taxation of deductible reimbursements

[Guest jigpsu100]

An employer with a 125 plan wants to increase decutibles, but only require employees to pay the old amount and therefore reimburse employees who exceed the old deductlbe amount up to the new amount. Is the payment from the employer to the employee for the difference in deductible taxable to the employee? I'm not much of a tax guy.

[QDROphile]

Employer coverage of the deductible is an employer provided health benefit, not taxable to the employee as long as the arrangement is not discriminatory, see section 105(h) of the Internal Revenue Code. The arrangement is or is part of a group health plan, subject to ERISA, COBRA, HIPAA and all other requirementa applicable to group health plans. Among other things, the terms need to be set forth in a written plan document and disclosure (SPD) must be provided to participants. One should also consider that the premium paid under the cafeteria plan for the core health coverage also buys the deductible coverage.

[Guest jigpsu100]

Thanks for your reply. In addition to the cafeteria plan, could we have a separate medical expense reimbursement plan. That way it could be used only when needed and wouldn't need to be funded. I know that I would have to follow the nondiscrimination requirements of 105(h). I guess they would need to file another 5500 and go through all of the formalities as well.

Only a small percentage of the employees will hit the deductible so I think this is the only way that it makes sense. Do you agree?

[GBurns]

The reimbursement of the deductible should be done through a MERP and be separate from the section 125 Cafeteria Plan.

[Don Levit]

If you are looking at a plan that would only be used when needed, would not have to be funded, and in which only a small number of employees would actually use,

why not consider an HRA?

Can you supply specific figures? What is the deductible now? What amount are you considering raising it to, in which the employer will fund?

Don Levit

[GBurns]

What would be the benefit of an HRA over a standard simple section 105 MERP?

There was no expressed desire to fund for other than incurred expenses, no pre funding and therefore no possibility of rollover of unused funds.

[Don Levit]

He never spoke of not rolling over unused funds.

This feature can be advantageous if the following scenario was legally possible.

Let us assume an employee has an HRA, in which there are no limits on unused balances.

After 5 years, he has no claims, and $15,000 in his HRA.

This amount exceeds the deductible, and the out of pocket expenses before the insurance kicks in.

Could this particular employee have a deductible of $15,000, without the plan being discriminatory?

If so, his group premium is lower, and, at least theoretically, this difference in premium could be available in cash or other benefits.

Don Levit

[GBurns]

He does not have to speak of not rolling over unused funds.

It was very clearly stated that "it could be used only when needed and wouldn't need to be funded" and that it would "reimburse employees who exceed the old deductlbe amount up to the new amount".

This means that there would be NO unused funds. If there are no unused funds in the scenario, it does not need to be said that there is no rollover of unused funds, because logically, there are no unused funds. Why would he talk about something that he already stated was not possible??

Why do we need a scenario other than the 1 that we are addressing?