POP Mid Year Change

[Guest cease]

An exisiting POP amends their document to allow employees to pay for individual health insurance policies on a pre-tax basis. Is an employee that has an individual health plan that he/she is currently paying with after-tax dollars permitted to elect pre-tax payment mid year (effective with the plan document change) or does the employee have to wait until the next plan year?

Looking at the 125 regs more closely, does anyone think that 1.125-4(f)(3)(iii) would apply? "If a plan adds a new benefit package option or other coverage option..., the cafeteria plan may permit eligible employees to revoke their election under the cafeteria plan and , in lieu thereof, to make an election on a prospective basis under the new or improved benefit package option."

[Guest b2kates]

I am confused when you state individual health insurance policies. Do you mean a policy for employee A and another policy for Employee B.

I do not believe under Section 104,105 and 106 of the code that individual policies are tax free benefits; only group policies.

[Guest cease]

b2kates,

Sorry for the confusion. Company X maintains a POP which allows employees to pay premiums for group medical plan coverage on a pre-tax basis. Plan sponsor would like to expand POP document to include individual health policies. For example, for whatever reason, employee A joins Company X and is offered the group medical plan and employee A does not want Company X's plan because Employee A has an individual health plan that he/she wants to keep in force. If the POP recognizes individual health plans and Company X is willing to withhold the individual health plan premium from Employee A (through salary reduction) amd remit the premium to Employee A's individual health plan insurer, couldn't the premium be treated as a pre-tax salary reduction (the argumment would be that since the employer is paying the premium to the insurer that it would be an employer-provided benefit???). I have been looking at Rev Ruls 61-146 and 2002-3 as well as 1.125-2 Q&A 7(b)(4) - last sentence. Note: I also read Question 5:16 from the Flexible Benefits Answer Book.

Note: I do not know what the right answer is and find myself confused by review of the above referenced material.

Thanks.

[Kirk Maldonado]

I'm not sure that I agree with b2kates statement.

I looked at this issue a long time ago; it had to 1989 or earlier. But based on what guidance I found at that time, I thought you could use the premium reimbursement feature of cafeteria plan to pay the premiums for an individual policy on the employee's life.

But I've not looked at that question again since then, so there may be more definitive guidance on this point now. Also, I don't feel completely comfortable relying on my memory of what my research more than 15 years ago revealed.

[jsb]

Going back to your original post, you note that the regs permit an election change - "If a plan adds a new benefit package option or other coverage option..., the cafeteria plan may permit eligible employees to revoke their election under the cafeteria plan and , in lieu thereof, to make an election on a prospective basis under the new or improved benefit package option."

There is no new or improved benefit package option for your employee to elect. Since the plan has added nothing I think you are out of luck for making an election change this year.

I do not know about the broader issue of whether or not the POP can pay a private carrier. I'll leave that to others. But I surmise you are a very small plan to be contemplating this. You set quite a precedent by permitting such a thing which may be OK with 5 employees but impossible to manage with 5,000 employees. And how would you handle potential future POP election changes based on changes in the private insurance marketplace. If I lose my private coverage for whatever reason, what would allow you to change the POP election? I think this is fraught with peril...

[Guest cease]

Kirk and jsb,

Thanks for the replies.

Kirk,

To your point, I feel comfortable with the concept of allowing the premium to flow through the POP. Where I got confused was a POP allowing pre-tax and after-tax salary reductions. I feel comfortable with the idea that the plan sponsor collects the pre-tax salary reduction from the employee and remits to the employee's insurance carrier. I wish guidance would be a little clearer.

jsb,

To your point, I am not on board with a plan sponsor that establishes a precedent based on an employee's request. I think it is opening a can of worms.

Based on Rev Rul 61-146, would it be reasonable to have the employee pay for the premium (which he/she is already doing) with after tax money and have the employer reimburse the employee tax free as long as the employee opts out of the employer's group health plan? If it matters, the employee in question is a rank and file employee, not a highly compensated employee. Again, I realize that a precedent would be established, but under this scenario, the language would not sit in the POP for all employees to see.

Also, I agree with you that if the plan amended mid year that the employee would not be able to take advantage of the pre-tax salary reduction until next year.

[jsb]

Interesting ruling, quite old, I hope not superceded by something later. Under this ruling, it appears that it would be OK to reimburse the employee on a tax prefered basis provided the payment by the employer is compliant with one of the 3 payment methods listed. However, I would find it even more perilous to do something like this on the QT with a rank and file member (are you unionized?) who might easily share his "good fortune" with his mates. Although there is generally a lot of inertia in individual benefit choices, no doubt the word will spread and others will want to participate in this exciting new program.