Reimburse employee for her portion of premium under spouse's plan

[Guest LCChalone]

I am on the board of a nonprofit. Can we legally reimburse a staff member for her portion of the health insurance premium paid by her spouse? We increased the staff member's hours in order to make her eligible for health benefits and PTO. However, her share of the premium for coverage under her spouse's plan is less than the premium in our small group plan. It wouldn't make sense for her to change providers. This would be a policy change so we would like to ensure it is legal and done properly. The thought would be to give staff the choice of either signing up for the group plan or reimbursing the staff for a health insurance policy obtained on their own - the maximum reimbursement being what the premium would be if the came in under the group plan.

[QDROphile]

A conventional way to come close to your goal is to adopt a section 125 plan, also known as a cafeteria plan and sometmes known as a premium only plan if it is limited to premiums.

Assume that the premium for individual coverage under your plan is $300 per month. Under the plan, each of the eligible employees would choose for the coming year between individual coverage and $300 per month. Elections can be changed mid-year only under certain circumstances. A person who chooses the coverage would not be treated as having any additional compensation. A person who choose the money would have $300 per month of additional compensation, so they would really take home less than $300 per month.

Can you try to shape the $300 per month amount to fit the individual and the cost of the individual's alternative health coverage? Probably not.

Also, unless you took extraordinary action, any of your employees could decide to forego coverage in favor of the $300 and you could end up with uncovered employees and higher employer FICA taxes. The extraordinary action involves some complications and may not be feasible in any case.

If employees start opting out, it might affect your cost of coverage. Your premiums are affected in part by how many people are covered under the group health insurance policy.

There are other possibilities that might get you closer to your expressed goal. You are likely to get other messages that describe at least one of them.

[GBurns]

Maybe I am not understanding the OP.

The premium is paid by the spouse not by the NP's employee. As a result the employee has no expense. How can you reimburse someone for an expense that they did not incur?

The premium paid by the spouse is quite likley paid through a cafeteria plan. If it is you cannot reimburse a premium that was paid on a pre-tax basis anyhow.

If the premiums paid by the non-employee spouse were not paid through a cafeteria plan, then if the premium payment is split so that the employee actually pays her portion of the premium, I suppose then it might be possible to reimburse her.

[Guest LCChalone]

A cafeteria type plan may work in the long run. It is something I will need to look into. The circumstance is that the NP needs to deal with the issue now. The staff person requesting the reimbursement is operating under her understanding that she was promissed this type of reimbursement when the executive committee agreed to bring her hours up to full-time in order to qualify for benefits. However, no one other than her can remember the part about reimbursing her for coverage obtained outside of the group plan. Because she may return to part-time in the next three months, we may only be dealing with a four month period in question. The office is very small - four people of which only three qualify for benefits. The group health plan in place is a 1-50 small group plan with t wo of the three qualified staff participating.

When a married couple files a joint tax return, the bottom line of the return does not differentiate who incurred the income or "expense." I know I am nitpicking here but I am trying to answer from the staff's perspective. So if I am to tell her this coming Tuesday that we can't reimburse because her spouse pays the full premium pretax with a payroll deduction, then I will need something to back my words up. Can you direct me to a ruling?

Any suggestions for me on how to resolve this dilemma without losing an employee?

[mbozek]

There is no prohibition against the NP employer paying additonal salary to its employee to pay for the cost of HI under her spouse's plan. If the cost of coverage for the spouse is $300 per mo the er can pay an additional 300 to the NP employee.

[GBurns]

mbozek

Wouldn't the $300 be taxable income? Even then it is still better than nothing.

LCChalone

I might be able to find something on point but in the meantime look at Revenue Ruling 2002-3 which explains a bit about reimbursing premium that was pre-taxed.

You are correct regarding a joint tax return, but that has nothing to do with what the employer sees for reimbursement or a FSA administrator.