Which one is cleaner? Or both?

[Guest parrot87]

If an employer wishes to cover individual premiums for dependents (i.e. lets say Medicaid) of employees, can this be done via a 125 plan? Please refer to 1.125-6(i) and 1.125-1(m)(1)

If not, anyone see any reasons why it couldn't flow through a 105 plan?

[GBurns]

What do you mean by "an employer wishes to cover individual premiums for dependents " ?

Cover How ?

Does the employer wish to pay the premiums ?

Does the employer wish to make premium payment by the employee an option ?

Is it dependent only coverage or is it the dependent portion of the premium ?

Is it under individual policies or it is a group policy ?

[Guest parrot87]

Employer A wants to let her employees purchase individual insurance for kids since it is cheaper. She currently pays for 50% of dependent health insurance premiums. The group plan charges $250 per child whereas comparable benefits can be purchased in the individual market for $100 per child. The adult employee would remain on the group policy but the child would be on the individual insurance policy.

Would this be covered as a premium reimbursement plan under 125, or do I need a 105 plan to go along with this? Is there any way we could make this 50/50? I imagine we could draft a 105 plan that is specifically crafted for this situation with an appropriate maximum, but it may have to be amended yearly and might not fit nicely.

[Lori Friedman]

Matthew, I think you could be "mixing apples and oranges." An I.R.C. Sec. 125 plan, or cafeteria plan, is a sort of umbrella that permits employees to make pre-tax contributions for permitted benefits. The Sec. 125 plan might work in tandem with a number of welfare benefit plans, including a medical or insurance plan. Sec. 125 and Sec. 105 isn't an either/or arrangement; they're complementary.

[J Simmons]

Employer A wants to let her employees purchase individual insurance for kids since it is cheaper. She currently pays for 50% of dependent health insurance premiums. The group plan charges $250 per child whereas comparable benefits can be purchased in the individual market for $100 per child. The adult employee would remain on the group policy but the child would be on the individual insurance policy.

Would this be covered as a premium reimbursement plan under 125, or do I need a 105 plan to go along with this? Is there any way we could make this 50/50? I imagine we could draft a 105 plan that is specifically crafted for this situation with an appropriate maximum, but it may have to be amended yearly and might not fit nicely.

Lori is correct. 125 keeps benefits excluded by other sections, such as 105, from becoming taxable income because the employee had the choice of taxable income instead. Both 125 and the other section that makes that type of benefit tax free must be observed for the benefit to be tax free if the employee had such a choice.

Usually the term 105 plan refers to some type of a MERP or other health reimbursement arrangement (HRA). Your post, Matthew, involves the employer's payment of insurance premiums. The payment of premiums by the employer is excluded from taxable income by 106. Payment of health expenses by the insurance company are excluded by 105b.

Using the $100 per child premium, the employer could 'offer' in the context of a 125 plan the coverage at a cost of $50 that an employee that accepted that offer would have to agree to salary reduction to cover. That $50 would, to be tax free, depend on compliance with 106 and 125. The employer would pay the full $100 actual premium cost. The second $50 would be tax free if in conformity with just 106.

Because there would be the employer bearing some of the premium cost, I think the employer would find itself smack dab in the middle of COBRA (if there are 20 or more employees on the typical business day during the prior year), HIPAA (unless there is just one employee), USERRA, Pregnancy Discrimination Act of 1978, etc. Most individual policies will not have all those bells and whistles. Thus, the employer could find itself liable to fill the gaps.

[Guest parrot87]

Thanks for the input. To further clarify the reason I posted:

The situation remains the same, but under the cafeteria plan, I feel it is unclear as to whether salary reduction can be used for dependent premiums. Must the employee be named on the policy along with the dependent for that policy to qualify?

Judging by both your responses, it seems like your answer is no. Can you elaborate as to the reasons why your answer is no? I'm not sure what Lori is saying, seems like shes saying I may need both or was just trying to dig for more info. John, you seem to be saying that this arrangement is fine via a 125.

A Cafeteria plan administrator got back to me and said that the employee must be named along with the dependent IF salary reduction is to be done via a cafeteria plan. Maybe she was just "yes man-ing" me. Anyway, I've already decided to draft an HRA to take care of the situation, since this is definitely compliant. NOTE: none of the other issues JSimmons brought up are valid in this case.

The optimal word in my post was "cleaner", which I admit is ambiguous at best. I was trying to reduce the admin work involved with this process. If this process were done salary reduction with checks being cut directly to the insurer, as is stated in 125, then that's much easier than the substantiation process involved with HRA's.

P.S. - John, I thought for that second $50 to be tax free, it would have to be employer funds, not employee funds. Can you point me to that section of 106 if I am mistaken?

[GBurns]

Section 125 is what allows the employee to pre-tax the employee share. It has nothing to do with 105.

Section 106 is what allows the employer's share to be tax free to the employee. It has nothing to do with 105.

An HRA does not allow employee contribution and the employer contribution cannot be conditioned on the employee's 125 pre-tax amount etc. So I wonder how you will be able to "draft an HRA to take care of the situation, since this is definitely compliant."

A section 105 MERP (non rollover HRA) does not have employee contibutions.

I think that the TPA is correct and that the employee must be the policy holder, but that could have been changed by the new Proposed Treas Regs. However, since a minor cannot apply for an insurance policy, I doubt that one could be purchased in the child's name anyhow.

But I wonder if any of us understand what you are posting since you clearly state that "NOTE: none of the other issues JSimmons brought up are valid in this case."

[Guest parrot87]

Section 125 is what allows the employee to pre-tax the employee share. It has nothing to do with 105.

Section 106 is what allows the employer's share to be tax free to the employee. It has nothing to do with 105.

An HRA does not allow employee contribution and the employer contribution cannot be conditioned on the employee's 125 pre-tax amount etc. So I wonder how you will be able to "draft an HRA to take care of the situation, since this is definitely compliant."

A section 105 MERP (non rollover HRA) does not have employee contibutions.

I think that the TPA is correct and that the employee must be the policy holder, but that could have been changed by the new Proposed Treas Regs. However, since a minor cannot apply for an insurance policy, I doubt that one could be purchased in the child's name anyhow.

But I wonder if any of us understand what you are posting since you clearly state that "NOTE: none of the other issues JSimmons brought up are valid in this case."

As far as the relationship between a 105 & 125, you can fight with Lori on that one. As for the 106, are you telling me that the HRA does not cover that? The plan document is written to include dependent premiums, and it does point back to sections 105 AND 106. What do you mean by section 105 MERP "does not have employee contributions"? I think I said that, didn't I? I am aware that the employee will have to pay their 50% post tax. What I was asking is if we could keep the 50/50 arrangement pre-tax while moving the dependent children to individual insurance in post #3 of this thread; also while keeping it "clean" via salary reduction, etc. to reduce administrative work. Are you saying you have a solution?

Insurance can be purchased in the child's name, a parent can apply for insurance for their child without being named on the policy. Why do you think this cannot be?

As far as my note, well, ok, maybe you have a point. But this group is a less than 20 group. Is there anything out there that I should watch out for? Also, why does Hippa only apply to a group of 1? I was under the impression Hippa only applies to groups of 50+ (edit: 50+ for employer concerns...)

[J Simmons]

P.S. - John, I thought for that second $50 to be tax free, it would have to be employer funds, not employee funds. Can you point me to that section of 106 if I am mistaken?

If the employer's share is paid and the employee has no option to instead take the $50 as extra cash pay or in some other taxable way, then 106a excludes that $50 borne by the employer from being in the employee's taxable income, even though it benefited the employee.

The employee's share if elected as a $50 salary reduction through a proper 125 plan is treated as though it is an employer contribution so that it too is excluded from the employee's taxable income under 106a. It is a tax law fiction created so as not to do too much damage to the constructive receipt doctrine. (By the way, over on the DoL side, ERISA does not use this fiction.)

Even though 106a is integral to the payment of premiums being excluded from the employees taxable income as part of a 125 cafeteria plan choice the employee has, you do not need a separate '106a plan'. In your 125 cafeteria plan document you simply state in clear terms what the required salary reduction, i.e. cost, to the employee will be if he elects that benefit.

If the health policy covering the child is not owned or held in the name of the employee, I would be concerned. The new 2007 proposed regs provide that it is the "employees' substantiated individual health insurance premiums". Prop Treas Reg § 1.125-1(m)(1). Prop Treas Reg § 1.125-1(m)(2) Example (i) speaks of "employees who are covered by an individual health insurance policy." Prop Treas Reg § 1.125-1(m)(2) Example (ii): "the employee's substantiated health insurance premium;... ." Prop Treas Reg § 1.125-1(m)(2) Example (iii): "employee's health insurance premium, ... ." No where in Prop Treas Reg § 1.125-1(m) is there mention of this procedure any mention of spouse or dependents, either as -1(m) extending to their coverage under individual policies or -1(m) only applying to the employee. What then are the EMPLOYEE'S individual health insurance premiums? Do they include individual health insurance that covers the spouse? the dependents? Does the employee have to be obligated legally to pay those premiums for covering spouse and dependennts for those premiums to be the employee's as contemplated by -1(m)? If the employee is so obligated, would that be sufficient under -1(m)? Maybe all that would be required is proof that the employee in fact paid those premiums regardless of legal obligation.

[J Simmons]

why does Hippa only apply to a group of 1? I was under the impression Hippa only applies to groups of 50+ (edit: 50+ for employer concerns...)

HIPAA generally applies to a group as little as 2. My statement was you better be concerned about HIPAA "unless there is just one employee". There is an exception to HIPAA privacy compliance if the employer has less than 50 and entirely self-administers in-house. Other aspects of HIPAA, such as the nondiscrimination rules and the special enrollment rules do not have the less than 50/self-administer only exception. If the individual policy took into account, when its premiums were set, the health of the individual, you could have a problem with HIPAA nondiscrimination.

[Guest parrot87]

P.S. - John, I thought for that second $50 to be tax free, it would have to be employer funds, not employee funds. Can you point me to that section of 106 if I am mistaken?

If the health policy covering the child is not owned or held in the name of the employee, I would be concerned. The new 2007 proposed regs provide that it is the "employees' substantiated individual health insurance premiums". Prop Treas Reg § 1.125-1(m)(1). Prop Treas Reg § 1.125-1(m)(2) Example (i) speaks of "employees who are covered by an individual health insurance policy." Prop Treas Reg § 1.125-1(m)(2) Example (ii): "the employee's substantiated health insurance premium;... ." Prop Treas Reg § 1.125-1(m)(2) Example (iii): "employee's health insurance premium, ... ."

No where in Prop Treas Reg § 1.125-1(m) is there mention of this procedure any mention of spouse or dependents, either as -1(m) extending to their coverage under individual policies or -1(m) only applying to the employee. What then are the EMPLOYEE'S individual health insurance premiums? Do they include individual health insurance that covers the spouse? the dependents? Does the employee have to be obligated legally to pay those premiums for covering spouse and dependennts for those premiums to be the employee's as contemplated by -1(m)? If the employee is so obligated, would that be sufficient under -1(m)? Maybe all that would be required is proof that the employee in fact paid those premiums regardless of legal obligation.

There's the rub John. Obviously the policy will be owned by the parent. As far as the second part, that's what I would like an answer on. I've received one answer so far, that answer was that the employee must also be receiving coverage on the individual policy. In the my question, I did say the employee would remain on the group plan. So are you revising your answer from go ahead to maybe?

As for Hippa, aren't those issues you brought up standard fare for 99.9% of the group plans out there? Its like telling me to look both ways before I cross the street because a car could hit me...well, no duh.

I do really appreciate your input John. Its very constructive.

[J Simmons]

So are you revising your answer from go ahead to maybe?

If you are comfortable that -1(m) includes the premiums in question, go ahead (and pre-tax the employee's $50). If you are not sure, then do it outside of a 125 plan on an after-tax basis. But I'd also watch out for those other federal laws that apply.