Guest GARNETT Posted April 1, 2000 Posted April 1, 2000 A client sponsors a medical insurance plan for its employees. The employees pay for a portion of the medical insurance with pre-tax contributions. For example, Example 1. Compensation $3,000.00 per month Medical Insur. 200.00 Net Compensation $2,800.00 FICA 173.60 Medicare Tax 40.60 Federal Withholding 560.00 State Withholding 140.00 Local Withholding 52.50 Total Tax and W/H 966.70 Net Compensation $1,833.30 Take Home Pay $1,833.30 The client has been approached by a consulting firm that claims that the company can shift more of the cost for the medical insurance to the employees by asking the employees to use more of their pre-tax dollars to purchase the insurance while, at the same time, reimbursing the employees (tax-free) for the increase. This is the example the consulting firm uses: Example 2. Compensation $3,000.00 per month Medical Insur. 500.00 Net Compensation $2,500.00 FICA 155.00 Medicare Tax 36.25 Federal Withholding 500.00 State Withholding 125.00 Local Withholding 52.50 Total Tax and W/H 868.75 Net Compensation $1,631.25 Reimbursement 202.05 (tax-free) Take Home Pay $1,833.30 The employee takes home the same income in Example 1 as she does in Example 2. The consulting firm "pitching" this "scheme" further claims that the employer, incurs the following savings: Example 3. FICA/Medicare $45.90 Workers Compensation 3.00 Federal Tax 60.00 State Tax 15.00 Total Savings $123.90/month Annualized Savings/Employee $1,486.80 Annualized Savings for 100 employees is $148,679.74 (i.e., $1,486.80 times 100). While this scheme appears to me to be a double-dip not generally authorized by the tax-code, i.e., the first dip is the pre-tax contribution made by the employee and the second dip is the reimbursement of a portion of that pre-tax contribution by the employer (again tax-free), the consulting firm claims that it has set-up this program for a wide-range of clients including a Fortune 500 company. I have two questions: (1) Has anyone every heard of a program like this and (2) Does anyone else question whether such a scheme is permissible under the tax code? Thank you for your responses.
IRC401 Posted April 2, 2000 Posted April 2, 2000 What is the basis for a tax-free cash distribution to the employee? Am employer may reimburse employees for medical expenses on a tax free basis, but that is not what is happening in your example. When an employee makes an election under under 125 plan, he elects to reduce his salary in exchange for the employer paying his medical expense (or premium). If the employer is paying the entire insurance premium, there is nothing to reimburse the employee for. [For the same reason you may not claim a child care credit for expenses run through a 125 plan.] The employer could give an additional credit against uninsured expenses. Any cash distribution is taxable. Please make my day and tell me a "Big Five" accounting firm is selling this one.
GBurns Posted April 2, 2000 Posted April 2, 2000 There are apparently three (3) such programs out there. On the face the illustrations are similar but the plans are very different. One, from Paychex, actually does state that it is reimbursing the amount deducted pre-tax, a situation which cannot be supported even by them. The second, called MR106, is being sold mainly in the Cleveland and Cinncinatti areas is a little different but has not been able to provide any material to support the plan design. The main program is the Health Incentive Plan which seems to have a lot of documentation and PLRs etc to support the various plan designs. In any case, based on what you wrote, I dont think you got the full explanation of how the plan works. You seem to be following a brochure or sales literature. Just as you dont buy a car or a house by looking at the brochure, you should not be able to pass any meaningful judgement without further details. you could compare this statement to an employer deciding to implement a 125 cafeteria plan after looking at only the brochure. What happens regarding funding method, eligibility, product offering, FSA admin etc etc etc are not in a brochure and this info is found elsewhere. Any plan out there is no different. George D. Burns Cost Reduction Strategies Burns and Associates, Inc www.costreductionstrategies.com(under construction) www.employeebenefitsstrategies.com(under construction)
Lisa Hand Posted April 3, 2000 Posted April 3, 2000 The Employee Benefits Institute of America had a very good article on this subject in their September 1999 Cafeteria Plans Current Developments and in their legal guide update from the same time period. It is very clear from both that this is not a valid use of the IRC. They also quoted Mr. Beker from the August Symposium specifically addressing this issue and saying that employees can not receive tax-free reimbursement for employer paid coverage.
GBurns Posted April 3, 2000 Posted April 3, 2000 I dont agree that the article or the reprint in the legal guide were any good. They both addressed a scenario created by the author and which is used in part by two of the plans but not the third.The article then went on to cite Rev Rul 61-146 claiming that this is the authority under which the plans operate. None of the plans make that claim. As a result the article has very little accuracy or relevance to the actual plans but relate only to the hypothetical scenario created by the author. The article also misquotes Mr. Beker. a transcript of the actual conversation was made and can be requested from the sponsors or from Mercer. In the transcript Mr Beker said "I haven't seen any of these questions, so I am trying to follow them as well as I can.". This was in response to the his being asked to comment on the scenario created by the moderator. Mr Beker went on to criticize the use of 61-146 in the depicted scenario etc. He did not comment on any of the plans on the market, he only commented on the scenario presented and the questions asked. George D. Burns Cost Reduction Strategies Burns and Associates, Inc www.costreductionstrategies.com(under construction) www.employeebenefitsstrategies.com(under construction)
Lisa Hand Posted April 3, 2000 Posted April 3, 2000 Any employer considering one of these programs should seek an opinion from their attorney. After an additional review of the article and legal guide section, I do not believe it was narrowly focused and would not advise my clients to operate in this type of gray area without written legal opinion and written approval from the IRS.
SLuskin Posted April 3, 2000 Posted April 3, 2000 A number of our clients have also been approached with this MR106 Plan. We sought (and paid for) an opinion from Benefits Lawfirm of Fisher & Phillips. The opinion that we have says that such double dipping is not permissible. Aside from the attorney opinion, if the employer reimburses this expense, how does it not become part of salary for FSLA purposes, for calculation of overtime, for payment of workers comp premiums, etc.
GBurns Posted April 4, 2000 Posted April 4, 2000 Lisa...I never suggested that they were narrowly focused. I said that they were no good. They depict a scenario created by the author for his article and not the scenario of the plans per se. They also misquote Mr Beker. To make an additional review of them seems pointless if you have no info on the plans nor the transcript of what Mr Beker really said. SLuskin...How did Fisher & Phillips perform an evaluation without info on the plan? Did you pay them to review just the brochure? George D. Burns Cost Reduction Strategies Burns and Associates, Inc www.costreductionstrategies.com(under construction) www.employeebenefitsstrategies.com(under construction)
Guest gsmith Posted April 11, 2000 Posted April 11, 2000 quote: Originally posted by GARNETT: A client sponsors a medical insurance plan for its employees. The employees pay for a portion of the medical insurance with pre-tax contributions. For example, Example 1. Compensation $3,000.00 per month Medical Insur. 200.00 Net Compensation $2,800.00 FICA 173.60 Medicare Tax 40.60 Federal Withholding 560.00 State Withholding 140.00 Local Withholding 52.50 Total Tax and W/H 966.70 Net Compensation $1,833.30 Take Home Pay $1,833.30 The client has been approached by a consulting firm that claims that the company can shift more of the cost for the medical insurance to the employees by asking the employees to use more of their pre-tax dollars to purchase the insurance while, at the same time, reimbursing the employees (tax-free) for the increase. This is the example the consulting firm uses: Example 2. Compensation $3,000.00 per month Medical Insur. 500.00 Net Compensation $2,500.00 FICA 155.00 Medicare Tax 36.25 Federal Withholding 500.00 State Withholding 125.00 Local Withholding 52.50 Total Tax and W/H 868.75 Net Compensation $1,631.25 Reimbursement 202.05 (tax-free) Take Home Pay $1,833.30 The employee takes home the same income in Example 1 as she does in Example 2. The consulting firm "pitching" this "scheme" further claims that the employer, incurs the following savings: Example 3. FICA/Medicare $45.90 Workers Compensation 3.00 Federal Tax 60.00 State Tax 15.00 Total Savings $123.90/month Annualized Savings/Employee $1,486.80 Annualized Savings for 100 employees is $148,679.74 (i.e., $1,486.80 times 100). While this scheme appears to me to be a double-dip not generally authorized by the tax-code, i.e., the first dip is the pre-tax contribution made by the employee and the second dip is the reimbursement of a portion of that pre-tax contribution by the employer (again tax-free), the consulting firm claims that it has set-up this program for a wide-range of clients including a Fortune 500 company. I have two questions: (1) Has anyone every heard of a program like this and (2) Does anyone else question whether such a scheme is permissible under the tax code? Thank you for your responses. I have also seen this plan and have researched all I could. I am curious about other opinions on the legality of this program. Personally, I can not find anything wrong with it. Any feedback would be appreciated.
Guest Thomas P. McCormick Posted April 12, 2000 Posted April 12, 2000 I am the Director of EBIA and a co-author of the Cafeteria Plans manual. EBIA never misquotes anyone. Here's the full exchange at the August conference, at which John Hickman, another co-author of our Cafeteria Plans manual, asked Mr. Beker for his views about so-called 106 plans. John: Looking out across the universe of benefit offerings that are out there, there's one scenario that we've seen recently marketed. A situation in which an employer may provide health coverage to employees and let's say that health coverage costs $200 a month. Currently, before the arrangement is put in place, the employee pre-taxes $100 of that through a valid cafeteria plan ... salary reduction election and the employer pays the other $100 as an employer-funded 106 benefit. Now we've seen arrangements marketed out there where essentially what happens is the employee will pay the premium portion paid by the employer, the $100 paid by the employer, and then be reimbursed tax-free by the employer for that $100 conceptually or presumably under revenue ruling 61-146. Is that type of arrangement one that you all are familiar with? Is that something you're able to comment on? Harry: I haven't seen any of these questions, so I'm trying to follow them as well as I can. 61-146 involves an employer that had a group health benefit that he made available to employees. He also did something rather interesting. He said: those employees who don't like what I'm offering can go out on their own and contract for individual coverage. Give me your premium statements and I will reimburse you for those premium amounts. And what the ruling says is that is a good 106-- accident and health plan. Same as if the employer was paying the premiums on his group health plan. I think in this particular, if I understand this example, what we have here is double-dipping. The employer can only pay the premiums once and get a 106-exclusion or the employee can only get his premiums paid once and get a 106-exclusion. I wasn't sure exactly what was going on but it seemed to me that up front the employee took the 106-exclusion and then subsequently, somewhere down the example, he got reimbursed again for the same amount. That's two 106-exclusions and obviously that's not permissible. I am off, somewhere? John: I think the analysis is a situation where you've got maybe $200 worth of premium. The $100 employer paid, the $100 employee paid and through this arrangement effectively, a $300 exclusion, $100 for the employee paid portion, $100 for the employer paid portion reimbursed to the employee, and $100 for the employer paid portion. Harry: I've seen something like this where you have a cafeteria plan, that the employee let's say salary reduces for $200 and the $200 goes for the premiums and then down the road, the employer reimburses the employee for the $200 that the employee previously salary reduced. That's double-dipping! They don't understand, there is some miscommunication here. When an employee salary reduces, those amounts are deemed to be employer contributions. Those are employer amounts. They're not employee amounts. Once the employee decides to salary $200 to pay for accident/health insurance. That is not the employee's money anymore. It is the employer's money and that is the only reason it's excludible from gross income, because 106 says employer provided accident and health coverage is excludible. The Code doesn't say employee provided accident health coverage is excludible. It has to be employer. So there's a fiction created that when you salary reduce we will treat those amounts as employer amounts and that's the only reason we don't include those amounts in your gross income. So if you're salary reducing and then getting those amounts excluded and then getting reimbursed, those are two 106-amounts and that doesn't work.
Lisa Hand Posted April 13, 2000 Posted April 13, 2000 Thomas - thank you for clarifying that point. At this point, it seems pretty clear "double-dipping" is not permitted.
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