Section 106 "Double Dipping"?

[SLuskin]

We have been approached yet again by a marketer who claims that under IRC Section 106, an employer can save huge amounts of money by withholding 100% of the health insurance premium on a pretax basis and then also reimburse the employees for that amount on a pretax basis. Does anyone have any experience with this sort of "double dipping"? Thanks.

[Lisa Hand]

Same response as the many other times that this topic has been raised, No double dipping under Section 106.

We actually had the founder and director of Employee Benefits Institute of America respond to this issue the last time it was raised, offering a transcript of the August 1999 ECFC National COnference where Mr. Beker of the IRS addressed this very point and in no uncertain terms said it was not allowed.

[GBurns]

First, we do not know if the plan that S Luskin is referring to is the same plan as before. If we assume that it is and also assume that the salesperson did say that the plan was reimbursing the pre-tax deduction and is not the interpretation of S Luskin from reading the brochure. Then it would be "double dipping" which is not allowed in this case.

However, to be accurate you should be aware that according to the transcript:

What Mr. Beker said was that the plan that was being described to him by Mr. Hickman was not allowed. Mr. Beker never said that any other plan would not work.Mr. Beker has verified what he sais and what he was referring to numerous times. He said that he was only answering the questions asked of him there at that time and not commenting on anything else or any other plan. Although he has stated this many times, I guess he would still take telephone calls to explain what he said and what he was referring to.

[SLuskin]

Thank you both. I did sit through the presentation. The scheme (which seems to me to be the same one that Harry Becker addressed) was to have the employees pay 100% of the insurance premium pretax through a POP plan. Then the employer was reimbursing the employee for the premium using a separate check. That reimbursement was being categorized the same as a mileage reimbursement, not taxable, no 1099, not included in the W2. They said the plan had been endorsed by Arthur Anderson, Peat Marwick and a few law firms. I still did not perceive the difference between this and the ones we have already addressed, in spite of the endorsements. I had also gotten a legal opinion from Fisher and Phillips, one of the labor law firms that we use. Fisher and Phillips also agreed that this scheme couldn't be done.

I guess the point really is that these plans are continuing to be very heavily marketed, and we should be prepared for that.

[GBurns]

The marketing of these products is getting interesting. Did they show you any proof of these alleged endorsements? If they did I would be very surprised, so would AE, PWC and the others. If they did not, did you suggest to your clients that they should reconsider doing business with that sort of person?

Almost all of the programs out there are just as you described and are similar to what Mr. Beker spoke about. they are illegal not only because of the "double dipping" but also because of defective SPD, Plan Document etc, and when sold to many small employers in most states violate either State law or the insurance contract when a mandatory employer contribution is required. I have seen cases where the insurer either cancelled coverage or refused to pay claims because of the contract violation. If the employee assumes to pay 100% of the premium there is no employer contribution.

Almost every one of these that have been cloned requires that the client user send in payroll information that is "recharacterized" by the Plan Administrator and payroll entries are provided. A straight payroll adjustment.This procedure wal outlawed by IRS Notice 84-22 and Announcement 84-44. They were originally referred to as "Zero Balance Plans". If you are just massaging the payroll it is illegal.

If there is some other mechanism or procedure that provides the "make up" amount such as actual medical expenses, then you have a different legal position, that has its own problems.

There are legal plans out there that look similar in the illustration. This what these guys are cloning.

[Guest RWeeks]

Much of the discussing on these "double dipping" programs has focused on Sec 106. Can anyone provide more information on the "Health Incentive Plan (HI Plan)" specifically? My understanding is it utilizes more of Sec 105, and therefor its authors believe they have written the plan in a way that meets IRS guidelines. We have done quite a bit of research, but still cannot seem to find a clear answer either way as to whether or not the "health incentive contribution" would be considered a double dip. I appreciate your responses.

[GBurns]

I keep hearing of people who have done "research" yet no one can say what they researched. Did they research the sales brochure or did they get explanatory material with technical details and legal support or basis information?

What did the authors say that they believe?

The basis for the plans (legal or illegal) has never been 106 but has always included many other areas.