Can a 105 Plan be written to cover only the HC/Key employees of a comp

[Guest Liz Klym]

A company of 25 employees has 5 that are HC. They currently pay all the health premiums for all employees. They are changing this so that the NHCE's have to pay a portion of their own premiums. But the HC's will still be paid by the company. Now, the company wants to also pay all unreimbursed medical expenses for the HC's but not for the NHCE's. Question: Can this group set up a 125 plan for the NHCE's and a 105 for the HC's? The 105 would then reimburse the HC's for all medical expenses not covered by insurance. If this isn't feasible, what alternative does this company have, when what they want to do is continue to benefit the HC's fully, but not the NHCE's?

[Linda]

Payment of unreimbursed medical expenses for the HCEs is a problem under 105(h).

[Guest Jeff Kropp]

Since fully insured medical plans are no longer subject to discrimination testing (after the repeal of §89 of the Internal Revenue Code) perhaps the company could purchase and fund a separate insurance plan solely for highly compensated employees. Of course, the policy would have to meet any state law requirements with regard to eligibility.

[Kirk Maldonado]

The "insurance" policies that I've seen that are designed for this purpose generally would not satisfy the "risk-shifting" criterion of the regulations under Section 105(h).

[Guest BENEFISH]

I agree with Kirk. There are plans sold for purposes of providing "executive reimbursement" as fully-insured benefits, thereby avoiding nondiscrimination rules under 105(h). These plans often fail to satisfy the IRS' risk-shifting characteristics. I watch my rather substantial back side when it comes to those plans. I also agree with Linda to an extent. Payment of unreimbursed medical expenses for the HCEs when Non HCEs are not eligible fails the 105(h) tests. The "problem", however, is a prohibition of the exclusion from income for the reimbursements, not a prohibition of the practice itself. The benefits paid under such a plan are taxable to the HCEs. The HCEs may still rather pay the tax on the reimbursement than to pay the medical bill in its entirety. (example: medical bill of $100 means tax of $31. What's better, $100 or $31?) Also, the company could decide to gross-up the reimbursement for the tax effect. I hope I haven't confused you as much as I have confused myself.