Employee Premiums for Health Insurance Without Cafeteria Plan

[mal]

Can an employee share of a health insurance premium be handled on a pre-tax basis without a Cafeteria plan? Employees do not have a choice between cash and the health coverage. All must participate and the only benefits offered are covered by 213(d).

Thanks in advance. 

[Brian Gilmore]

How could there be no employee choice between cash and health coverage? You would have state wage withholding problems if you forced participation in a plan with employee contributions.

In other words, there always is going to be the choice between cash and the health plan, which is why you need the Section 125 cafeteria plan safe harbor from constructive receipt to facilitate pre-tax contributions.  It's the only game in town.

• Full details: https://www.newfront.com/blog/the-section-125-safe-harbor-from-constructive-receipt

Cite:

Prop. Treas. Reg. §1.125-1(b)(1):

(1) Cafeteria plans. Section 125 is the exclusive means by which an employer can offer employees an election between taxable and nontaxable benefits without the election itself resulting in inclusion in gross income by the employees. 

Slide summary:

2023 Newfront Section 125 Cafeteria Plans Guide

[401 Chaos]

FWIW, I agree with Brian Gilmore's post. 

I don't know about the OP's exact fact pattern and this isn't what is described there given the reference to "employee share" but I think there are some employers out there who cover 100% of premiums without giving any additional cash if an employee declines coverage, etc.  I suppose in those cases there could be tax-free, employer provided coverage without a cafeteria plan and the employer might think of the "employee's share" as basically being built into their salary.

[mal]

These employees are collectively bargained. The CBA states that 100% of the employees will participate in the plan. The only choice is between single or family coverage. 

[QDROphile]

401 Chaos indicated a path that could provide some tax advantage, but given the way the CBA describes the financing, it might difficult to make it understandable and fit expectations and the language on the table. Among other things, what I am imagining, without thinking through all the details, would appear to affect compensation as opposed to just provide tax benefits. That could could get sticky, especially when a union is involved. In my experience, unions do not have much capability or tolerance for nuance, such as pareto optimality/efficiency.  To illustrate, assuming single coverage is a fixed amount, the employer would decrease nominal taxable wage compensation by that amount across the board (might be impossible with hourly employees) and then increase tax free compensation by covering that amount of healthcare premium for everyone. Anyone wishing to buy up to extra family coverage would have to do that after tax. Does anyone want to reopen bargaining to that end? 

[Brian Gilmore]

Interesting situation with the CBA mandate through collective bargaining eliminating the choice aspect.

If there is a difference in the "employee contribution" for employee-only vs. family coverage, wouldn't there still be a choice between taxable cash and qualified benefits for those employees with a family?  In other words, couldn't employees with a family choose the employee-only tier in order to receive more in taxable cash?  Or do employees with dependents have to enroll the family?

If you there is no difference in cost between EE-only and family--or if there is a cost difference but employees can't choose to drop down to EE-only coverage if they have a family--my take would be that no cafeteria plan is needed or even possible in that situation because of the lack of choice (i.e., no taxable cash option).  The "employee contributions" would simply be treated in the same manner as an employer contribution that is excluded from income under §106. 

Prop. Treas. Reg. §1.125-1(b)(4):

(4) Election by participants.

(i) In general. A cafeteria plan must offer participants the opportunity to elect between at least one permitted taxable benefit and at least one qualified benefit. For example, if employees are given the opportunity to elect only among two or more nontaxable benefits, the plan is not a cafeteria plan. Similarly, a plan that only offers the election among salary, permitted taxable benefits, paid time off or other taxable benefits is not a cafeteria plan. See section 125(a), (d). See §1.125-2 for rules on elections.

[mal]

Thanks for the input. It turns out that the CBA requires 100% participation and requires a fixed dollar employee contribution per pay period. The employee share is the same regardless of their coverage tier (single, single plus one, family). I don't see any constructive receipt issues. 

The next argument from the employer is that not all benefits offered by the plan are 213(d) expenses, and therefore the employee contribution cannot be paid pre-tax. My experience has been that the employee/employer contributions are still made on a pre-tax basis, but any taxable benefits (short term disability, etc.) are taxable if/when received.