 105(h) -- which arguably is why you can't reimburse premiums from a health FSA -- b/c it would violate 105(h). Not to harp on this, but don't you find it troubling that they are setting forth what can be reimbursed under a health FSA in 125 regs rather than 105(h)? There are some provisions in the code that enable the IRS to craft rules through regulations. I don't see any such provision in 125 so they should be limited to interpreting 125, 105, etc. not creating additional prohibitions on what would otherwise be permissible benefits. And, I think they sort of acknowledge this - look at the training manual and Q&A 7 where is says that the prohibition of payment of ins. from a health FSA doesn't prevent the payment through the normal operation of the plan. The IRS seems to think a separate premium payment account is allowed. And, here's another twist. Suppose I have a health FSA and rather than ask for a reimbursement I request that the plan pay the premium directly to the carrier. Is that o.k.? If reimbursing a premium pursuant to 61-146 creates an FSA, then arguably having the premium paid directly from a true FSA to the carrier shouldn't violate the prop. 125 reg.

The bottom line is it doesn't make much sense and it seems, to me that the Treasury and IRS may be taking inconsistent positions. I don't like premium payment accounts b/c of the other issues. But, many of us feel that it's allowed for the reasons cited in prior posts and this has been confirmed (informally) by Harry Becker on a consistent basis for many years. I think there is enough "official" guidance to support it - the statute and the 61 ruling and the 125 reg might not contradict that entirely b/c it allows premiums to be paid through the normal operation of the plan. If anything, I'd argue that the prop. 125 reg is invalid rather than arguing that a premium payment account creates an FSA that is subject to that prop. reg.

What I really wish is that the Treasury clear this one up....

[Guest bruss]

Has there been any further guidance on this issue? I have a small employer who does not provide any health insurance. The only full-time employee would like to find a way to pay (pre-tax) her spouse's cobra premiums (she is also covered by the policy)...employer wants to know if they could establish a 125 plan for this purpose. All the other employees are part-time, but they may also be interested in being able to pay for their individual policies on a pre-tax basis.

I have a call in to Harry Beker at the IRS to see what they say.

[GBurns]

bruss

Have you had a reply or spoken to anyone else at the IRS?

[Guest bruss]

I did get a call from the IRS office...although there is no "site"...it won't work to run a spouse's cobra premiums through your employer's 125...they said just consult the 125 regs. The problem is that the employee is not the policy holder. Otherwise, there is no problem with individual policy premiums running through a 125. The problem in this case, is that the employee is not the insured. The employee must be the policy holder...

So my particular situation can't be solved, unless the employee and her spouse can get different coverage, which will be difficult because of health problems, at least in the short term. Spouse is unemployed.

I think this is an area that we should alert our legislators to...people on Cobra that can't effectively deduct their premiums. Basically pretty darn unfair!