Purchase of individual health coverage

[Guest John Nelson]

If an employee purchases on his own a health insurance policy (e.g., Blue Shield) that covers the employee for expenses of medical care, can the employee be reimbursed for his premium payments under his employer's cafeteria plan? Prop Regs under section 1.125-2 Q&A 7 state that "health FSA may not treat participant's premium payments for "other health coverage" as reimbursable expenses" -- but, I don't know what is meant by "other health coverage". It seems to me that premium is a "medical expense" under Code section 213. Any thoughts, comments? Thanks.

[Guest JPCMPLS]

Individual premiums may be reimbursed through the medical premium conversion(Section 106) option under a Section 125 Plan, but not under the unreimbursed health flexible spending account (Section 105)option. The proposed regulation section 1.125-2 Q&A 7 states, "This paragraph (B)(4) does not prevent premiums for current health plan coverage (including coverage under a health FSA) from being paid on a salary reduction basis through the ordinary operation of the cafeteria plan." Also see Rev. Rul. 61-146 for rules regarding required documentation for non-group premiums paid by employees.

[Guest John Nelson]

Thank you very much for your comments.

[Guest Vicky B]

I'm not real familiar with the Sections you are quoting in your answer (106 or 105) so I hope this doesn't sound stupid. BUT it sounds like you're saying that a current employee can even pay for his Cobra from a previous employer through pre-tax dollars. Am I understanding that correctly? Thanks.

[KIP KRAUS]

I am confused, as vicky. Sect. 105 & 106 seem to relate to amounts paid by employers. Section 105 specifically seems to relate to the person income tax deduction for unreimbursed mediical expenses in excess of 7.5% of adjusted gross Income of the individual. In my opinion, a Section 125 is specifically related to an employer's sponsored plans and the option of an employee to choose non-taxable benefits or cash. Clearly, an individual health policy, not sponsored by an employer, is not an option of benefits or cash. I would not allow COBRA or individual health premiums to be reinbursed via a Section 125 plan. Good Luck

[Guest JPCMPLS]

Please read the Rev. Rul. cited on 1/5 - Rev. Rul. 61-146. This ruling states that reimbursement of individual health insurance premiums pursuant to a formal accountable plan will qualify as an employer sponsored plan for purposes of Code Section 106. Cafeteria plan rules specifically reference Section 106 benefits as qualified benefits. Hopefully this clears things up a little. As far as COBRA premiums are concerned, several years ago Harry Beker

of the Treasury Department responded to this question at a continuing education seminar and informally suggested that he did not see a specific problem with this so long as the reimbursement is not from the medical spending account. However, I have been reluctant to advise clients to amend plans to permit this until the IRS issues official guidance on this.

[KIP KRAUS]

JPCMPLS:

I wish I could get a copy of Rev. Rul. 61-146, because I just read an article by IOMA published in November 97 entitled The 7 Most Common Filing Errors IRS Flex Audits Uncover. In this article they said that one problem with compliance was individual premiums being reimbursed through flexible spending accounts. They sited Regulation 1.125-2 Q&A 7(b)(4) and Revenue Ruling 61-146 saying that such a practice was not permissible. I haven't read either siting yet. .I can't find R. V. 61-146. All of the IRS web sites I go to Don't have R.Vs past 90. Could you suggest a site where I might find it? Or, if you have a copy, maybe you could fax it to me. My fax # is 716-768-5145.

Any help would be appreciated so that I can clear this matter up in my mind. Thanks

[Lisa Hand]

Kip: We are not talking about running individually owned insurance through a FSA, that is not permitted. However, JPCMPLS is talking about running the premiums through the Section 125 Plan as a separate non-FSA option.

[KIP KRAUS]

Lisa

Can you give me an example? I know individully owned policies can't be paid through an FSA, but what are you referring to as a non-FSA? John Nelson's original question seemed to me to be related to an individually owned policy.

[Lisa Hand]

A premium payment portion of a cafeteria plan which would either function like the group health benefit or be processed through a TPA can offer coverage under individual health insurance policies, provided that coverage is excludable under Code 106. The Preliminary Draft IRS Examination Guidelines recognize that individual policies amy be offered through a cafeteria plan. It is the sponsoring employer's choice whether or not to offer this option, since it may present additional compliance issues.

[KIP KRAUS]

Thanks Lisa. That's what I was thinking.

[Guest G Burns]

Can you explain the "medical premium conversion" referred to by J PCMPLS on 1/05/99 ? How is it set up? Please describe the flow of the premium. Where can I find the Preliminary Draft IRS Examination guidelines?

[Joe Priselac]

You can reimburse employees for individual health insurance premiums. It is true that the health care FSA can not be used for this purpose. We therefore write our plan document to create a separate account that requires a separate election. The employees turn in evidence of premium payments and get reimbursed tax-free. The uniform coverage rules pertaining to Health FSA don't apply so we operate the account analogus to a dependent care FSA.JPCMPLS is right on the mark as far as justification for this approach. We have discussed this approach with Harry Beker and he repeated his earlier position. He is as good as it gets right now.

[Guest JPCMPLS]

Thanks for clarifying my earlier point. I have had numerous arguments with insurance brokers/consultants over the years on the viability of this approach, but have not had one of these plans challenged by the IRS or a client's CPA firm. Prior to recent group insurance reforms and HIPAA, small employers (including many non-profits)often could not get group health contracts at a reasonable premium. Allowing employees to run individual policy premiums through a 125 plan proved to be a significant benefit to low paid workers.

[SLuskin]

I agree with Joe. We have a separate individual premium account in our documents. The employee (not the spouse or the dependent) must be the owner of the policy. COBRA is a different issue, and the interpretations seem to be tightening. I attended an EBIA conference, and COBRA premiums of spouses are definitely prohibited. COBRA premiums to a former employer are a gray area. COBRA premiums you pay for a dependent who came off the health insurance (not a full time student anymore, for example) can be run through.

[Guest R Jermier]

1/13/99 Lisa posted an answer that referred to "additional compliance issues" that might arise from allowing individual insurance premiums to be paid through the premium portion of a Cafeteria Plan. What would those issues be?

[Guest wsweeney]

If I understand this correctly, and employer can amend or design a cafeteria plan to include the option of reimbursing employees for individual health premiums. The employee will have the cost deducted from their paycheck on a pre-tax basis, then the employer can reimburse the employee for that premium. This is where I am a little confused. Does the employer have to set up a separate account to fund these reimbursements or can the employer add the reimbursement back in the paycheck as non-taxable income?

[Lisa Hand]

R. Jermier - offering individual policies through a cafeteria plan may present compliance issues under ERISA, COBRA, FLMA ect, if the individual policy is deemed to be an employer-provided benefit. Careful consideration should be given to the wording of the plan document to address these concerns.

wsweeney - no, premiums are not put back into the employee's check. Joe P. gives an excellent description of the process in his above answer.

[Guest G Burns]

I have not seen anything in 125, ERISA, COBRA, FMLA or anywhere that ever said that employer provided coverage has to be a Group plan. There are numerous employer plans with individual products.The reason that Group plans are dominant is for Guaranteed Issue or Simplified Issue, nothing else.