Income or Fringe

[Guest Susan Sussman]

I have a client who offers health insurance to certain employees working over 20 hours per week. One employee who does not work over 20 hours a week would like to "buy" into this health insurance by having her premiums deducted directly from her paychecks pre-tax. Essentially, her paycheck would be reduced to almost $0 b/c most of her paycheck would go towards the insurance premium and she would be relieved of most of her tax liability. Does this pose a problem? Is it tax avoidance? Would it really be a fringe benefit considering it constitutes most of her salary? Any guidance would be appreciated. Thanks!

[SLuskin]

I have a client who offers health insurance to certain employees working over 20 hours per week. One employee who does not work over 20 hours a week would like to "buy" into this health insurance by having her premiums deducted directly from her paychecks pre-tax. Essentially, her paycheck would be reduced to almost $0 b/c most of her paycheck would go towards the insurance premium and she would be relieved of most of her tax liability. Does this pose a problem? Is it tax avoidance? Would it really be a fringe benefit considering it constitutes most of her salary? Any guidance would be appreciated. Thanks!

Susan, what does the Cafeteria Plan document say about eligibility to participate? If the doc says over 20 hours, this employee cannot "buy" into it pretax. Also, is the carrier going to allow this sort of thing? Generally, the eligibility for the 125 Plan mirrors the eligibility for the group medical plan. Otherwise, there is a phantom benefit which would certainly be looked at very strangely upon audit. Also, are there any other under 20 hour employees? Are they offered the same opportunity? I would be inclined not to permit this at all.