Splitting Hairs

[Guest erisafried]

Here, for your reading pleasure, is an excerpt from Prop. Reg. Section 1.409A-1(b)(9)(iv), relating to the reimbursement of post-employment expenses for a limited time:

"To the extent a separation pay arrangement (including an arrangement involving payments due to a voluntary separation from service) entitles a service provider to reimbursement by the service recipient for a limited period of time of payments of medical expenses incurred and paid by the service provider but not reimbursed and allowable as a deduction under section 213 (disregarding the requirement of section 213(a) that the deduction is available only to the extent that such expenses exceed 7.5 percent of adjusted gross income), such arrangement does not provide for a deferral of compensation."

I would be particularly interested to know if anyone has any thoughts about the red italicized language or has heard anyone at IRS or Treasury make mention of it. The context is this: what if an employer agrees to pay or not charge or subsidize an terminating executive's COBRA premiums for 18 months -- how do you steer that around 409A? COBRA premiums are deductible under Section 213(a) (assuming you satisfy the 7.5% AGI test). If the "not" in the foregoing excerpt applies only to the word "reimbursed," you've got a clear way to exclude the COBRA subsidy from 409A, and the "allowable as a deduction" phrase clearly liberalizes things by excusing the former employee from the 7.5% AGI test. On the other hand, if the "not" applies to both "reimbursed" and "allowable as a deduction," you'd need another exception or else you'd need to comply.

The welfare plan exception in 1.409A-1(a)(5) is a little troubling because it refers to "any other medical reimbursement arrangement, including a health reimbursement arrangement, that satisfies the requirements of section 105 and section 106." What does it mean to satisfy the requirements of Sections 105 and 106? Does that mean a COBRA subsidy limited to random HCEs who terminate would be a problem due to Section 105(h)?

Maybe the COBRA subsidies are just hard-wired into a severance plan or agreement and provided on an unalterable monthly (or whatever) schedule, thereby complying with 409A?

Anybody have any brilliant solutions to this one or am I just missing the forest for the trees?

[Kirk Maldonado]

ERISAFried:

I wouldn't recommend that you apply for a job as a forest ranger.

A plan which reimburses employees for premiums paid under an insured plan is not subject to Section 105(h). Section 1.105-11(b)(2).

[Guest erisafried]

Well, that's one job possibility out of the way.

Thanks for that heads-up (can you hear the sound of my hand hitting my forehead?). How about COBRA subsidies for self-funded plans? This could be for an employer that has a self-funded group health plan or perhaps through a less formal 105(b) medical expense reimbursement arrangement.