Individual premiums

[Guest lovemymgb]

I need some help understanding the proposed IRS regulations from August 6, 2007 regarding individual insurance premiums. In our cafeteria plan, we have a premium payment account for group insurance, medical reimbursement account, health savings account, and dependent care account. An employee obtained an individual health insurance policy in her name outside the company's group plan. Is it possible for the employee to pay for the individual premiums with pre-tax dollars through the cafeteria plan? Would we need to set up a separate premium payment type account for individual insurance premiums to do this, or is this even possible? I'm so confused...!

[J Simmons]

A cafeteria plan may but is not required to reimburse for premiums paid for individual coverage. So if the cafeteria plan so specifies, it is possible. It would need to be made part of the premium payment benefit, not part of a flex account, such as your 'medical reimbursement account'.

While it is possible, it is fraught with potential hazards for the employer to do so. Proceed with extreme caution. Get a benefits lawyer before doing so.

[QDROphile]

Here is a hint for your futher inquiry. No matter how you come out on the issue, if you have not at least discussed HIPAA in connection with the arrangement, you have not adequately considered the consequences.

[Don Levit]

QDROphile:

Why would HIPAA be relevant if the employer did no leg work for the employee to secure the policy, including not paying any premiums?

Don Levit

[LRDG]

The employer has created a group plan by providing an account to either pay or reimurse medical premiums for individually owned policies, possibly subject to IRS, DOL and treasurary regs.

The situation is not unlike group supplemental policies sold via payroll deduction with individual policies issued to employees, paid with 100% employee contribution, pre-tax via Sec. 125. Cafeteria plans convert the payment from an employee contribution to one made by the employer, and is therefore provided the tax benefit provided under Sec. 125.

The employer goes a bit further, enter into a contractural agreement with the insurance carrier to allow monthly list billing via payroll deduction and makes decisions regarding types of coverage, cost comparisons with other carriers and similar decisions. The ambiguity is wether a group plan exists that gives rise to regulatory requirements other group plan are subject to, similar to the ambituity associated with individual policies for individual medical coverage in your post.

[GBurns]

Don

Aren't you confusing HIPAA with ERISA ?

ERISA, COBRA and applicable state law are issues that should also be part of the consideration ?

Not knowing the group size, I would also point out that reimbursing the premium would cause the application of State Small Group health insurance laws which would create another set of issues, in many states.

[Don Levit]

LRDG:

Can you provide any documentation to your assertion?

The latest proposed IRS regs on cafeteria plans state that the plans themselves are not ERISA plans, but merely mechanisims for paying premiums.

George, I am not suggesting the premiums be reimbursed.

I am stating the premiums are paid entirely by the employee, through the cafeteria plan, with no reimbursement.

Don Levit

[GBurns]

Frankly, I see no problem and nothing new about an employee pre-taxing the premium through the cafeteria plan for an individual policy. Premiums for supplemental policies for all sorts of coverages from providers such as Unum, Aflac, Colonial, Allstate/American Heritage etc etc has been acceptable for years. It is part of many POP cafeteria plans. The only caveat in some cases was the issue of taxation of benefits, which would not be applicable in this case because of the exclusion of medical expense benefits.

Don,

You are correct, premium reimbursement is not an issue here.

But the issue raised regarding HIPAA etc applies not to the cafeteria plan, but to the plan/arrangement related to the coverage.

[Guest lovemymgb]

How do run an employee's non-group insurance premium through a cafeteria plan pre-tax without doing "reimbursement"? How is that structured?

[J Simmons]

The mechanics of that are best handled by having the EE pay the premium on the individual policy to the insurance company and then the ER, pursuant to a cafeteria plan that allows and employee election for payroll reduction, reimbursed the EE with a non-payroll check. See Rev Rul 61-146.

But do this per such a premium benefit specified in the cafeteria plan and election by the employee, separate and apart from his or her "medical reimbursement account". That type of flex account must be for non-premium medical expenses that the employee would otherwise pay out of his or her pocket.

Do vet out the issues mentioned in this thread, however, before doing this.

[GBurns]

lovemymgb

There is no "reimbursement" in the same way that there is no "reimbursement" of the premium amount that is pre-taxed for the group medical insurance. It is just another pre-tax salary reduction but payable to a different insurance carrier.

Look at any illustration for a POP cafeteria plan, or look at most Aflac brochures that show a cafeteria plan.

The premium payment is directly from payroll to insurance company so no "reimbursement" is done. No different from group premiums.

If you use the procedure in Rev Rul 61-146 (which was looong before cafeteria plans were conceived) the employee paid the premium privately so therefore "reimbursement" is necessary. There is no pre-taxing anything on the payroll nor an FSA nor anything else in 61-146.

However, the new Proposed Treas Regs allows pre-taxing of individual premiums, but there seems to be some concerns as to exactly what is meant and how it works.

[J Simmons]

George,

What are those concerns about what is meant and how it works?

Treas Reg § 1.125-1(m)(2) Example (ii) provides that if the employee's individual health premiums are substantiated, payment will be tax free to the employee under IRC § 106 (just as in Rev Rul 61-146) if the employee is reimbursed directly for those premiums--or by a check delivered to the employee that is made payable to the insurance company or jointly to the insurance company and the employee, Treas Reg § 1.125-1(m)(2) Example (iii) and (iv).

[GBurns]

The first concern was illustrated in a recent thread where a popular posted made it clear that he was not aware that there were even new Proposed Treas Regs.

The second concern is regarding whether the new Prop. Treas Regs will be either changed or ever become final.

Other than those I have seen questions regarding whether 1.125-1(m) allows pre-taxing of the premium and whether it can be done through an FSA or should be a direct reimbursement as per the literal reading (and as per 61-146).

In any case, the OP is not seeking a 61-146 type reimbursement, but rather a pre-taxing by the employee of the premium.

[J Simmons]

George,

Could you help me understand what you mean by "pre-taxing by the employee of the premium" that is not accomplished under method 1 under Rev Proc 61-146, where the premiums are tax-free under IRC section 106?

Harry Beker, the principal author of the 2007 proposed regs, directed me to method 1 of Rev Proc 61-146 as a way to handle cafeteria plan payments of premiums elected by the employee (with a corresponding election for salary reduction) when I explained to Mr Beker that an insurer was refusing direct payment of premiums from the employer on the employee's individual health insurance policy.

[GBurns]

pre-taxing = salary reduction = deducting on the payroll from the employee's wages without applying FICA and FWT. The same as is done for health insurance premiums in a POP section 125 cafeteria plan. The amount taken on the payroll was not subject to taxes.

If you read 61-146 you will see that the employee self paid on his own (by check, cash or otherwise) not through a payroll deduction, then got reimbursed by the employer. The reimbursement by the employer is not taxable income.

Mr. Beker probably did not quite understand what you were asking since the acceptance of premium whether from an employer or employee is neither a cafeteria plan issue nor even an IRS issue but is governed by the insurance contract and state law in some cases.

[Don Levit]

George:

Can you provide an example of contract language and state law in which premiums can be accepted in certain ways?

Don't you think federal regulation would preempt these forms of payment?

Or. do you interpret the proposed IRS regulations to read as written, "except if your state prohibits this from being done?"

Don Levit

[J Simmons]

pre-taxing = salary reduction = deducting on the payroll from the employee's wages without applying FICA and FWT. The same as is done for health insurance premiums in a POP section 125 cafeteria plan. The amount taken on the payroll was not subject to taxes.

If you read 61-146 you will see that the employee self paid on his own (by check, cash or otherwise) not through a payroll deduction, then got reimbursed by the employer. The reimbursement by the employer is not taxable income.

Mr. Beker probably did not quite understand what you were asking since the acceptance of premium whether from an employer or employee is neither a cafeteria plan issue nor even an IRS issue but is governed by the insurance contract and state law in some cases.

It's possible that Mr Beker misunderstood what I was asking about a cafeteria plan, but he volunteered Rev Proc 61-146 as a work-around to the insurance company's refusal when Mr Beker called to reply the following fax I sent to him on May 10, 2000 about HIPAA applicability to individual policies premiums paid through a cafeteria plan:

Mr. Beker: I am writing this to pose a situation and ask for you input and thoughts, albeit on an informal basis. For years, the general thought has been that individual policies (other than for life insurance) can be paid for through a cafeteria plan, on a pre-tax, pre-FICA basis. This is even implicit in PLR 199936046. However, as a practical matter, this may no longer be feasible in light of HIPAA's rules capping pre-existing condition elimination periods and crediting certain prior coverage against those elimination periods. This appears to depend upon whether a cafeteria

plan, which is in reality a payroll practice that if the set of attendant rules are followed will allow certain benefits to be paid for on a tax free basis despite the employees having had the choice of cash instead, is a HIPAA 'group health plan.'

The problem is how the medical insurance industry has reacted. While these HIPAA rules have been incorporated in group medical policies, only the less restrictive rules made specifically applicable to individual policies have been so incorporated therein. Thus, if a cafeteria plan that offers medical insurance coverage is per se a HIPAA group health plan, despite being designed without a group policy, but for individual policies, then the HIPAA group health plan rules (stricter) would have to apply. The medical insurance industry would have to write a special individual policy (highly unlikely, in that it would have some group-like underwriting components and require extensive information gathering and underwriting effort that would not be cost-effective) for use in cafeteria plans.

It does not appear that the intent of Congress was to require that the only type of major medical insurance policies that could be offered through a cafeteria plan be group rather than individual.

If so, it could have said so. More telling however is that Congress specifically addressed what requirements group policies must have and what different requirements that individual policies would have to have. Indeed, the definition of group health plan for HIPAA purposes is found in IRC sec· 5000(a) and provides that such is a plan of an employer "to provide health care (directly or otherwise) to the employees, ... ." A cafeteria plan really does not provide health care (for that

matter, neither does an insurance policy--health care professionals provide the care). However, while the insurance policies (like medical FSAs--which I think are HIPAA group health plans if available to more than 1 employee) provide financial coverage against the costs of health care, a cafeteria plan is yet one more step removed. It merely is a payroll mechanism to effect payment of the premiums for such health insurance. However, the "(directly or otherwise)" language could be

applied quit broadly, perhaps even to snare into the definition cafeteria plans as they relate to the payment of premiums for medical insurance.

HIPAA regulations have, if certain criteria are met, exempted medical FSAs from HIPAA group health plan overage. However, to meet the nondiscrimination rules, medical FSAs as a benefit almost always are a 'group health plan' in providing health care benefits. But the medical insurance portion of a cafeteria plan can effect payment for either a group medical policy (which itself would be a HIPAA group health plan like medical FSAs) or for individual policies, which would not be a HIPAA group health plan just because more than one employee can use the cafeteria plan to payor their various individual policies. My thinking is that HIPAA would apply to a group insurance policy that is paid for through a cafeteria plan, but not a individual policies so paid for. Your thoughts and input on this would be greatly appreciated.

[GBurns]

Don

Premium issues start with the aplication for coverage where Payor Information and Relationship is established. These have to be acceptable by the insurance company and if so, is then made a part of the contract. Look at any contract. Also established is Premium Amount, Frequency, Due Date etc etc.

Here is a standard BBSTX individual application.

It is a matter of contract and that insurance contract and underwriting etc is as approved by the state dept of insurance.

ERISA does not pre-empt state insurance laws. The insurance contract is not the benefit/welfare plan. More so since we are talking about an individual policy bought outside the confines of employer.

As for state law see your state Small Employer health insurance regulations. You might want to start with TAC Rule 26.13(k). I do not know where to find the List Billing prohibition that relates but the Texas DOI did issue a Bulletin on the subject in the last few years. You might want to spend an hour listening to the 2006 TIC conference on individual policies in the employer market and the issues involved.

The IRS excerpt should need no explanation since in most cases state regulation of insurance policies is the norm.

[QDROphile]

How do you characterize the individual polices for HIPAA purposes? Try this description: The employer has a health plan. Under the plan any employee who wants health coverage must find an individual policy with the desired coverage. The employer will pay the premium, either directly, or indirectly by reimbursement to the employee after the employee pays the premium. Is that a group health plan? The HIPAA definition seems to cover it. The variations on the coverages are not relevant to the HIPAA definition.

The cafetria plan as a delivery device is not relevant. The cafeteria plan is just a tax trick affecting the individual.

[GBurns]

J Simmons

You asked about HIPAA in May, 2000 ?

I am surprised that he even attempted an answer considering when the Regulations were finalized and that this was while the comments made to the NPRM were probably still being reviewed.

As I recall, at that time everyone was still studying it and opinions were as numerous as opiners.

[GBurns]

QDRO

I have seen arguments that it could be either an Exempt Benefit or a Payroll Practice.

Your illustration is exactly what used to be done in what used to be called "the Payroll Deduction market" (now known as Worksite Marketing) until the issue of taxability of the benefits of some types of supplemental policies became an issue.

I think (but have not verified) that companies like Aflac take the safe route of stating in their material HIPAA compliant statements but try to leave the issue to the employer/Plan Sponsor.

Whenever I have referred to things like cafeteria plans as "tax tricks" I get no end of flak.

[J Simmons]

J Simmons

You asked about HIPAA in May, 2000 ?

I am surprised that he even attempted an answer considering when the Regulations were finalized and that this was while the comments made to the NPRM were probably still being reviewed.

As I recall, at that time everyone was still studying it and opinions were as numerous as opiners.

Hi, George,

Well, Mr Beker's response was not directly to the HIPAA question I posed. He did not opine either way on it. When he asked specifically what was prompting my question, I explained that it was health insurers refusing employer checks to pay premiums on individual health policies, citing the HIPAA concern. That's when Mr Beker then pointed me to Rev Rul 61-146, and explained that we could simply have the employee pay the premium, bring proof of payment, and then cut a non-payroll check from the employer to the employee to effect the cafeteria plan's payment of the premiums for the individual policies.

[Don Levit]

QDROphile:

I agree that your scenario could be considered a health plan.

However, if the employee pays the entire premium, without being reimbursed, through a cafeteria plan, would you consider that a health plan?

Don Levit

[Don Levit]

George:

In regards to how the insurer gets paid, what does that have to do with state insurance law?

I understand Texas and other states have laws or bulletins regarding how insurers get paid, but what do those laws have to do with the primary responsibilities that states have in regulating insurance contracts?

Don Levit

[QDROphile]

If the employee pays the premium and there is no reimbursement, the employer is not involved in any way, so it cannot be a group health plan. If the premium is paid through after-tax payroll deduction, I would argue that the payment arrangement is just a courtesy to the employee -- the employer still makes no decison regarding health benefits. But if the employer is involved in funding, including thorugh a cafeteria plan, other decision making, it is easy to fall into the HIPAA definition. If the employer will only pay after-tax payroll deductions to certain insurance companies, I would wonder.

[J Simmons]

If the employee pays the premium and there is no reimbursement, the employer is not involved in any way, so it cannot be a group health plan. If the premium is paid through after-tax payroll deduction, I would argue that the payment arrangement is just a courtesy to the employee -- the employer still makes no decison regarding health benefits. But if the employer is involved in funding, including thorugh a cafeteria plan, other decision making, it is easy to fall into the HIPAA definition. If the employer will only pay after-tax payroll deductions to certain insurance companies, I would wonder.

Both COBRA and HIPAA refer to the same definition of 'group health plan' set forth in IRC § 5000(b)(1). For COBRA and HIPAA to apply, the 'group health plan' must either

(a) be contributed to by the employer, or

(b) be "of the employer".

The COBRA regulations specify that health insurance provided through a cafeteria plan may be a 'group health plan' (Treas Reg § 54.4980B-2, Q&A-1) if the employer makes a contribution toward the premium cost or the insurance is not available to other individuals at the same cost it is to the employer's employees. Thus, even if the employer does not bear any of the premium cost, COBRA (and probably HIPAA too) will apply if the employer negotiates special rates on the premiums (such as price breaks) for its employees.

The employer's negotiating a special premium cost would make the policy "of the employer". If not, is an employee-pay-all (through cafeteria plan elected salary reductions) "of the employer"? Maybe, but the implication of the COBRA regulation on it suggests not, and it is the same definition used for HIPAA.

[GBurns]

Don

I have tried, but I cannot understand your questions.

Insurance issues are regulated by each state.

Insurance contracts like rates and all policy forms have to conform with state law and be approved by the state. This includes the terms and conditions etc even the size of the type used for printing. The application which is a policy form which is then incorporated into the policy, which is also a policy form.

The terms and conditions include method of premium payment and payor. Therefore state insurance law governs how insurance companies get paid.

The primary responsibility of state insurance regulators is to enforce the state insurance laws. Insurance contracts are subject to state laws. What are you implying ? That insurance contracts are not ?

[Don Levit]

George:

If the policy is an individual policy, and is not subject to group laws, what difference does it make if the employer pays the premium for you, or I pay the premium for you?

Don Levit

[Don Levit]

John:

Can the state provide a definition of a group health plan that conflicts with the federal definition?

Don Levit

[J Simmons]

John:

Can the state provide a definition of a group health plan that conflicts with the federal definition?

Don Levit

Hi, Don,

For purposes of applying the state's own laws that are not preempted by ERISA, the state may set its own definition even if that conflicts with the federal definition of 'group health plan' for HIPAA and COBRA purposes. The federal definition would nevertheless apply to determining if HIPAA and COBRA apply to the specific arrangement.

[masteff]

For what it's worth in the overall conversation.... Prop Reg 1.125-1(m)

[GBurns]

It makes a difference if the contract says so.

It makes no difference whether individual, group or otherwise, it is as the contract says that it is. That contract was approved by the state and that is what the insurer has to use. Some slight variation is allowed in the very large group market, but stll there is eventual state law compliance and regulation.

But in any case whatever is agreed to in the application becomes the contract terms and conditions. If the contract specifies who is Payor, then that is it.

As to your question to John, Yes a state can have its own definiftion. Texas does and that is yours state isn't it ?

Just like MA etc have their own definitions in the marriage area and NJ does not recognize section 125 as being tax relief, a state is free to have its own definition that is different from federal. States have their own privacy laws and minimum wage laws don't they ? So why not group health plan ?.

[Guest lovemymgb]

As a follow up to my original question, if we set up a separate premium payment account for non-group premiums, what change of status rules apply? The same change of status rules that apply to the group premium payment account? Thanks for your help. This discussion has certainly been enlightening!

[GBurns]

If you are pre-taxing the employee's contribution, it should be done under a section 125 cafeteria plan. It makes no difference whether for individual policies or a group policy, the rules of section 125 apply.

[KJohnson]

If you have access to the EBIA Cafeteria Plan Manual look at pages 322-330. Their upshot is while it might be fine under the 125 propsed regs (as long as it is addressed in your 125 Plan document), you still shouldn't do it if you are talking about individual premiums for major medical coverage because of HIPAA, ERISA and COBRA concerns.

[J Simmons]

For what it's worth in the overall conversation.... Prop Reg 1.125-1(m)

Hi, Masteff,

See posts ## 13 and 14 in this thread where Prop Reg 1.125-1(m) was discussed.

[Guest George Chimento]

This discussion of premium reimbursement accounts is very helpful. The technique dates back to 1961 and is a practical way to provide pre-tax reimbursement to employees not covered by the employer's group policy and who wish to purchase individual policies.

In the case of a typical 125 plan with flex accounts, it would be much more convenient if reimbursement for individual policy premiums could come from the same flex-account that is used to reimburse non-insured medical/dental expenses. However, that does not seem to be allowed.

Out of curiosity, what is the legal reason for requiring a separate account for premium reimbursement?

[Guest George Chimento]

<<you still shouldn't do it if you are talking about individual premiums for major medical coverage because of HIPAA, ERISA and COBRA concerns>>

Frankly, I have never heard of anyone ever having trouble with HIPAA, ERISA, or COBRA for these arrangements, and I think the concerns are overblown.

Hewever, there is a VERY REAL issue if an employer permits its post age 65 employees to use a PRA to purchase individual med-ex supplement policies. That would be construed as a violation of the Medicare Secondary Payer rules, because the employer would be directly involved in the employee's effort to use Medicare instead of employer group coverage. Alway exclude such policies from coverage under a PRA.

[GBurns]

The technique from 1961 to which you refer does not allow for pre-tax reimbursement. See Rev Ruling 61-146. Non-taxable reimbursement but not pre-tax reimbursement.

As for HIPAA, ERISA and COBRA etc concerns, a Google search will bring yoou many cases regarding individual policies.

[Don Levit]

George:

Could you provide a case which strongly suggests these violations?

Don Levit

[GBurns]

Don

Cases do not suggest violations. Cases decide if alleged violations occurred.

The fact that cases alleging that violations exist is by itself cause for concern for many people. It is up to each person to see if any cases fit their particular facts and circumstances. But, it should not matter if there are no cases as yet, it should only matter that there is compliance with applicable law so as to avoid a lawsuit.

[Guest George Chimento]

<<The technique from 1961 to which you refer does not allow for pre-tax reimbursement. See Rev Ruling 61-146. Non-taxable reimbursement but not pre-tax reimbursement.>>

Historically, I agree with you, because 125 was not around back then. It's pretty clear now that with 125 it can be done pre-tax, of course.

I still don't understand the legal reason why a separate account has to be established, however. Why can't they just allow employees to take the money from a typical flex account?

[J Simmons]

I agree with George C. that it does not seem sensible for the prohibition on drawing premiums out of a health flex account under a cafeteria plan. If the funding is solely from the ER, you may have an HRA, a single pot of money that can be tapped for either health premiums expenses or out-of-pocket medical expenses. Since you can mix-and-match with tax-free money from an HRA for both types of health expenses, what is the rationale for not allowing mix-and-match of those health expenses from a single health flex account funded by EE paycheck reductions? Why must there be under a cafeteria plan a premium account separate from the health flex account?

[KJohnson]

Interesting article

http://www.calbrokermag.com/Magazine/story/Feb08/Glass.htm

[GBurns]

We seem to have strayed far from the OP.

The question was " Is it possible for the employee to pay for the individual premiums with pre-tax dollars through the cafeteria plan?".

The answer is Yes.

It seems we strayed when someone introduced reimbursement of the premium. This was not the issue.

As for reimbursing pre-taxed premiums, these were addressed in posts #13 and#14 and by Masteff.