Employer purchasing individual insurance policies

[Guest TXCafe]

I have a new one to me that I'm hoping someone can help me with. I have a client who is a small employer and is looking for new cheaper options for insuring a handful of employees. They have found that the premium rate for 6 individual policies is cheaper than the group rate they can get for all 6 employees. They want to know how they can still enjoy tax benefits if the employer purchases these individual policies and then the employees pay a portion just as they would under a group plan. I am not sure how to answer them on this. It wouldn't appear there is any "double dipping" ocurring. I'm just not sure how to set this up. Any ideas?

[Don Levit]

TXCafe:

Good question.

Assuming you wish to explore this option in Texas, how would you deal with a bulletin issued by the Texas Department of Insurance last year?

Go to:

http://www.tdi.state.tx.us/bulletins/2006/cc9.html.

Don Levit

[masteff]

So if you decide it's still okay to get individual contracts after reading Don's link...

The issue I see is whether it would constitute group-term life. So we can look to the regs...

1.79-0 says "The term 'policy' includes two or more obligations of an insurer (or its affiliates) that are sold in conjunction." and "Thus, a group of individual contracts under which life insurance is provided to a group of employees may be a policy."

The next place I'd point you to is 1.79-1 in whole. First noting the list of requirements in 1.79-1(a). Then noting the rules under 1.79-1© on groups smaller than 10 (you said yours is only 6). To ensure compliance, you'll have to take extra note of ©(2)(ii) which provides rules on how rates can be set in such a group.

[Don Levit]

masteff:

Let's first see if these are life or health policies.

I assumed they were health policies.

Don Levit

[masteff]

masteff:

Let's first see if these are life or health policies.

I assumed they were health policies.

Don Levit

D'oh. (Where's the Homer Simpson icon?)

Okay, so if it's health... CCH Master Benefits Guide (2002 version) says in part 580 that "the exclusion [from employees income for employer contributions to premiums] applies regardless of whether a group policy or individual policies are involved." However in true CCH form, that specific item does not have a citation but I presume it has to do w/ sections 105 and 106.

[Guest TXCafe]

Wow I wasn't aware of the bulletin so thank you so much for that, Don. I'll definitely inform my clients about it as well as they are in Texas as well.

It IS health insurance. I was a little lost reading about group term life!

So what I'm gathering from your responses is that first I need to make sure this is a legal arrangement under Texas Insurance law and that my client is aware that their responsibilites, etc are the exact same for this arrangement as they would be for a group plan. I think my client is looking to save money and not to short their participants so let's assume they take action to follow this law and still want to pursue this arrangement. It would seem from your responses that it would be treated just like a group plan but it's one of those "gray" areas that the IRS just doesn't really mention? Am I understanding your (so hard not to type "ya'll" every time! ) responses correctly?

Thanks so much for your help!! I don't know about you guys but I hate enrollment time! The work just mounds up!

[Don Levit]

TxCafe:

According to the Bulletin, if the employer subsidizes any of the premium, this would be considered a group plan, according to the TX DOI.

If that is the case, the premiums cannot be different for the participants, due to a health status factor.

Thus, any type of list billing would be prohibited.

The interesting dynamic here, in my opinion, is that whether or not an arrangement is a group plan, would be determined by federal law, not by a state Department of n surance bulletin.

When I talked to the regulator mentioned in the bulletin, I sent him a fifth circuit court case, which took place in Texas, which seemed to suggest that whether or not individual policies are subject to being a group plan, would be determined on a case-by-case basis, even if the employer subsidizes the premium.

When I asked the regulator if he read the court case, he said to me he did not have the time.

Don Levit