Reimbursements by an employer for premiums paid by employee via 125 pr

[Guest JFC]

Can an employer reimburse employees (as a tax-free amount on their normal paycheck) for group medical insurance premiums being paid by the employee on a pre-tax basis under a Section 125 Premium Conversion Plan?

Any citations that address this question would be helpful.

[Guest BENEFISH]

Simple answer: No.

Technical answer: The amount withheld on a pre-tax basis (presumably by spouse's employer)is considered by the IRS to be a salary reduction. Mechanically, the employee agrees to a reduction in taxable salary in exchange for an employer payment of premium which is excluded from employee's income. Accordingly,the employer paid the premium and not the employee; thus no reimbursement can be made to the employee in your case. (See IRC Sections 125, 106, and accompanying regulations.)

[Guest JFC]

BENEFISH: Don't understand what you mean by: "(presumably by spouse's employer)". I agree with your answer, but have you ever heard of a "106 Plan"? These plans seem to be providing an arrangement whereby employees CAN be reimbursed tax free. Thanks.

[Guest BENEFISH]

I said "presumably by spouse's employer" because I cannot imagine in my worst state of intoxication a situation where an employee would contribute on a pre-tax basis under his own employer's Section 125 plan and then expect to be reimbursed by his own employer the amount that was just withheld. I can imagine (and have been approached by) an employee who is covered as a dependent under a spouse's plan which requires a contribution. What I was saying is that in that situation, the premium withheld on a pre-tax basis cannot be reimbursed AND also excluded from the employee's income.

Section 106 is the section which excludes employer-paid premium from the income of the employee for whom it was paid. Various private letter rulings and revenue rulings permit employers to reimburse employees for health insurance that they purchase on an individual basis and exclude that payment under Section 106. There are certain conditions which must be met for this to work, but it is not uncommon. In these situations, however, reimbursement is not made for premiums which may have been paid somehow on a pre-tax basis (commonly dependent premium contribution under a spouse's plan). The value of health insurance coverage can only be excluded ONCE under Section 106. As far as my knowledge of a "106 Plan", I assume that you are talking about an arrangement such as the reimbursement scenario I have described here. I do not know it by that name nor have I ever heard anyone call it by that name. But a name means nothing--you could call it a JFC plan if you want. It is the underlying mechanics of income exclusion under the internal revenue code that matters.

[Guest JFC]

BENEFISH: Tap a keg and check out www.mr106.com!

I've read Section 106 and a number of PLR's involving Sections 106, 105, 125 etc., but have yet to find a DEFINITIVE ruling on this specific issue: Can the employer provide a tax-free reimbursement for premiums paid by the employee (for his and/or his dependents group medical coverage) under a 125 premium conversion plan?

[Guest BENEFISH]

JFC, I looked at the website you suggested and found it to be questionable at best. I would like to think that the creator of this plan is ignorant of tax law and tax mechanics and is not intentionally selling this "MR106" plan as a scam. The only DEFINITIVE ruling you will get on your question is in the form of a private letter ruling. I plan to talk to an old friend of mine at the IRS (Key District Director) to get his unofficial opinion, but I will stake many years of professional benefits tax knowledge and experience on an unfavorable opinion.

By means of this post, I respectfully ask CHARLIE STEVENS, LINDA, and any other benefits professionals or attorneys to look at www.mr106.com specifically at the "savings analysis" screen and to post their opinion here.

Issues involve pre-tax "fee for service" (Section 125(f)), and non-taxable reimbursement to employee of amounts paid by employer.

[Guest JFC]

BENFISH: Thank you. Your responses validate my own interpretation of the relevant tax law surrounding this issue. A couple of my clients have been approached by a firm actively marketing this arrangement. My advice has been for them to obtain a PLR before implementing -- although I would also be willing to wager on an unfavorable opinion.

[Linda]

I agree with Benefish. In the typical 125 plan, the employee reduces his/her pay under 125 and the employer provides the coverage. That coverage is not taxable to the employee due to 106. In the Mr. 106 Plan, it seems as if you are trying to use 106 a second time for the same coverage. I think the employer's "reimbursement" of the employee would be taxable (not excludable under 106).

[Guest Randy L]

I also looked at the web site for mr106 and came to the same conclusion as Linda and Mr./Ms. Benefish. I was not previously aware of the product name, but we have been approached by many of our east coast clients regarding the legitimacy of such a scheme. It sounds very appealing to most employers who are looking for ways to save benefits dollars and have run out of fresh ideas. This is a fresh idea, but doesn't smell fresh.

[GBurns]

Benefish. Have you spoken to you old friend at the IRS re the MR106 Plan? I am curious as to what you could have asked him based on limited knowledge of the plan, since they have not been providing in depth info without a confidentiality agreement.A similar situation is reported by EBIA in their Cafeteria Plan Newsletter. The IRS person mentioned there was Mr. Beker who has since said he only answered based on what was read to him from a Paychex brochure on their version of the same plan and not on what the plan really might be. Ask a dumb question and you will get a dumb answer, Ask a proper question and you should get a much more valid answer.

[Guest Sheryl Kopsing]

I understand all the talk about an employee's pretax premium through their employer's group health plan not being reimbursable, but is there anyone out there who can shed some light on how the individual premium works through the premium conversion portion of a 125 plan? Can the employee obtain outside insurance coverage on himself and his dependents and have it deducted from his paycheck by his employer pretax, and then be reimbursed for the same amount? Help is needed, thanks!

[Guest Sheryl Kopsing]

Just to add a note to my last post. I am not referring to the premium reimbursement being made through the medical flexible spending account, but a separate account which would be elected at the beginning of a plan year or upon becoming eligible for the 125 Plan.

[Joe Priselac]

Sheryl,

An employer can establish a separate spending account for individual i.e. non-employer sponsored health insurance premiums.You can not use the health FSA to reimburse a participant for insurance premiums. Our documents include this separate account. The participant makes a separate election for the insurance premium account. Many people use it for college student health insurance premiums. This account is another option under the Section 125 plan that the employer sponsors. This account is not to be confused with the POP account for employer sponsored health insurance that requires an employee contribution.

My comment on the mystical reimbursement plan discussed earlier is that it would not pass muster. When an employee reduces their taxable income via a Section 125 plan, they have traded dollars for benefits. The money used to pay the premiums are technically employer monies; that is why the taxability of disability benefits changes when the premiums are done pre-tax.Why should an employee be reimbursed on a tax free basis for an expense they technically did not pay? I have had this sort of idea run by me before and my argument is that you don't get tax free twice on the same item, but then again what do I know.

[Guest BENEFISH]

George Burns, Yes I have spoken with my old friend at the IRS and have gotten his UNOFFICIAL opinion. I guess what makes it unofficial is that it doesn't mean anything to anyone except him and me. Given the example provided in the MR106 website, all technical experts with whom I have spoken find the product it promotes to be questionable at best if not outright fraudulent. If you find it to be legitimate, I would love to see your explanation of the mechanics which make the same dollars nontaxble twice.

Also, I don't remember asking any dumb questions and it is certainly not my intent to provide dumb answers. Have I done this? It seems that something got your fur up.

[GBurns]

Benefish. I apologize, but I was not calling your question dumb, I was referring to the individual from Paychex who asked Mr Beker at the Symposium to pass judgement on a bad brochure. However, it does seem like a lot of people out there are passing judgement on a sales brochure.I know that I would never buy a car from a brochure or spec sheet and I certainly would not buy Mr106 from a brochure. There is much literature including relevant PLRs etc available on a similar plan. I also know a number of Fortune 1000 Companies that have such plans.

[Guest JFC]

GBurns: Can you cite the relevant PLR's?

[GBurns]

As I once told you before, the information is being treated as proprietary until the receival of patent and copyright and currently the companies involved require a signed confidentiality agreement which you have refused to sign. Ask Paychex if they will share their info with you, freely.If not, do what many others do, search or buy the research software from CCH, BNA etc.

[Guest ptpnthr]

I read the MR106 site. I agree with GBurns that it is hard to know what's going on without reading the plan, but if the concept is what it appears to be, it cannot work.

When an employee signs a 125 election form, that employee makes an irrevocable (subject to exceptions which we all know) election not to be in CONSTRUCTIVE RECEIPT (in accordance with the 125 rules) of the money. The employee never received it and there is nothing to reimburse. If it is somehow being reimbursed then the employee was in constructive reciept and you have a disqualified cafeteria plan. When the employer gives the employee the money that the employer is attempting to reimburse, that is simply a cash payment included in income under Section 61 and wages under 3121, etc. The employee has no basis for excluding it. Again, I have not seen the plan, but if the concept is what it appears to be, it doesn't work. Consider Glenshaw Glass - look at your net worth at the beginning, your net worth at the end, and find a basis for excluding all accumulations to wealth.

[This message has been edited by ptpnthr (edited 10-21-1999).]

[Kirk Maldonado]

I have a question for GBurns. How can you have a proprietary interest in citations to PLRs?

I'm sure that the IRS would be very interested in knowing how you can have an ownership interests in official governmental documents. Are you going to try to charge the IRS a license fee for publishing their PLRs? What an example of capitalism at its finest!

[Guest ptpnthr]

JFC:

To answer your question, the 125 regs allow you to offer benefits excludable under 106. An IRS revenue ruling issued in the 50s or 60s allows you reimburse after tax premiums and exclude them under 106. If it is excludable under 106, it should be able to be run through a cafeteria plan. The ruling may be outdated and so a PLR would be recommended. The distinction between this arrangement and what seems to be the MR106 plan is here your get only your premium pre-tax but with the MR106 plan you get both your premium AND some additional "reimbursement" pre-tax, which can't happen absent some exclusion or deduction.

[Guest ptpnthr]

JFC:

To answer your question, the 125 regs allow you to offer benefits excludable under 106. An IRS revenue ruling issued in the 50s or 60s allows you reimburse after tax premiums and exclude them under 106. If it is excludable under 106, it should be able to be run through a cafeteria plan. The ruling may be outdated and so a PLR would be recommended. The distinction between this arrangement and what seems to be the MR106 plan is here your get only your premium pre-tax but with the MR106 plan you get both your premium AND some additional "reimbursement" pre-tax, which can't happen absent some exclusion or deduction.

[Kirk Maldonado]

The Revenue Ruling mentioned by ptpnthr is Revenue Ruling 61-146.

[GBurns]

Kirk. The PLRs are public record but the method of using them is not.This includes the Plan design, implementation techniques, accounting etc etc. The Prime VEBA case is a case in point, they complied with the Code in plan design but failed in accounting and actuarial areas and so the IRS killed them.Also look at 401(k) plans, all the major players have a proprietary plan which are all copyrighted etc.

[Kirk Maldonado]

GBurns. If you go back and read the prior messages, the question that was posed to you was what are the cites to the PLRs. Your response was that information was proprietary. That was what I was responding to.

[Guest Sheryl Kopsing]

Joe, are you saying then that it is ok to deduct the premium amount pretax and then reimburse the individual the amount of the premium each month as long as it is from a separate account?

[Joe Priselac]

Sheryl,

Yes, I am saying that regarding nonemployer sponsored health insurance.This not to be confused with the MR 106 reimbursement discussion that has been going on concurrently.

[Guest Sheryl Kopsing]

Thanks, Joe!