ExecuCare Executive Reimbursement Plans

[Guest benefitsnerd]

New Small Group company (C Corp) is offering FSA for the first time but the plan is top heavy. The top 2 executives significanly exceed allowed pre-tax contributions. As an alternative, ExecuCare Executive Reimbursement plan would provide these two employees the ability to receive benefits for unreimbursed medical expenses on a tax free basis and in addition, the employer will be able to write off the claims payments (110% of claim amount) as an eligible business expense.

Question: Can the employer make itself whole by reducing the two participants annual income comensurate to the dollar amount the employer paid in benefits?

[GBurns]

Just because the promoter of a plan claims that the plan has certain tax benefits does not make it so. Have you read the current opinion letter? Wondered why the old opinion letters were withdrawn or replaced? But most of all, read the disclaimers and caveats in the opinion letter.

For there to be the purported tax benefits, the plan has to be an insured plan, doesn't it? Does it qualify? Because something comes from an insurance company does not make it insured? What does the opinion letter say about it qualifying as insurance?

Re your Question:

If the employer pays the benefit, wouldn't this be a self insured plan? If self insured and covers only the executives, Why would you need Exec-u-Care? If self insured and covering only the executives why would 105(h) not apply?

[mbozek]

What is Execucare's opinon, after all its their product?

[GBurns]

Over the years they have used an opinion letter from a Big 4. However, the opining Big 4 keeps changing for reasons not disclosed. All the opinions read roughly the same with the same caveats basically saying they think that the plan is... but if... then.... and mainly that it depends on whether the plan qualifies as insurance but they are not saying that it does etc.

[Ron Snyder]

Exec-U-Care is sponsored by a reputable company. Their brochure states that "premium contributions may qualify for a tax deduction" and includes the disclaimer, "As with any tax matter, you should discuss this with your personal tax advisor."

This is not adequate to make me feel comfortable. The opinion letter, from Ernst & Young, goes all the way back to 8-1-2000, almost the dark ages for this type of opinion. I would expect a post-230 contact with Ernst & Young to yield a response that the opinion letter has been withdrawn.

[Kirk Maldonado]

I agree with the skepticism voiced by vebaguru.

The first generation of product that Exec-u-care produced (that I saw) clearly violated the 105(h) regulations. I can't imagine anybody being able to make an argument that it worked with a straight face.

Their second generation product (that I saw) was a lot less aggressive, but it still wasn't clear that it worked.

I think that, in the final analysis, it will depend on the client's risk level tolerance.

However, I've not seen any of the opinions supporting their product, but I'm skeptical that they would change my viewpoint. I've read many opinions in over two decades in private practice, and I've yet to read one that changed the point of view that I held before I read the opinion.

People have to read opinions very carefully. Many of them actually say nothing.

I saw one in which a major law firm opined that something worked. But if you read the opinion, it was based upon facts that were the exact opposite of what happened. Thus, the law firm was able to issue the opinion and generate a ton of legal fees, yet had no exposure, because nobody could rely upon it.

[mbozek]

Why do you think that the benefits would be taxable? There are recent cases where shareholders of personal corps have been permitted to exclude medical expenses paid by their employers under a written plan approved by the corporation.

[GBurns]

Can you give some examples of these recent cases so that we can see if there is any similarity to the Exec-U-Care type arrangement?

In general, since the benefit is the reimbursement of eligible medical expenses, for the benefit to be not taxable it has to be a benefit paid under an accident and health plan whether insured or self insured.

Since it is discrminatory (for certain executive) it should have to be fully insured.

The question is whether this arrangement constitutes insurance. This is an issue that none of the opinion letters used, have been willing to address.

Look at the "premium" arrangement and you will see why many would question the ability to qualify as insurance absent a risk factor etc. The fact that an insurance company is involved does not make it, and has nothing to do with a product or arrangement being, insurance.

[Kirk Maldonado]

mbozek:

For the reimbursements under a discriminatory medical expense reimbursement plan benefit to be exempt from income tax, they must provided under a fully insured arrangement.

The first generation of the Exec-u-care plan ("First Generation "Poduct") provided that that the amount of the premium was (something like) 120% of the costs. Thus, there was no shifting of risk to the insurer, so that those arrangements wouldn't survive even the weakest level of scrutiny.

I don't recall exactly how their Second generation Product works, but I distinctly recall that it was tweaked to address this problem, although I thought that the risk that the insurer might actually incur any losses was pretty attenuated. Thus, I felt it was not clear whether it work or whether it didn't work; it was a grey area.

Gburns:

Set forth below is the pertinent language in the regulations under section 105(h) regarding when an arrangement is fully insured. I which that it were more expansive than it is, but it is all we have to go on. At least I'm not aware of any court decisions, revenue rulings, or private letter rulings on this issue:

A plan underwritten by a policy of insurance or a prepaid health care plan that does not involve the shifting of risk to an unrelated third party is considered self-insured for purposes of this section. Accordingly, a cost-plus policy or a policy which in effect merely provides administrative or bookkeeping services is considered self-insured for purposes of this section. However, a plan is not considered self-insured merely because one factor the insurer uses in determining the premium is the employer's prior claims experience.

Thus, the First Generation Product clearly flunked this test, because the amount of the premium was determined under a "cost-plus" formula.

Everyone:

Somebody posted a message on the Message Boards a long time ago saying the Jefferson Pilot and Security Financial offered products that were similar to that offered by Exec-U-Care. Does anybody know anything about how those insurers structured their plans?

[mbozek]

In RD Weeldreyer, 86 TCM 622 and R. Schmidt, 86 TCM 631 (2003) Tax ct held that reimbursement of employee medical expenses was excluded from employee's income under IRC 105/106 and deductible by employer under IRC 162. No mention was made of application of 105(h) to reimbursements. See also RW Tschetter 86 TCM 639 and Waterfall Farms, 68 TCM 648.

[GBurns]

I have not seen any that did not have that same financing structure nor have I seen any without an opinion letter that had a caveat (or sidestepped) regarding the qualifying as insurance issue.

[KJohnson]

Kirk,

Exec-U-Care is underwritten by Jefferson Pilot

[GBurns]

It is now currently underwritten by Jefferson Pilot. In the past there have been Monumental Life, Guarantee Life and others. Why the insurance companies and the writers of the various opinion letters get changed every now and then is a question that should be answered.

[Guest nobletorch]

Hello All

Anohter raging discussion on the board - great.

Here is my 2cents worth.

Back to the orginal facts -- I am going to restate them.

We have a new group. They have an FSA program. Two of the Highly Compensated Employees over contributed to the plan. Thus it is top heavy and the employer wants to know what the options are.

First and foremost - I am not sure an FSA can be top heavy in the same sense that other benefit plans - specfically pension plans -- can be. Even if they can be - your plan adminstrator/enrollment process should limit their contributions automatically. Incases where that does not occur - refund the excess over the plan limit.

Now back to our highly compensated employees. ----

They apparently don't mind paying the medical bill out of their pocket but object to paying the taxes on those dollars. The employer doesn't mind paying the employees but also wants to avoid the taxes. ---------- This is really strange because the taxes are the smaller portion of the total expense.

So here are some options.

1. The employer pays the medical bills. Treats the money as a bonus to the employee which increase the employees gross income. He become liable for the taxes but even in the highest brackets this is less than 35-40% of the total bills. Additionally, the employee can then apply those dollars towards the 4.5% floor went he itemizes his taxes at the end of the year. At the same time the employer gets to take that expense as a business expense which reduces the business' taxable income.

2. The employer buys the employee an individual fully insured policy (no gimmicks) that would cover these expenses. To avoid discrimination issues, I would recommend that the premium for this policy be treated as compensation in the same manner as in #1. Again the benefits of this is that the employee gets the coverage for the price of the taxes.

3. The first two options assume that the employer thinks that these folks are "keepers" and that they are worth the hassle and risks of jumping through all the hoops to keep them. (This would include other executives and regular employees getting frustrated at the special treatment these two are receiving. If they are not worth that then don't jump through the hoops.

Like a lot of things - the more complicated it gets, the more likely things are going to get messed up. Every time you have to jump a hurdle you run the risk of tripping. The finshline better be worth it.

[GBurns]

The problem is with option 2. Where would the employer get such "an individual fully insured policy (no gimmicks) that would cover these expenses" that would not create problems?

As previously pointed the question of whether any of the named or available products qualify as being insurance is unanswered. This issue is skirted and avoided in all the Opinion Letters related to any of the available products.

[mbozek]

NT: If you had taken the time to research prior posts you would have discovered that employer reimbursement of an employee who pays for individual health ins policy is not taxable income under Rev Rul 61-146 and is not discriminatory under IRC 105. Alternatively an employer purchased individual policy is excluded from taxable income under reg 1.106-1. Excluding employees who are covered by insurance from a FSA avoids discrimination issues under 125.

[Guest nobletorch]

Good point. The answer is your friendly insurance agent. Mutual of Omaha used to have a policy that would cover just the deductible, or the deductible and the 20% co-insurance on your medical plan. If the employer's plan has other thresholds individual indemity polices may provide the anwer. If one cannot be found - then option two is not vaiable.

[Guest nobletorch]

MB - I understand your point. My assumption was that these policies would be supplemental to the employer plan. I will review the citations. Thanks

[Guest taylorjeff]

This may be too late, but its' been awhile since I've reviewed this board. I thought I'd take a stab since I've used the product from Security Life for myself in the past. The product I had was insurance and Security Life was at risk. They were on the hook for claims per person up to $100K. The billable amount to the employer (me, in this case) was max'd at $30K if one enrollee, $20K per if two, $15K per if 3-5, and so on. The premium was the submitted claims + 9%. Before I used it I checked with a few other benefits consultants more familiar with the plans and all agreed if there was an "at risk" feature it qualified and was a way to provide a discriminatory plan for higher comped employees. And of this date, I have never heard of any of these plans (either security Life or Jefferson pilot) being disallowed. But, if I was to sell this product to a client I would add the caveat that this is an "on the edge" product and that while unlikely, it is possible that it could be disallowed as a business expense, income could be attributed to the beneficial parties, or both. For my protection, I'd ask the insurance company for an updated disclosure as to whether they had been challenged on the product.

As to the second part of your question, the only way I've ever seen this plan used is to provide extra benefits to the firms' key employees, and the employer paid the full cost (claims and surcharge).

[GBurns]

Did the supporting legal documents, such as the Opinion Letter used, claim that Security Life was "at risk" or that the product was covered by an insurance policy?

All the OLs that I have seen, caveat this issue by stating that an opinion is not being expressed as to whether the Plan qualifies as insurance. The issue being the "at risk" question.

Why do you think that Security Life is "at risk" and why was it "insurance"?

Being "underwritten by" is not the same as being "insured by" or being "at risk". Insurance products have a state Dept of Insurance approval. Do you know what state approved it and either the approval number of the approved policy form number?

[Kirk Maldonado]

GBurns:

First, I want to state that I know absolutely zero about getting insurance products approved by the applicable state insurance commmissioner, so this may be a dumb question.

Second, I agree with the comments in your most recent post.

Third, I am wondering why you are asking if the insurance commissioner has approved the policy. Would the insurance commissioner refuse to approve a policy if there was no risk to the insurer (on the ground that it would be misleading to consumers to label it as "insurance?")

[GBurns]

In many of the posts the connection is being made with an insurance company as if the item was being provided by that insurance company rather than by the marketing company. The assumption seems to be that because the marketing material uses the term "underwritten by" it means the same as "insured by".

I asked the question because many people think that because an item comes from or is associated with an insurance company, it is automatically insurance. This is a problem that surfaces quite often with self funded health plans and ASO contracts etc, but also comes up with other items as well.

There are promoters of various "plans" who will use the administrative services of an insurance company or just "name drop" so as to imply a relationship that is not full disclosed to nor understood by the consumer. Legitimacy by association, if you will.

1 of the ways of determining whether or not an item is "insurance" is to see if the item is approved by any state regulator. All insurance products have to be approved either by the regulator in the state of domicile (group and association products) or by the regulator of the state of residence of the consumer. Also in most states items that are approved in another state (usually group products only) must also be filed for informational (and monitoring) purposes. Individuallly underwitten (non group) products have to filed with and approved by the state of residence of the consumer.

This approval includes, rates, policy form, marketing materials and market conduct etc.

To answer your question, Yes many insurance commissioners would not approve for those and other reasons. Misleading is good, but not meeting reserving requirements or loss ratio etc calculations should also be considerations. Having monitorable items is always a consideration, and in this case the monitoring should be so unusual as to cause them concern.

Aside from the insurance aspect from the state regulatory point of view, there still remains the "at risk" requirements of the IRC. This aspect is what is evaded in the Opinion Letters.

[Guest taylorjeff]

GBurns,

It is a insurance policy. Security Financial has filed the product and is licensed to do business in 46 states.

The insurance company is at risk. As noted in my previous post, the maximum benefit is $100K per emp per benefit period. For 1 employee, the maximum premium is $30K, for groups of 11+, the maximum premium is $12K per emp.

They considered purchasing an opinion letter from Ernst & Young 12 years ago. The cost at the time was $50,000 and they elected to pass. Since the policy was licensed for sale as an insurance product, approved by the state departments of insurance, in their opinion that was really all that was required. Based on what I've been reading in this post regarding the caveats contained in these opinion letters, this sounds like a sensible approach.

FYI, I found out about the policy and the company through reading the HIU publication of the NAHU.

[Kirk Maldonado]

taylorjeff:

I don't think that their risk exposure is anywhere near the level that people would assume with the $30,000/$100,000 amounts you mentioned.

Basically, all that the insurance is going to cover in most cases is the deductible and the co-payments. That's because the employer's Out Of Pocket Limit ("OOPs Limit") will kick in at some point and in most cases cover everything that the executive incurs.

Also, executives tend to be healthier than the general public, as evidenced by the favorable rates available to them for life insurance policies.

I would be very skeptical that any of the insurance companies ever lose any money on those products. By that, I mean if you treat all of the policies issued by that insurance company to all of the different employers that purchased policies from it.

[mbozek]

TaylorJeff: is this an underwritten product where the ins co reviews the applicant's medical history before issuing the policy or does the co do little or no medical review before issuing a policy? I dont think the standard is whether the ins co makes money on all health policies since ins co. dont lose money on group life policies. The question is whether risk of loss for medical expenses has been shifted to an unrelated third party under the policy. If the ins co can be required to pay up to 100k in benefits under the policy for med care for 30k in premium then there has been a shifting of risk. The probability that the carrier will incur a loss on the policy is not relevant. If it was then ADD issued to airline passingers would not be deemed ins proceeds under the tax law exempt from income tax for those few passingers who die in airline crashes. I dont think any ins co loses money on an ADD policy but ADD is still ins because the risk of loss has been shifted to the insurer.

[Kirk Maldonado]

mbozek:

I agree with your statement that the test is whether risk has been shifted to the insurance company.

My point is that there is no risk to the insurance company if there is no possibility of loss. For example, if the premium per person was $10,000, but the OOPs limit was $7,000, how could the insurance company lose money? Even if every participant incurred the maximum amount of claims, the insurance company would still make at least $3,000 per participant.

Stated in a different fashion, there is no shifting of risk in that arrangement because the insurance company has no risk; there's no way that they could lose money, even in the worst case scenario they make money.

[mbozek]

According to TaylorJeff there is an exposure of 100k. Maybe you are thinking of a different policy. If there is no risk to the ins co the policy cannot be marketed as insurance. Q- is this policy available in NY?

[Larry M]

Here is a possible scenario:

There is an insured medical plan covering all employees and the HCEs have a supplemental medical insurance plan.

The basic plan may be one which has a deductible, some co-payments and, most likely, an out of pocket maximum ("OOPM") per individual, and an overall maximum limit of $2,000,000 per individual per lifetime. For the sake of argument, let's assume the OOPM is $10,000.

The supplemantal plan insures the HCEs for any coverd medical expenses which are not reimbursed by the basic plan (the maximum is the $10,000 OOPM plus any other covered expenses which may exceed individual limitations - e.g., mental health limitations or expenses in excess of the $2,000,000 maximum, but, in total, no more than $100,000 per year (or lifetime?).

So, for $30,000 per year, the supplemental policy will insure the employee for a benefit which has a most likely net (expected claim cost) cost of much less than $10,000 per year.

Well, this supplemental plan is considered "insurance". It definitely can get approval by insurance departments as a valid group insurance policy (and, if presented properly, as an individual policy).

The question I have is why would an employer would pay the carrier an annual surcharge of $20,000 to $25,000 per employee for this supplemental coverage as opposed to no more than $5,000 to $10,000 as a combination of self funded beneifts plus the additional taxes on an occasional basis?

Oops, I forgot. Many employers will pay thousands in fees and other expenses to avoid paying hundreds in taxes.

[GBurns]

taylorjeff

There are 2 different requirements to be insurance. The state DOI and the IRS. Even if the state approves a product that does not mean that it meets the IRS "at risk" requirements etc. This point is made in the caveats of those products that do have an Opinion Letter.

Here is a link to the 200 E&Y Opinion Letter for Exec-u-Care:

http://www.benico.com/PDF%20files/EYLong.pdf

Note the wording and the argument regarding premium structure especially the mention of "a cost plus arrangement" on page 10.

So the question still is, Whether the premium arrangement meets the IRS requirements for "at risk" and "insurance" etc, or is it just "a cost plus arrangement"?

I also, like Larry M, wonder why any employer would do it anyhow?

[Guest taylorjeff]

The insurance policy can and does pay more than the premium. Any section 213 expense is eligible. Non-covered, over U&C, non-network charges, etc. In my case, my family has a $0 deductible 100% policy. But, my submitted charges were approx. $4000 (orthodontist, Rx/OV copays, Er copay, eye care, etc.). There is a $10,000 limitation in the policy for infertility, so that is a possibility, as would mental health, private duty nursing, chiropractic, tmj, phys/speech/occ. therapies or any services with inside maximums. There is also an AD&D bnefit.

The employer is not going to pay "$25000" in premium for $2000 of benefit. the policy has an annual premium of $200 and an additional premium equal to the submitted claims plus 9%. As stated earlier there are premium "caps" based on group size.

I've seen this product often in professional service firms, engineering, architects, etc.

It is not licensed in NY.

I read pages 10 & 11 of the E&Y letter. Maybe i'm going blind (its 2am), but I didn't see the section on the "cost plus" premium arrangement, though I'm sure its there somewhere. It did seem like E&Y was saying based on all the relevent criteria, the Jeff Pilot product was insurance, had risk, and was not a self insured product.

[mbozek]

See PLR 200007025 where IRS held that a self funded plan in which risk for health benefits for employees and partners was shifted to the plan from the partnership that sponsored the plan is an arrangment having the effect of accident or health ins in which payments are excluded from the income of the partners of the plan sponsor. The IRS views insurance as the shifting of the risk from the insured to the insurance program and the risk of loss is distributed among the participants in the program. The payment of additonal premiums to cover unexpected losses incurred by the plan does not prevent the arrangement from being treated as accident or health ins.

[Kirk Maldonado]

taylorjeff:

In the clients that I've had look at the Exec-U-Care Policy, there was no way possible that the insurance company could lose a penny. There is always a theoretical risk that it could happen, but it is a lot less than the risk of the executive being hit by a meteor in the next twelve months.

You wouldn't by any chance be affiliated with one of the insurance companies or help them market that product by any chance, would you? Your arguments are a bit too impassioned for somebody who doesn't have a financial interest in the marketing of these products.

I have no financial interest in whether my clients buy those policies. I just don't want them to get involved in something that may not produce the tax results that they proffer.

Also, I'd like to see a current opinion from a major accounting firm or law firm. I'll bet that the new restrictions in Circular 230 will effectively preclude any favorable opinions on these contracts.

Furthermore, if it was clear that these contracts work, why would somebody pay $50,000 to $100,000 to get an opinion on them if you could get a private letter ruling on them for one-tenth the price? (Assuming that is a topic on which the IRS would rule.)

[mbozek]

I thought that insurance under IRS rules was based on whether there was a shifting of risk from the employer to another entity (See PLR 200007025) not whether the insurance co was likely to incur a loss. There was a federal case about a year ago where a ct held that the remoteness of the risk insured against had no effect on whether the risk was insured under the IRC.

[Guest taylorjeff]

Hi Kirk,

I'll answer your points.

taylorjeff:

In the clients that I've had look at the Exec-U-Care Policy, there was no way possible that the insurance company could lose a penny. There is always a theoretical risk that it could happen, but it is a lot less than the risk of the executive being hit by a meteor in the next twelve months.

Answer - I haven't looked at the Execucare Product, so I can't agree or disagree. I did call the contact at Security Financial Life and they said they have paid out claims in excess of premiums on some individual accounts, approximately $250,000 last year.

You wouldn't by any chance be affiliated with one of the insurance companies or help them market that product by any chance, would you? Your arguments are a bit too impassioned for somebody who doesn't have a financial interest in the marketing of these products.

Answer - No, I'm not in any way affiliated. As I said in my first post, I bought the product for myself. I haven't marketed to any of my clients. I am involved with two groups who had purchased the plans previously and have had them for many years. I don't think I was "impassioned" at all. I was simply giving my own experience dealing with one company and addressing statements about the product I had. Ie. It wasn't insurance. It wasn't filed as insurance. It was self-insurance. People were paying premiums grossly in excess of whatever benefit they could receive.

Answer - It does look like a self insured plan but so does a retrospectivle rated health plan. It seems to me that since this was filed with the DOI in 46 states, and insurance is a state regulated issue, that should settle the matter.

I have no financial interest in whether my clients buy those policies. I just don't want them to get involved in something that may not produce the tax results that they proffer.

Answer - Fine.

Also, I'd like to see a current opinion from a major accounting firm or law firm. I'll bet that the new restrictions in Circular 230 will effectively preclude any favorable opinions on these contracts.

Furthermore, if it was clear that these contracts work, why would somebody pay $50,000 to $100,000 to get an opinion on them if you could get a private letter ruling on them for one-tenth the price? (Assuming that is a topic on which the IRS would rule.)

Answer - As I stated previously, Security Life considered getting the opinion from a firm, but didn't feel it was necessary as their contract had been reviewd by the DOI in the states it was marketed. And why bother with a private letter ruling? I just don't understand how or why the IRS would have any oversight authority over a state DOI approved insurance product (designed to cover eligible, ie section 213 expenses) sold in their respective states. Do you or anybody else on this forum know of any consumer who has bought one of these products and had their premiums disallowed or had to pay a penalty?

[Kirk Maldonado]

I don't think that the IRS views the actions by the insurance commissioners as binding on the IRS on this point. Nor can I imagine a court taking that position.

Your arguments might sell well to unsophisticated listeners, but I doubt that they will be considered persuasive by most of the readers of the Message Boards.

[mbozek]

Isnt the issue whether there is risk shifting from the insured to an insurer under the insurance contract - Under PLR 200007025 risk shifting "will occur when the insurer agrees to protect the insured against direct or indirect economic loss arising from a defined contingency involving an accident or health risk... The risk shifting occurs because the insurer assumes another's risk of economic loss in exchange for the payment of a premium by the insured or other payor." "If the premiums represent the actuarial cost of transferring risk then they will be deductible as insurance not withstanding that the premiums may be subject to a later adjustment depending on the taxpayers actual loss experience." TAM 9540001.

If the economic risk insured against is transferred to the insurer and distributed among its insureds then the policy is insurance whether it is provided under an insurance policy approved by a state ins dept or under an arrangement having the effect of insurance. The creiteria for insurance does not include the likelyhood of the insurer incurring a loss. The representations regarding the policy provisions appear to provide for payment for certain illnesses in excess of the premium.

[GBurns]

taylorjeff

Do you know how many states the Security Life or any of the other plans, are approved in? And what size groups are any of them approved for?

From my recollection, very few states have approved any of them and those that have any sort of approval, have size restrictions etc.

[Guest taylorjeff]

GBurns,

When I called, I was told their SML Select & BeneComp product is filed and available in 46 states. The company itself (Security Financial Life) is licensed to do business in 49 states and several U.S. territories.

In the material I have, there is no minimum or maximum group size. I've seen plans of this type used primarily with business owners, executives, and key employees so, in reality, the group size tends to be small.

Jeff

[Guest Dolores]

New Small Group company (C Corp) is offering FSA for the first time but the plan is top heavy. The top 2 executives significanly exceed allowed pre-tax contributions. As an alternative, ExecuCare Executive Reimbursement plan would provide these two employees the ability to receive benefits for unreimbursed medical expenses on a tax free basis and in addition, the employer will be able to write off the claims payments (110% of claim amount) as an eligible business expense.

Question: Can the employer make itself whole by reducing the two participants annual income comensurate to the dollar amount the employer paid in benefits?

Fast forward 2 years, and a client that is an S corporation is being offered the Exec-U-Care program for its over 2% shareholders since they cannot participate in the Company's Section 125 plan and related FSA plan. The website for Exec-U-Care doesn't specifically address S Corp tax issues, especially the question of whether reimbursements will be taxable to the S shareholders or whether the Company payments for "insurance" would be added to S Corp shareholders taxable income. The representation by the broker selling the plan is that the Company would get the deduction for the 111% it pays to Exec-U-Care and that reimbursements of medical expenses to the owners would not be taxable income to them.

Any comments on the S Corp tax issues or undates on opinion letters for the program?

[Don Levit]

Folks:

This has been a fascinating discussion on the differences between self insured and fully insured plans.

Ostensibly, the rationale is that fully insured plans are not subject to discrimination issues, while self insured plans are.

While literally factual, the practicality is that both arrangements are subject to discrimination issues.

Self insured plans are not subject to state regulation.

Therefore, the federal government needed to pass discrimination provisions.

Fully insured plans are subject to state regulation, including discrimination issues.

Therefore, federal laws, supposedly, are not necessary.

Don Levit

[Guest Dolores]

Folks:

This has been a fascinating discussion on the differences between self insured and fully insured plans.

Ostensibly, the rationale is that fully insured plans are not subject to discrimination issues, while self insured plans are.

While literally factual, the practicality is that both arrangements are subject to discrimination issues.

Self insured plans are not subject to state regulation.

Therefore, the federal government needed to pass discrimination provisions.

Fully insured plans are subject to state regulation, including discrimination issues.

Therefore, federal laws, supposedly, are not necessary.

Don Levit

How do I get more information on state (Missouri) regulations pertaining to discrimination issues?

The latest opinion letter provided to me by the broker is from KPMG, dated October 2005. It still looks like the conclusions on tax impact are still based on the assumption that the plan is an insured accident and health plan. There are a number of reasons presented to support it being considered an insured plan, but no definitive finding that it is an insured plan. it still seems clear that it this presumption is subject to future challenge. So we would have to advise a client considering this plan that there is some risk of a future challenge to the plan's insured status.

[Don Levit]

Dolores:

I think you are asking the proper question.

If the plan is an insured plan, it will be regulated by the insurance department of Misouri.

Why not ask the broker which licensed insurers in Missouri are offering the plan?

What hoops did they have to go through to be able to offer the plan?

Don Levit

[J Simmons]

Don's question about

What hoops did they have to go through to be able to offer the plan?

seems appropriate, but the inquiry should not stop there.

To be non-taxable, the product must be 'fully insured'. For those federal income tax purposes, the question of 'fully insured' is a matter for the IRS and ultimately federal courts. The IRS has indicated there must be risk-shifiting to, not just an ASO contract arrangement with, the third party company.

State insurance commissions regulate the selling of insurance. There is certainly an overlap with the tax issue. In the state I practice, a product is not insurance that must be registered/regulated as such unless it "is a contract whereby one undertakes to indemnify another or pay or allow a specified or ascertainable amount or benefit upon determinable risk contingencies." I take that to mean risk shifting as well.

If in the registration process, the state's insurance commission undertakes a qualitative analysis of whether the product as to which registration is applied is in fact 'insurance' as so defined (rather than merely assuming all applications are made regarding what amounts to insurance, on the premise the applicant wouldn't go to the effort and expense of application if it wasn't), then the qualitative determination by the state insurance commission could be persuasive on the tax issue.

The IRS could yet challenge the product as not meeting the tax definition. The question for tax purposes is who is relieved of the financial risk? It must not only be the employee, but also the employer for the nondiscrimination rules not to apply.

The state may consider the Exec-u-Care product to be insurance for state regulatory purposes simply because Exec-U-Care is undertaking to indemnify the individual covered, regardless of whether it is Exec-U-Care or the employer that actually bears the brunt financially.

In the tax scenario, whether Exec-U-Care or the employer that actually bears the brunt financially is critical as to whether the arrangement is fully insured and no discrimination rules apply (i.e., Exec-U-Care bears the financial brunt) or it is not fully insured and nondiscrimination is required (i.e., the employer is bearing part or all of the financial risk).

If the arrangement between Exec-U-Care and the employer is that the employer will pay in 'premiums' to Exec-U-Care the entire claims costs (with or without an admin fee) experienced, then it is the employer that is self-insuring and Exec-U-Care simply administering the arrangement. If that is the reality of the product, then it 'looks, walks and talks' like an ASO contract, and the arrangement is self-insured and subject to the nondiscrimination rules for tax purposes.

If the Exec-U-Care arrangement with the employer calls for the employer to pay a fixed premium, but also that employer will pay all or a part of claims up to or over a certain point, then you have the employer having retained some of the risk. That's partially self-funded, for tax reasons, and subject to 105h nondiscrimination.

If on the other hand the amount the employer pays to Exec-U-Care is fixed, based for example on underwriting results factoring in prior claims experience, and Exec-U-Care takes it, financially speaking, from there entirely, then you have a fully insured product from a tax perspective.

Either way, it might be 'insurance' for state law purposes and regulated as such because the risk is shifted away from the individual. But the tax inquiry is whether the risk is also shifted away from the employer. That may be something the state regulators are not concerned with.

[Don Levit]

John:

Yes, the tax issue is significant, for if the plan is discriminatory, and it is fully insured, the executives will be taxed on all of their reimbursed medical expenses.

It was stated previously that the Execucare plan was a supplemental policy.

I assume there is a valid group policy available, and the 2 executives are participating in the supplemental plan.

Here is how Reg. 1.105-11©(2)(ii)(2) reads. "Other Rules. The rules of this section apply to a self-insured portion of an employer's medical plan or arrangement even if the plan is in part underwritten by insurance. For example, if an employer's medical plan reimburses employees for benefits not covered under the insured portion of an overall plan, or for deductible amounts under the insured portions, such reimbursement is subject to the rules of this section."

Is this regulation pertinent to our discussion?

Don Levit

[J Simmons]

Hi, Don,

Yes, that regulation is most pertinent to the discussion, and is the basis of the following paragraph from my earlier post

If the Exec-U-Care arrangement with the employer calls for the employer to pay a fixed premium, but also that employer will pay all or a part of claims up to or over a certain point, then you have the employer having retained some of the risk. That's partially self-funded, for tax reasons, and subject to 105h nondiscrimination.

That relevance is why in this thread various posters have used the term 'fully insured' to describe the situation that must exist to be free of the nondiscrimination requirement. If only partially insured, then the remainder of benefits to EEs as reimbursed by the ER 'out of its pocket' is subject to the nondiscrimination rules, and if not observed, a portion or all of such reimbursements to the 25% highest paid EEs will be taxable income to them.

Only if the plan is entirely, 'fully' insured can you ignore nondiscrimination under 105h and the benefits received by those 25% highest paid EEs be tax-free to them. In my view, that means that once a fixed premium is paid for a coverage period (CP 1) by the ER to the third party insurer, there can be no additional amount due from the ER for CP 1 based on the claims during CP 1. If the ER can be further obligated for payments for claims made during CP 1, then the arrangement is partially if not fully self insured and subject to 105h nondiscrimination.

In determining the premium to charge for the next period of coverage (CP 2) the third party insurer can take into account prior claims experience (including those from CP 1) without causing the arrangement to be self-insured, even partially, provided the ER is not obligated legally to the third party insurer to continue the policy into CP 2.

[Guest ftaormina]

Would you happen to have a copy of this letter you mentioned below. I have seen the Ernst and Young letter but have been unable to find any additional opinion letters on the subject. If you do not have a copy do you have any idea how I could obtain a copy. Thank you so much in advance.

The latest opinion letter provided to me by the broker is from KPMG, dated October 2005. It still looks like the conclusions on tax impact are still based on the assumption that the plan is an insured accident and health plan. There are a number of reasons presented to support it being considered an insured plan, but no definitive finding that it is an insured plan. it still seems clear that it this presumption is subject to future challenge. So we would have to advise a client considering this plan that there is some risk of a future challenge to the plan's insured status.

[Ron Snyder]

Deleted due to posts on other thread.

[Chaz]

Does anyone have any updated information about ExecuCare (Exec-U-Care? Execu-Care?) plans? I have clients telling me that Principal Financial has been telling them that the arrangement is fully insured and that the clients don't have to worry about the nondiscrimination rules because the arrangements are grandfathered under PPACA.

Thanks.

[lvena]

I would answer your question, yes and no. Assuming the plan was started prior to 9/23/2010, and is grandfathered, it is true that the the non-discrimination rules do not apply.

However, as of 9/23/2010, annual and lifetime limits are not allowed on ANY plans, grandfather or not. Assuming that your clients' plan has a limit, it does not matter if it is grandfathered.

[Chaz]

I would answer your question, yes and no. Assuming the plan was started prior to 9/23/2010, and is grandfathered, it is true that the the non-discrimination rules do not apply.

However, as of 9/23/2010, annual and lifetime limits are not allowed on ANY plans, grandfather or not. Assuming that your clients' plan has a limit, it does not matter if it is grandfathered.

Thanks for the response. I am really looking to see if there is any new information about whether these plans are truly fully insured.