Medical Insurance Premiums thru 125 Plan

[Guest forum4]

We have a 125 plan for employees to pay for their medical insurance premiums. Our enrollment form for the medical coverage gives us authorization to deduct their premiums from their pay. Must an employee authorize a separate withholding for the pretax payment of their premium payments and if so, must a new authorization be given each year?

[QDROphile]

You have to distinguish between salary reduction and payroll deduction. Salary reduction is what makes the premium amount "pre-tax" (what an unfortunate term!). Payroll deduction can apply to after-tax amounts that are directed to some use, such as payment of health plan premiums -- or more likely long-term disability premiums. Section 125 requires salary reduction agreements. They need not be complicated and can be included on the benefit election form.

Whether or not a new salary reduction agreement is necessary each year depends on plan terms, but if benefit selections or premiums change for the next year, do you dare use the old agreement?

[Lori Friedman]

It might be worth noting that the whole "election form" issue is very loose.

I.R.C. Sec. 125 and its proposed regulations don't provide a required format for a salary reduction agreement, nor do they describe any methods that would be unacceptable. The IRS has applied the law broadly and permissively, taking the position that Sec. 125 merely requires an employee to make an informed choice -- either by action or inaction -- between cash and another benefit. Many cafeteria plans actually have no formal written salary agreement between the employer and the employee. Also, many plans, especially POPs, use "negative elections" -- benefit coverage as the default condition unless affirmatively declined.

In Rev. Rul. 2002-27, 2002-20 IRB 925, a cafeteria plan may provide for an automatic enrollment and renewal process when an employee doesn't affirmatively elect to receive cash compensation instead of a health insurance benefit. The "negative election" won't cause employees to be in constructive receipt of income.

[GBurns]

The medical enrollment form should not be used to authorize salary deductions or salary reductions. A separate form should be used.

Does your medical form really authorize or does it just state how the premiums will be paid? Saying that $X will be paid through payroll deduction is not necessarily an authorization.

Aside from QDROphile's point, there are some who might opine that state law might be applicable. Most state laws require written consent etc.

For those who will point out that Federal law preempts state law, bear in mind that the relevant guidance from the IRS is still mainly Proposed Treasury Regulations. Proposed Regs have no effect of law according to many courts. "No effect of law" will not preempt state law.

In any case, this is usually moot since either coverage or premiums do change almost every year, thereby rendering the old form obsolete anyhow.

[Guest forum4]

GBurns - you state "The medical enrollment form should not be used to authorize salary deductions or salary reductions. A separate form should be used."

Our current enrollment form simply states premiums will be payroll deducted. Is there any reason the salary reduction authorization can't be built into the enrollment form? We have the option to waive out if medical coverage (and receive cash payment) so we require a new form be completed each year.

[leevena]

You are asking about two seperate actions. The first is can you deduct the employees premium contribution from their pay, and yes you need their authorization. Most times the enrollment form will have wording on it allowing for it to occur.

As for the second action, you are asking if you can make the premium contribution a pre-tax item. This is different and seperate from asking if you can deduct payments for the carrier. I have seen it done both ways; some employers do this automatically without asking the employee and I have seen employers ask the employee. Could never understand why an employer would do it without asking?

My recommendations to all my clients is to have two authorizations, one for pre-tax and one for deductions.

As for the format, that is up to you, but you might want to have two forms. It will provide you with flexibility if you make any changes later.

[GBurns]

First, saying that "premiums will be payroll deducted" is not the same as saying that they will be pre-taxed. So for that reason you need an agreement to have the amount pre-taxed (under section 125). Note the comments by QDROphile on this issue.

Second, since pre-taxing has a potential effect on Social Security benefits, it is advisable that the employee be made aware of this. That is why forms used for pre-taxing of benefits usually have this warning/notice, even for voluntary products such as from AFLAC, Colonial, Allstate (American Heritage) etc. Look at your section 125 related forms and promotional material and you should see that most carry this warning/notice.

Third, if there is no separate Salary Reduction Agreement, What do you do if the employee has a qualifying event that allows a change in pre-tax amount?

Fourth, Doesn't your Cafeteria Plan Plan Document require a separate written agreement/election for salary reduction?

It could be built into the enrollment form, but it might not have the space for the wording and it also would not give you as much flexibility. This is assuming that the enrollment form that you are referring to is not 1 of the health insurance application forms provided by the insurance company. The enrollment forms provided by an insurance company might not be changeable without filing with the state, which would be costly and impractical.