Overpaid Premium Reimbursement Account

[bcspace]

This is regarding a premium reimbursement election.

One of our clients has an employee who's insurance went way down. Unfortunately, it was not reported for a month and now more money has been sheltered from the employee's pay check than would be sheltered by the end of the year if the change had been reported on time.

So, if we change the election to a compromise amount, we still cannot account for all the extra funds paid out by the end of the year.

I know how to correct for this in our software but what should our client do? Are they within their rights to demand the extra money paid out to come back?

Thanks

[LRDG]

It depends on the plan provisions regarding making premium election changes, and election change reporting requirements the employee is responsible for.

If the plan allows premium election changes, and the employee has complied within the time provided to make an election change, but due to mis-handling or communication/paper delays not in the employee's control the deadline has been missed, and if the employee has satisfied any substantiation requirementsthe, the adjustments should be made with a refund to the employee.

Adjustments and a refund of excess premiums should be returned to the employee via payroll with appropriate tax withheld on the premium amount that exceeds the actual premium amount due. A seperate check can be issued, but the payroll system should reflect the necessary adjustments, tax withheld on the excess premium amount. amd funds returned to the employee.

[GBurns]

I do not understand.

A "Premium Reimbursement Account" within a Cafeteria Plan ? Who gets reimbursed and for why ?

What do you mean by "premium reimbursement election" ?

If this is salary reduction for the employee share of the health insurance premium, then why "reimbursement" ?

I also have a problem with "we still cannot account for all the extra funds paid out by the end of the year." Paid out to Whom ? Insurance premiums are usually forwarded to the insurance coomppany each month. If excess premium is paid it should show up immediately, so I do not understand why you would be doing anything at the end of the year rather than the very next month after the first excess payment.

[J Simmons]

Hi, George,

My understanding is that the term 'premium reimbursement account' in the cafeteria plan context has been coined as a marketing term after the publication of the proposed regs in August 2007 to refer to what is described in Treas Reg 1.125-1(m). Treas Reg 1.125-1(m) put into regulatory statement (albeit proposed right now) some of the scattered prior guidance, formal and informal, on using a cafeteria plan to tax-free pay or reimburse employees for premiums under individual health policies. For example, many of these principles derive from Rev Rul 61-146.

It is "reimbursement" to the employee after he/she has paid the premiums, presents proof, and is thus reimbursed.

Usually, there would be no need for a ledger or "account" of this benefit, as the amount reduced from the employee's pay each month equals the amount that the employee is reimbursed that month for individual health coverage premiums.

One that elects under the cafeteria plan to use features of -1(m) for payment of individual health coverage premiums could be said to have made a 'premium reimbursement election'.

My reading of the OP is that the employee elected an amount for payroll deduction for premium reimbursement for the year based on what his/her individual health coverage cost at the time of the election. These amounts have been being held out of his/her pay. Then mid-year, the cost of the coverage dropped, but the payroll deductions continued at the same amount. The result is that more has been deducted from the emploee's paychecks than he/she will have in premium expense for the individual health coverage this year, and the question then is, what may or must the employer do with that overage?

EDIT ADDITION: Just because the proposed tax regulations, and prior guidance, have permitted the reimbursement of individual health premiums paid by an employee, on a tax free basis using a cafeteria plan, an employer ought to proceed cautiously before embarking on so reimbursing as there are significant ERISA, HIPAA, COBRA, FMLA, ADEA, ADA, USERRA, and Pregnancy Discrimination Act of 1978 issues, and state law concerns. Not that an employer cannot do so, but it takes almost surgical precision to navigate a 125 plan through the complexities and challenges posed by these other laws.

[GBurns]

As you said, the new Prop. Regs came out in August 2007 and I recall that it was to take effect January 2009. I could not imagine that someone made a decision to implement this change in time for plan year 2008. If a calendar year plan with enrollment in November, they would have had to make the decision almost immediatley so as to have the PD amended and SPD etc produced in time. It just did not seem plausible that they could have been relying on the new Prop. Regs.

The scenario in your last paragraph raises questions. Under that scenario there is and would be no substantiation or verifcation of premium payment. If there were then the excess deduction would have been reported after the very first month so there would be no accumulation. It also raises questions regarding the company's Accounts Payable procedures. What invoice was the premium remitted against? And why was an amount in excess of the invoice amount paid ?

To many things raise questioons, so I think that there is something that I am not understanding, probably in the terminology. Then again it could just be my medication.

[J Simmons]

Hi, George,

I think that the snafu occurred in the fact that while the premium decrease would have been known to the employee in the month that the premiums decreased, "it was not reported for a month" and thus the amount taken out of the employee's pay was higher than necessary to cover the actual premium. So what does the employer do with the difference between what it took out of the employee's pay and what the actual premium cost to be reimbursed is?

There is no premium expense against which it can be assessed properly and paid tax-free. Should/may the employer add that difference back to the employee's next paycheck, where it will be subject to payroll tax withholding and be included in the employee's taxable income? Or, because the employee did not timely report the drop in premium cost, does the employer simply keep the difference?

[bcspace]

I do not understand.

A "Premium Reimbursement Account" within a Cafeteria Plan ? Who gets reimbursed and for why ?

What do you mean by "premium reimbursement election" ?

If this is salary reduction for the employee share of the health insurance premium, then why "reimbursement" ?

Thanks for your replies so far.

Forgive my ignorance and likely improper use of terms but I'm in a tough situation. I used to do only the software side for this company. But now the owner (my father) has passed away and I'm now finding myself doing the regulatory/insurance side as well while the estate is in probate and I decide whether or not to continue the business beyond my being the personal representative of the estate. There are no other employees/company directors etc. It was a one man show and frankly, he did it very well.

But I am having trouble finding all the necessary info to help our clients manage their plans. From doing the software, I am familiar enough with FSA's to be "dangerous", but that is all.

The employees of this particular client buy their own insurance privately, the employer reimburses them for their premiums. The reimbursements are not immediately available like those of an MFSA.

One particular employee whose premiums were $250, changed their insurance to one whose premiums are $75. Problem is, they did not report the change until after several $250 reimbursement were made. One solution might be to change the election to $75 and consider the employee over-reimbursed until the contributions catch up.

However, it's near the end of the year so there isn't enough time for catch-up. So by the end of the year, reimbursements to this employee for this benefit will exceed the amount elected (because of the change in premium from 250 to 75). So the question is, can or should the employer go after the money?

My reading of the OP is that the employee elected an amount for payroll deduction for premium reimbursement for the year based on what his/her individual health coverage cost at the time of the election. These amounts have been being held out of his/her pay. Then mid-year, the cost of the coverage dropped, but the payroll deductions continued at the same amount. The result is that more has been deducted from the emploee's paychecks than he/she will have in premium expense for the individual health coverage this year, and the question then is, what may or must the employer do with that overage?

J Simmons, that is correct.

From the answers so far, it seems apparent that I must communicate to the client the importance of verifying that the premiums are paid (or invoiced) before reimbursement. I used to have such a benefit myself once and the only verification required by that company was me giving a copy of my insurer's invoice to my employer at the beginning of the year and that was it. I certainly see the value of doing it month by month analagous to submitting a claim.

But the main question is, since the employee has already been overreimbursed, can the the company ask for it's money back assuming the company followed it's own rules outlined in the plan document?

Perhaps since the employee didn't report the change, the company should assume that the employee had the more expensive coverage (even though he didn't want it) and make the appropriate deductions from the paycheck to cover the reimbursement until the change was reported? Problem there would be no invoices from the insurer to that effect.

Thanks

[GBurns]

If the employer is reimbursing the employee for premiums that the employee paid for privately purchased health insurance, Why is there any election and premium deduction ?

[J Simmons]

So that it may be done tax-free pursuant to cafeteria plan, to avoid the constructive receipt rule that would otherwise make the arrangement taxable income to the employee.

[Guest parrot87]

Reimbursements made through a cafeteria plan for individual premiums don't require a yearly election. There isn't a problem, you just think there is. The process is that the receipts are provided, then reimbursement is provided.

I think there was a law in 2006 that allowed the above process to be streamlined by allowing the reimbursement to be made without direct substantiation with a receipt every month, basically turning it into an honor system.

Even still, there is no required yearly selection that an employee must make for a POP plan that reimburses individual premiums. Go ahead and change the deduction and balance the books on any reimbursement that was made tax free that shouldn't have.

[J Simmons]

Reimbursements made through a cafeteria plan for individual premiums don't require a yearly election. There isn't a problem, you just think there is. The process is that the receipts are provided, then reimbursement is provided.

There must yet be an election before the earnings that are deducted and used by the employer to make the reimbursement, become available to the employee. I agree the regulations do not require a yearly election, but there must yet be an advance election that otherwise meets the cafeteria plan rules or you have constructive receipt.

I think there was a law in 2006 that allowed the above process to be streamlined by allowing the reimbursement to be made without direct substantiation with a receipt every month, basically turning it into an honor system.

Please provide a citation, particularly in light of the fact that 1.125-1(m) of the 2007 proposed regs go into detail about the substantiation required before premium reimbursement may be made tax-free under a cafeteria plan.

Even still, there is no required yearly selection that an employee must make for a POP plan that reimburses individual premiums.

I agree that the advance election does not need to be made on a yearly basis, unless the plan documentation requires it. The regulations permit the advance election to be changed before any upcoming month and apply. The yearly election requirement under cafeteria plan regulations is required only for flex accounts.

Go ahead and change the deduction and balance the books on any reimbursement that was made tax free that shouldn't have.

I did not read the OP as stating that any reimbursement has been made for which there is not a corresponding premium cost. The discrepancy is an overage of deductions of pay compared to premiums to be reimbursed, not an overage of reimbursements.

While the regulations do not require a plan year election, the plan documents in issue and the election form itself might so specify the annual concept. If so, and the fact of the overage of pay deductions occurred because of the employee's failure to notify the employer/plan administrator, it would seem to me that the employee will forfeit the overage to the extent it is not offset by premium costs incurred by the end of the year.

If neither the plan documents or the election form impose an annual characteristic to the election, then adjustment could be made to the pay deductions going forward until the premium costs catch up with the pay deductions and you then can match them in amount going forward from there.

SEE further, modifying comments in post #15.

[Guest parrot87]

The law I referenced says that reimbursement for premiums can be made before submission of the receipt (just a "yes you can do this on a practical level" law), I was being loose with my language when I said "no substantiation". Of course, the new regs should over-ride anything now.

Yes, if we're being nit-picky, you must choose to be in the POP plan but you don't have to earmark a set dollar amount like FSA's.

I'll have to check, but with individual premiums thru a POP plan, I thought these were considered reimbursements, not salary withholdings. All of this as tax free.

[LRDG]

Premium only plans are a provision under Sec. 125 and must meet compliance, forfeiture and election change requirements as imposed on FSAs.

The only exception to the participant's irrevocable annual salary reduction agreement/participant irrevocable annual election requirement under a Premium Only Plan under Sec. 125 is the option for an automatic renewal on each subsequant plan anniversary date, but only after an initial POP irrevocable salary reduction agreement/POP election is made.

The objectives achieved when IRS allowed this type of POP was two fold. One is that employer's were able to tie the receipt of group medical coverage to the Sec. 125/POP election, eliminating the participant's option to receive benefits post tax, eligible POP benefits were made available only pre-tax. The other is once an initial POP election is made, provided the salary reduction agreement states the election will remain in effect for each subsequant plan year, annual open enrollment is eliminated.

Because there is no annual open enrollment, participants are at a greater risk of forfeiture if the participant wants to change an existing election absent an underlying qualified status change. Open enrollment is the only opportunity for participants to change their elections in the absence of a qualifying status change.

I am in favor of clients with a POP that includes automatic annual election renewal feature to prepare and distribute an annual statement verifying the irrevocable POP election/salary reduction agreement made in 1995, for example, will remain in effect for the 12 month plan year beginning on XX and ending XXX.

Premiums paid under a Sec. 125 plan in conjunction with employee premium payments for individual health coverage should not be confused with a Premium Only Plan under Sec. 125.

[J Simmons]

I'll have to check, but with individual premiums thru a POP plan, I thought these were considered reimbursements, not salary withholdings. All of this as tax free.

Reimbursements and salary withholdings are not incompatible, but both part of the tax-free payment of individual health premiums. Reimbursement goes to how the benefits are paid; salary withholding goes to who bears the expense. Unless all the expense is borne by the employee through salary withholdings equal to the true, third party cost of the benefits, then the whole slew of other federal laws are invoked: ERISA, HIPAA, COBRA, FMLA, ADEA, ADA, USERRA, and Pregnancy Discrimination Act of 1978. The exposures for the employer to provide benefits under those laws would make use of individual health policies a non-starter.

Apart from whose bearing the expense, reimbursement means the employer writes a check out to the employee upon proof that the employee has already paid the premiums on the individual health policy rather than the employer writing out a check and sending it to the issuing insurer those premiums directly.

[J Simmons]

Premium only plans are a provision under Sec. 125 and must meet compliance, forfeiture and election change requirements as imposed on FSAs.

The only exception to the participant's irrevocable annual salary reduction agreement/participant irrevocable annual election requirement under a Premium Only Plan under Sec. 125 is the option for an automatic renewal on each subsequant plan anniversary date, but only after an initial POP irrevocable salary reduction agreement/POP election is made.

The objectives achieved when IRS allowed this type of POP was two fold. One is that employer's were able to tie the receipt of group medical coverage to the Sec. 125/POP election, eliminating the participant's option to receive benefits post tax, eligible POP benefits were made available only pre-tax. The other is once an initial POP election is made, provided the salary reduction agreement states the election will remain in effect for all subsequant plan years, annual open enrollment is eliminated.

Because there is no annual open enrollment, participants are at a greater risk of forfeiture if the participant wants to change an existing election absent an underlying qualified status change. Open enrollment is the only opportunity for participants to change their elections in the absence of a qualifying status change.

I am in favor of clients with a POP that includes automatic annual election renewal feature to prepare and distribute an annual statement verifying the irrevocable POP election/salary reduction agreement made in 1995, for example, will remain in effect for the 12 month plan year beginning on XX and ending XXX.

Premiums paid under a Sec. 125 plan in conjunction with employee premium payments for individual health coverage should not be confused with a Premium Only Plan under Sec. 125.

LRDG, I agree on the annual characteristic of the election. The prior regs were vague and there was, in my opinion, a reasonable interpretation of them that elections for premium payment could be made other than on a plan year basis. The 2007 proposed regs are more clear that all elections, including those for premium payment/reimbursement, are to be on the plan year basis. Though there is yet a lingering bit of vaguenss in Prop Treas Reg § 1.125-2(a)(2)(ii): "The first day of the plan year (or other coverage period)", this seems overshadowed by the rule that "A plan is not a cafeteria plan unless the plan provides in writing that employees are permitted to make elections among the permitted taxable benefits and qualified benefits offered through the plan for the plan year (and grace period, if applicable)." Prop Treas Reg § 1.125-2(a)(1).

[Guest parrot87]

http://www.benetex.com/uploads/American%20...125%20Guide.pdf

refer to the bottom of page 4. Sorry, I'm not at work with all my files and documents, although I wouldn't look this up since none of you are paying clients (no offense, but its open enrollment season)

Clean up the books of any disparities between premiums & reimbursement/salary reduction. There's no big law that has been broken here, its just an oversight in that the employer withheld salary before substantiation. This situation sounds like an admin. error, nothing else...especially if the checks have the insurance company's name on it.

I'd ask your accountant in which way this would be most acceptable. I would say that taxes must be paid on any amount that has ALREADY been given to the employee. If the salary has been withheld but not distributed, then go ahead and just give back the excess and tax it.

[GBurns]

Note the wording used in paragraph 2 of page 1, "The effective date of the new regulations is generally plan years beginning 1/1/2009 or later. Although it also does state that employers have the option to rely on them prior to the effective date.

That being said, I still wonder about such early adoption and think that there is some question about what is being said in the OP.

[LRDG]

This plan probably has little to do with early adoption of a plan under proposed Sec. 125 regs taking effect in January 2009. This plan and probably many similar arrangements likely adopted under Revenue Rulings 61-146 that date back to the 1960's, as stated earlier.

[GBurns]

Rev Ruling 61-146 had no employee pre-taxing. The employer used employer finds to reimburse the employee.

In this OP it is the employee pre-taxing employee money, then having that money sent to the insurance company, just like in a POP 125 plan.

I am still not sure what the OP is describing and prefer not to speculate in the hope that it will be clarified.

[bcspace]

Clean up the books of any disparities between premiums & reimbursement/salary reduction. There's no big law that has been broken here, its just an oversight in that the employer withheld salary before substantiation. This situation sounds like an admin. error, nothing else...especially if the checks have the insurance company's name on it.

I'd ask your accountant in which way this would be most acceptable. I would say that taxes must be paid on any amount that has ALREADY been given to the employee. If the salary has been withheld but not distributed, then go ahead and just give back the excess and tax it.

In order to "clean up the books", the employee would have to pay back the extra money paid out because as far as the employer was concerned, the employee was paying a $250 premium when in fact it was $75. The employee was receiving, for two months, $250 each month when in fact that employee had canceled that insurance and purchased one for $75 a month.

So $500 was pretax from salary when in fact it should have been only $150, a discrepency of $350. Th employee has already deposited those checks so they can't be stopped. The employee has come forward to acknowledge their mistake and report the new premium but has not offered to pay the money back. The employer has not asked for it. However, the employer has asked our company, the provider of their admin software......

That is my question. It sounds like the resonable thing to do, but what I want to know is it legal or appropriate for the employer to try and recoup that $350 from the employee since it was the employee's fault for not reporting the change in premium?

[GBurns]

While it is the emloyee's fault for not reporting the change, that error pales in comparison to the employer's error in reimbursing before verifying. Aside from the error caused by the change, this is also a systemic problem whiich could carry consequences. It is not a simple oversight, it is a system and plan design failure or at best, a failure to operate a plan in accordance with its PD.

[GBurns]

Ask plan administrators or those who have experienced IRS or DoL audits of any sort of plan, or for that matter any audit of any sort. It is the mole hills that become mountains.

In audits there is no such thing as almost correct or just a little pregnant.

I doubt that you have ever gotten away with telling an auditor that an error was not really of any consequence.

I don't believe in running unnecessary risks based on speculation rather I believe in a rational interpretation of the law and experience with its application. I could not be so dismissive based on my experiences and my research.

[bcspace]

lol

I take it no one wants to be the one to say go after the employee for the money or not? Tell you what, I'll counsel them to do it and let you know what happens. We can all learn together.

I don't believe in running unnecessary risks based on speculation rather I believe in a rational interpretation of the law and experience with its application. I could not be so dismissive based on my experiences and my research.

Is there anything in the law or your experience in it's application regarding getting money back from an over-reimbursed employee?

Thanks

[GBurns]

Take the money back through the payroll system and correct the payroll figures accordingly. Then start to do it more correctly.

[Guest mjb]

Take the money back through the payroll system and correct the payroll figures accordingly. Then start to do it more correctly.

GB

Is this permissible under state labor laws requiring employee consent to salary reduction?

[Guest parrot87]

I'm not GB but look at the bottom of page 71 of the attached document. Also refer back to page 61 for its relation to the situation discussed in this thread.

New_125_rules___full___2008.doc.pdf

[GBurns]

mjb

I do not see why it could be a problem or concern.

Most salary elections are for an annual amount broken down according to payroll frequency. I have only seen a few that emphasized the periodic payroll amount. So the emphasis is on the annual election amount. In fact, this seems to have been the root cause for the problem in the OP.

That being said the correction is only being done in order to correctly comply with the salary reduction agreement not to change it.

[Guest mjb]

mjb

I do not see why it could be a problem or concern.

Most salary elections are for an annual amount broken down according to payroll frequency. I have only seen a few that emphasized the periodic payroll amount. So the emphasis is on the annual election amount. In fact, this seems to have been the root cause for the problem in the OP.

That being said the correction is only being done in order to correctly comply with the salary reduction agreement not to change it.

bscspace:

Was the employee making pre tax contributions of $250 a month which the employer sent to the insurance company to cover the cost of the premium or was the employer reimbursing the employee on an after tax basis for $250 each month because the employer thought that was what the employee was paying?

[bcspace]

Was the employee making pre tax contributions of $250 a month which the employer sent to the insurance company to cover the cost of the premium

Yes, except the company pays the employee directly and the employee pays the premium. This is how it worked for me when I was employee with my Dad's (now deceased) company.

or was the employer reimbursing the employee on an after tax basis for $250 each month because the employer thought that was what the employee was paying?

The employee forgot to notify the company that she had switched insurance plans, dropping the premiums she paid down to $75 per month. With only two months left to go in the plan year, there was no way to make any type of accounting adjustment (analogous to a change of election) without the employee paying back the extra money. With this new premium she was paying, she had already been reimbursed above the maximum.

And this is indeed what we told the employee she had to do and from what I hear from our client, she's done it.