Company Reimbursement of Pre-Tax Employee Contributions

[Guest GARNETT]

A client sponsors a medical insurance plan for its employees. The employees pay for a portion of the medical insurance with pre-tax contributions. For example,

Example 1.

Compensation $3,000.00 per month

Medical Insur. 200.00

Net Compensation $2,800.00

FICA 173.60

Medicare Tax 40.60

Federal Withholding 560.00

State Withholding 140.00

Local Withholding 52.50

Total Tax and W/H 966.70

Net Compensation $1,833.30

Take Home Pay $1,833.30

The client has been approached by a consulting firm that claims that the company can shift more of the cost for the medical insurance to the employees by asking the employees to use more of their pre-tax dollars to purchase the insurance while, at the same time, reimbursing the employees (tax-free) for the increase. This is the example the consulting firm uses:

Example 2.

Compensation $3,000.00 per month

Medical Insur. 500.00

Net Compensation $2,500.00

FICA 155.00

Medicare Tax 36.25

Federal Withholding 500.00

State Withholding 125.00

Local Withholding 52.50

Total Tax and W/H 868.75

Net Compensation $1,631.25

Reimbursement 202.05 (tax-free)

Take Home Pay $1,833.30

The employee takes home the same income in Example 1 as she does in Example 2. The consulting firm "pitching" this "scheme" further claims that the employer, incurs the following savings:

Example 3.

FICA/Medicare $45.90

Workers Compensation 3.00

Federal Tax 60.00

State Tax 15.00

Total Savings $123.90/month

Annualized Savings/Employee $1,486.80

Annualized Savings for 100 employees is $148,679.74 (i.e., $1,486.80 times 100).

While this scheme appears to me to be a double-dip not generally authorized by the tax-code, i.e., the first dip is the pre-tax contribution made by the employee and the second dip is the reimbursement of a portion of that pre-tax contribution by the employer (again tax-free), the consulting firm claims that it has set-up this program for a wide-range of clients including a Fortune 500 company.

I have two questions: (1) Has anyone every heard of a program like this and (2) Does anyone else question whether such a scheme is permissible under the tax code?

Thank you for your responses.

[Guest jlcowden]

See response under voluntary benefits posted today 4/13/00.

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jlcowden

[Lisa Hand]

See responses posted under Cafeteria Plans