Reimbursing Self Through FSA

[jsb123]

Hi, all. I am new to the forum, and am hoping someone can help with a question. In advance, I apologize if this issue has already been addressed elsewhere. I didn't see it. So here's my question:

I am a part owner of small business. A friend, who owns a separate small business, has told me that (i) his company eliminated its group health plan, (ii) his company now provides each employee a pay increase of $400 per month, and (iii) employees buy their own health insurance on the private market. Importantly, he also informed me that his employees set up FSAs, into which they deposit pre-tax dollars, and that employees simply reimburse themselves from the FSA, on a pre-tax basis, for their healthcare premiums.

Is this permitted? If it is, I think my business wants to move in this direction, as it would likely be a win-win for both the company (as employer) and the employees.

Any help would be GREATLY appreciated. Thank you.

[QDROphile]

The commonly understood meaning of "FSAs" for medical expenseses involves a "cafeteria plan" under section 125 of the Internal Revenue Code. Plans under section 125 are established and maintained by an employer and involve salary reduction by the employer. They are not arrangements established or maintined by employees. Your source either did not decribe the details of operation corectly or the plan is being operated incorrectly. For examples, employees do not reimburse themselves. They submit claims for reimbursement that are evaluated for eligibility for reimbursement. And here's the most important part: healthcare premiums cannot be paid or reinbursed through an FSA; they are not eligible medical expenses.

It is possible to cover group medical plan premiums under a cafeteria plan, but not individual premiums. The arragnement described to you is not permissible. It was somewhat controversial to cover individual health policy premuims under section 125, but the practice was not uncommon. The idea has now been directly and expressly addressed by the IRS and it is not permissble.

[leevena]

QDROphile is correct.

Soon after ACA, there was/is substantial confusion around this strategy of allowing employees to fund their medical premiums via the fsa. There are some vendors out there pushing it very hard, even with marketing materials that are written in such a way that it looks legit. One that comes to mind is Zane, but there are others even today pushing the concept.

See Technical Release 2013-03.

Good luck.

[Brigid Anderson]

Perhaps you mean a HSA; but even so, subject to some limited exceptions not applicable here, premiums cannot be reimbursed from an employee HSA. The word is not getting out to small employers about this but, in light of IRS Notice 2013-54 and DOL Tech. Rel. 2013-03 (both issued Sept. 13, 2013), there is really no way for an employer to help employees purchase individual market coverage on a tax-advantaged basis. In addition, while that guidance allows a salary increase, it must not be conditioned on purchasing individual health insurance (in other words, it must be open-ended, leaving the employee free to use the increase for other things); otherwise, the employer will be treated as purchasing the insurance, which is also prohibited even when done after-tax. Employers violating these rules are subject to self reporting of $100-per-day excise taxes on Form 8928, so the adverse consequences are real. Limited transition relief expires June 30, 2015 for certain small employers (generally those that employed an average of fewer than 50 full-time employees, including full-time equivalent employees). [iRS Notice 2015-17 (Feb. 18, 2015)] You should talk to your accountant or attorney (and bring this guidance to his or her attention if need be). Yes, good luck!

[GBurns]

Please do pass this information to your friend.

Whether it is FSA or HSA, does not matter, as explained above. There is simply no way to reimburse individual health insurance premiums on a tax free basis.

There also could be an insurance fraud issue. Almost every Application for Individual health insurance has a section which asks the applicant to certify that they will not be reimbursed, in any way whatsoever, directly or indirectly. The Application becomes part of the policy. These employees would have knowingly made a false statement and collected insurance benefits as a result. This provision is mirrored in most state health insurance laws. The penalties could be very severe for these employees. There could also be penalties to the employer in addition to the $100 per day per employee excise taxes mentioned by Brigid Anderson above.

Let me say again, the penalties are HUGE.