Health Insurance Premiums for Participant covered by spouse's employer's plan

[Guest CFreed]

I have a client with a cafeteria plan that offers a premium account, medical reimbursement account, and dependent care reimbursement account. A participant has elected to not participate in the health insurance offered by the employer and to instead be covered by her spouse's employer's health insurance plan. Is it permissable to reimburse the amount paid as a premium for her through the cafeteria plan? Is there anywhere in the code that I can reference to explain this to the client?

[J Simmons]

Not spelled out in the statute or the regs.

The closest thing I know of that the IRS addressed the issue was in the Preliminary Draft of IRS Examination Guidelines for Cafeteria Plans (Spring 1998) that indicated, as best I recall, that the policy needs to be taken either in the name of the employer sponsoring the cafeteria plan or the employee participant, not in the name of the employee's spouse or the spouse's employer.

[LRDG]

When premiums were removed as an eligible expense for reimbursement from Medical FSAs, among other intentions, it was intended to prevent the employer who was not the sponsor of the medical plan from experiencing FICA savings of an employer who was the sponsor of the medical plan. Each employer who sponsors a cafeteria plan and medical plan experiences FICA savings they are entitled to.

If not, employer A, with a Sec. 125 Medical FSA, but with no medical plan, could potentially experience FICA savings via the Medical FSA reimbursing the premiums of Employer B, who is the sponsor of a Sec. 125 Medical FSA and a medical plan.

[J Simmons]

Prop Treas Reg § 1.125-1(m) allows for "[t]he payment or reimbursement of employees' substantiated individual health insurance premiums" as "a qualified benefit for purposes of section 125." What then are employees' health insurance premiums? Does the possessive mean that the employee must be obligated under the policy to pay the premiums? or simply that the employee otherwise would pay the premiums or has paid the premiums on a policy in the spouse's name?

[Jacmo]

LDRG is right. The policy has to be in the employee's name. I recall from the mid to late '80s that one of the reasons this rule was made was because thousands of employers were saving FICA dollars off the spouses of government employees--before they had a cafeteria plan.

[GBurns]

Jacmo

The restriction that you and LRDG refer to are under the old Proposed Treas Regs but not under the new Proposed Treas Regs cited by J Simmons.

[LRDG]

Jacmo

The restriction that you and LRDG refer to are under the old Proposed Treas Regs but not under the new Proposed Treas Regs cited by J Simmons.

Regs have not been amended under 'new' proposed treasurary regs to remove restriction on FSAs from reimbursing insurance premiums.

There has been for several years a clarification by IRS that allows for individually owned medical insurance coverage to be paid or reimbursed by an employer under a plan that has never been very well articulated by IRS. Non-discriminationm rules have not been addressed, administration and requirement to define the plan in a document are issues IRS has yet to define in regs.

The only requirement I'm aware of that has been defined is that there be substantiation of the cost. As I recall if the policy is in the name of the employee's spouse, but covers the entire family of the employee is not defined in the regs as they were proposed and continue to exist.

I am not involved in marketing or administering such plans and therefore have not followed with the keen interest of someone waiting for some development. But as one who in general follows IRS developments and published refindments in regs over the years, these have not as far as I'm aware, been defined any further.

[Don Levit]

LRDG:

For individually owned medical insurance, would discrimination, administration, and the plan being defined in a document be relevant if there was no ERISA plan created by the employer reimbursing medical premiums?

Don Levit

[GBurns]

LRDG

I do not see where anyone mentioned FSAs. Proposed Treas Regs 1.125-1(m) cited by J Simmons is certainly a change from what was in the old Regs. What do you think they are allowing to be now reimbursed?