Group Health Insurance Premiums Reimbursed by Employer

[Guest DEBKUNA]

Our firm has encountered an employer who is reimbursing their employees the cost of the premium amounts for them to be covered on their spouses employer's plan.

This has definitely caused an uproar in our small business community as the employees are now terminating their coverage to jump on their spouses insurance to be reimbursed by their employers.

This seems unfair, but I am sure it is legal. My question is what would be the draw back for this employer? And, wouldn't the employee's then have to report that as income/wages and be placed on the employee's W2's?

Any helpful information would be greatly appreciated.

Thank you,

[leevena]

Perfectly legal, and has been done by companies for years. As for whether there is a drawback for an employer to do this, it depends. I don't know which state this group is located, nor the underwriting guidelines, so I cannot say for sure. What I would ask is, "will the employers' healthplan be negatively impacted as he shrinks the enrollment?"

Usually the answer is no, but not sure. As for the upside, the employer can fix their cost to these employees at the contribution amount and not have to worry about future rate increases.

Hope this helps.

[QDROphile]

Tell us more about the uproar and the unfairness aspects.

[Guest DEBKUNA]

Tell us more about the uproar and the unfairness aspects.

The employer is a larger employer in the area and is now persuading their employees and dependents to enroll on to the spouses plan regardless of cost and they will reimburse them via the MERP. In addition, any difference in copays, deducibles..etc. will also be reimbursed. Thus the other employers are in a bit of an uproar as they now have the risk. Of course, this will force all the area employers to increase the cost for spousal/dependent coverages. So several groups are seeking advice.

Thank you for your input...greatly appreciated.

Deb

[KJohnson]

If this is viewed by the IRS as an option between taxable cash and a non-taxable benefit (coverage under the employer's own plan) and the arrangement is not run through a cafeteria plan then you run the risk of those who take take the non-taxable benefit being in "constructive receipt" of the cash. Thus those who stay in the employer plan could conceivably be taxed. I would tread carefully here. I think there are a number of threads that discuss the various issues that might arise.

[leevena]

KJohnson brings up a good point, for which I do not know the correct answer. The extra dollars can be run through the 125, but I do not know for sure about the MERP. I feel confident that the MERP is ok, but not 100% confident.

Regardless of the tax issue, what the employer is doing is not illegal, and has been done by other companies in the past. Now that I know it is a larger group, I do have some additional comments about the downside to the employer. Assuming that group is experience-rated or some form of alternative funded, this could cause some negative effects for the group. As the size of the group decreases, the credibility of the group's claim experience decreases. This could lead to additional costs, or lost of experience rating. But that being said, I would hope that the group has already explored this possibility and calculated what the effect would be on their costs.

[QDROphile]

So the employees of this particular employer are worse than average health risks? The world is imperfect, and so are rate setting endeavors, but all things being otherwise equal, a greater number of participants in a health plan tends to make the premiums lower and create more opportunities. Perhaps the other employers are subsidizing health insurance costs and the additional volume means more participants to subsidize. One can only imagine what motivates a decison to subsidize. It would be interesting to know if the fears of additional cost to the other employers are well founded.

[Guest DEBKUNA]

So the employees of this particular employer are worse than average health risks? The world is imperfect, and so are rate setting endeavors, but all things being otherwise equal, a greater number of participants in a health plan tends to make the premiums lower and create more opportunities. Perhaps the other employers are subsidizing health insurance costs and the additional volume means more participants to subsidize. One can only imagine what motivates a decison to subsidize. It would be interesting to know if the fears of additional cost to the other employers are well founded.

If a group has a MERP in place that states all employees, spouses and dependents MUST take the spouses insurance over the employees insurance and if the spouses employer puts a MERP in place that states the same, that the employer that had the MERP in place first "wins" so to speak? Does anyone know? Thanks.

[JanetM]

You lost me, what is a MERP?

[Guest DEBKUNA]

You lost me, what is a MERP?

Medical Expense Reimbursement Plan or Program.

[namealreadyinuse]

Are we all sure that MERPs can reimburse insurance premiums?

[Guest DEBKUNA]

Are we all sure that MERPs can reimburse insurance premiums?

From what I have found, MERPs can reimburse insurance premiums and they are active in our community right now. Any one else know??

[J Simmons]

My understanding is a MERP under 105h and not part of a 125 cafeteria plan can be accessed by the employee to reimburse for either health insurance premiums or other out-of-pocket medical expenses.

A medical flex account that is offered under 125 (and governed by 105h as well) cannot, however, be used to reimburse for or otherwise pay premium costs--just non-premium, out-of-pocket medical expenses.