Employer stops med. ins. icreases wasges Non Taxable

[mrichman333]

Ok, I just got a call.  A small business stopped providing medical insurance because  of increases but increased this persons salary by what  the employer was paying in premiums.   The first paystub shows the increase as non taxable income.

How dos that work???

[ILLMAS]

No more pre-tax premiums for individual insurance policies?

• Stinson Leonard Street LLP
• Angela M. Bohmann
• USA
• October 10 2013
• 

Author page »

Over the years we have seen some employers, particularly small employers, choose to provide health coverage to their employees by paying all or part of the premium for individual insurance policies that the employees have obtained. Under an old IRS revenue ruling, Rev. Rul. 61-146, that type of premium subsidy could be provided on a pre-tax basis so long as the employer either paid the insurance company directly or reimbursed the employee for the cost of the coverage. Some employers have been considering that model for providing coverage to employees under the Affordable Care Act (“ACA”). Employers were hoping that by providing funds to employees to purchase coverage on the individual market, the employer could avoid the penalty for failure to offer coverage while limiting the employer’s cost. In recently issued guidance, the IRS and the Department of Labor have essentially said no to this alternative.

 

Source:  http://www.lexology.com/library/detail.aspx?g=1c3010c3-033f-4421-9749-d67e43140961

[mrichman333]

So as long as the employee actually uses the money for heath insurance and the employer classifies it as a reimbursement for such it is non taxable

[grmy2h]

It is taxable.

[Jack from Ohio]

So as long as the employee actually uses the money for heath insurance and the employer classifies it as a reimbursement for such it is non taxable

It is taxable.  This is specifically stated in the ordinances.  The employee can deduct the insurance premiums on Schedule A.

[mrichman333]

His paystub has it listed as non-taxable.   How would you advise him?

 

Then what the point of  Section 105 for reimbursement of the premiums paid for individual ("personal") health insurance policies

 

http://www.zanebenefits.com/blog/can-employers-reimburse-employees-individual-health-insurance-in-2014

[mrichman333]

Then according to this if the employer sets it up correctly it is not taxable

 

https://www.tasconline.com/biz-resource-center/plans/health-reimbursement-plan/

[kcjenkins]

The  105 plan is still allowed, but it has to be done right.  You must have an actual 105 Plan set up, you can't just reimburse the workers and call it non-taxable.  Although Treasury Regulations do not specifically require that accident or health plans be in writing, a number of court decisions have made it clear that it is imperative that a corporation, by a resolution adopted by its Board of Directors, formally establish certain rules and regulations governing payment of benefits and that these rules be communicated to the employees involved as a definite policy of the corporation. Without such a written plan, deductions can be lost, premiums may become taxable income, and benefits can lose their tax shelter.

 

Presumably, all medical reimbursement plans will need to be in writing in order to satisfy the IRS that nondiscrimination requirements have been met. Also, Title I of the Employee Retirement Income Security Act (ERISA) requires that a written instrument establish Employee Welfare Plans. And any plan providing medical, surgical or hospital care, sickness or accident benefits, or disability benefits is an Employee Welfare Plan and is subject to ERISA requirements.

 

Most commonly used by self-employed, they can be used for employee reimbursement.  There are rules as to non-discrimination and to the percentage covered, etc.

 

 

 

http://www.law.cornell.edu/cfr/text/26/1.105-11

 

http://www.benefitplans.com/Employee_Benefits/Sec_105/Sec_105_intructions.asp

[Jack from Ohio]

Then according to this if the employer sets it up correctly it is not taxable

 

https://www.tasconline.com/biz-resource-center/plans/health-reimbursement-plan/

What do the recent rulings by the IRS say?  Forget the opinions of non-tax companies.

 

It is taxable to the employee.  He can deduct the premiums on Schedule A.

 

Tell his employer to get his payroll people trained and updated and make the necessary changes.

 

IRS regs and rulings trump any "opinions" by other groups or agencies.

[mrichman333]

What do the recent rulings by the IRS say?  Forget the opinions of non-tax companies.

 

It is taxable to the employee.  He can deduct the premiums on Schedule A.

 

Tell his employer to get his payroll people trained and updated and make the necessary changes.

 

IRS regs and rulings trump any "opinions" by other groups or agencies.

 

The employer uses ADP

[kcjenkins]

Then most likely they have set up a proper 105 Plan.  

[mrichman333]

^{OK, I'm confused!!!!   I'm looking at pub 969 page 17}

 

^{http://www.irs.gov/pub/irs-pdf/p969.pdf}

 

 

^{"A health reimbursement arrangement (HRA) must be funded solely by an employer. The contribution cannot be paid through a voluntary salary reduction agreement on the part of an employee.}

 

^{Employees are reimbursed tax free for qualified medical expenses up to a maximum dollar amount for a coverage period. An HRA may be offered with other health plans, including FSAs......... there are no reporting requirements for HRAs on your income tax return."}

 

^{"What are the benefits of an HRA? You may enjoy several benefits from having an HRA.}

Contributions made by your employer can be excluded from your gross income"

[kcjenkins]

The IRS issued Notice 2013-54 on September 13, 2013, eliminating the opportunity for employers to reimburse most medical costs in all but limited circumstances. The change is effective for plan years beginning on or after January 1, 2014. The notice eliminates an employer’s ability to use a stand-alone medical reimbursement plan, health reimbursement arrangement (HRA), or other tax-favored arrangements, such as a cafeteria plan, to help employees pay for individual health insurance policies or other out-of-pocket medical costs.

 

The notice does this by pointing out that these arrangements would fail to satisfy the Affordable Care Act’s (ACA) market reform provisions requiring no dollar limits on essential health benefits and no-cost preventive health services. For example, the market reforms prohibit any limit on certain essential health benefits. But stand-alone Section 105 plans limit the amount for which an employee may seek reimbursement. The sanction for violating these rules is a punitive $100-per-day, per-employee penalty, or $36,500 per participant per year — effectively a total prohibition.

 

Section 105 plans are still permitted for ancillary benefits such as dental and vision coverage, long-term care, and disability coverage, because these are not part of essential health benefits. An employer may still provide pre-tax dollars to the employees in a manner that is exempt to the employee for these reimbursements.

 

The requirement for unlimited covered benefits does not apply to one-employee medical reimbursement plans. Businesses that have only one employee may continue to offer this benefit. In a very small business in which a family member is the owner’s spouse, the medical reimbursement plan may cover the spouse and dependents of the employee, and thus include the business owner. In this manner, medical expenses, in addition to medical insurance, can be provided on a tax-deductible basis. But Section 105 plans must meet nondiscrimination rules, so these one-employee plans are only practical where there are no other regular employees in the family business.

 

A Section 105 plan that is coordinated with insurance coverage, so that the combined arrangement provides an ACA-approved group health plan, is permitted if the benefits provide coverage that meets the ACA market reform requirements of unlimited benefits and no-cost preventive services. But a key condition must be met: Each participant in the medical reimbursement plan must be enrolled in the health insurance plan.

 

These restrictions regarding Section 105 plans are summarized in IRS Notice 2013-54.  Warning, reading this notice may cause illness and/or suicidal thoughts!  [my warning]

 

We do not know enough details to know whether this individual's W-2 is correct or not.  Jack is assuming that it's not, which is reasonable, but since it is still possible I'm basing my 'could be' on the fact that ADP usually errs on the cautious side, and we don't know any real details.  Hope this helps, Rich.   

[mrichman333]

The IRS issued Notice 2013-54 on September 13, 2013, eliminating the opportunity for employers to reimburse most medical costs in all but limited circumstances. The change is effective for plan years beginning on or after January 1, 2014. The notice eliminates an employer’s ability to use a stand-alone medical reimbursement plan, health reimbursement arrangement (HRA), or other tax-favored arrangements, such as a cafeteria plan, to help employees pay for individual health insurance policies or other out-of-pocket medical costs.

 

The notice does this by pointing out that these arrangements would fail to satisfy the Affordable Care Act’s (ACA) market reform provisions requiring no dollar limits on essential health benefits and no-cost preventive health services. For example, the market reforms prohibit any limit on certain essential health benefits. But stand-alone Section 105 plans limit the amount for which an employee may seek reimbursement. The sanction for violating these rules is a punitive $100-per-day, per-employee penalty, or $36,500 per participant per year — effectively a total prohibition.

 

Section 105 plans are still permitted for ancillary benefits such as dental and vision coverage, long-term care, and disability coverage, because these are not part of essential health benefits. An employer may still provide pre-tax dollars to the employees in a manner that is exempt to the employee for these reimbursements.

 

The requirement for unlimited covered benefits does not apply to one-employee medical reimbursement plans. Businesses that have only one employee may continue to offer this benefit. In a very small business in which a family member is the owner’s spouse, the medical reimbursement plan may cover the spouse and dependents of the employee, and thus include the business owner. In this manner, medical expenses, in addition to medical insurance, can be provided on a tax-deductible basis. But Section 105 plans must meet nondiscrimination rules, so these one-employee plans are only practical where there are no other regular employees in the family business.

 

A Section 105 plan that is coordinated with insurance coverage, so that the combined arrangement provides an ACA-approved group health plan, is permitted if the benefits provide coverage that meets the ACA market reform requirements of unlimited benefits and no-cost preventive services. But a key condition must be met: Each participant in the medical reimbursement plan must be enrolled in the health insurance plan.

 

These restrictions regarding Section 105 plans are summarized in IRS Notice 2013-54.  Warning, reading this notice may cause illness and/or suicidal thoughts!  [my warning]

 

We do not know enough details to know whether this individual's W-2 is correct or not.  Jack is assuming that it's not, which is reasonable, but since it is still possible I'm basing my 'could be' on the fact that ADP usually errs on the cautious side, and we don't know any real details.  Hope this helps, Rich.   

 

 

Thanks.   I'm telling him if his paystub says it's nontaxable it's nontaxable don't worry about it.

[Jack from Ohio]

Thanks.   I'm telling him if his paystub says it's nontaxable it's nontaxable don't worry about it.

If he gets a CP2000 or other notice, guess who he is going to blame....  Dangerous game to base your recommendations on third party opinions.

[jklcpa]

We do not know enough details to know whether this individual's W-2 is correct or not.  Jack is assuming that it's not, which is reasonable, but since it is still possible I'm basing my 'could be' on the fact that ADP usually errs on the cautious side, and we don't know any real details.  Hope this helps, Rich.   

 

 

I agree that we don't know whether or not the W-2 is correct or not, and neither does mrichman333. I also think Jack's assumption is reasonable and the client should be able to provide, or obtain, a copy of the HRA plan summary if a proper plan really exists.

[Jack from Ohio]

I agree that we don't know whether or not the W-2 is correct or not, and neither does mrichman333. I also think Jack's assumption is reasonable and the client should be able to provide, or obtain, a copy of the HRA plan summary if a proper plan really exists.

I heard Karen Hawkins speak at 3 seminars in Chicago.  "If you know, or should have known, you will be held responsible for submitting inaccurate information to the IRS."

 

She acts like she has no one to answer to and can do pretty much anything she wants.   Documentation for this kind of situation, if ever audited, falls to the taxpayer AND the preparer.  She is a very frightful person that no one seems to want to rein in.

[Pacun]

I wonder what our responsibility is in regarding to wrong W-2s. Should we questions the entries on the W-2?

 

Let's say that an employee shows me a W-2 with box 1 $60000 and Box 3 and 5 $70,000. So I see $10K missing somewhere, I see that the employer lists $10K with code D. So I know that this is some sort of a retirement plan. Should I ask the employee to get a copy of the plan so that I can make sure that it set up correctly and if not, the $10K should be taxable. Most of the time, I don't correct W-2s and I enter the numbers on ATX as shown on the W-2.

[mrichman333]

I wonder what our responsibility is in regarding to wrong W-2s. Should we questions the entries on the W-2?

 

Let's say that an employee shows me a W-2 with box 1 $60000 and Box 3 and 5 $70,000. So I see $10K missing somewhere, I see that the employer lists $10K with code D. So I know that this is some sort of a retirement plan. Should I ask the employee to get a copy of the plan so that I can make sure that it set up correctly and if not, the $10K should be taxable. Most of the time, I don't correct W-2s and I enter the numbers on ATX as shown on the W-2.

 

I agree.  But this person is also a friend and tells me his boss is clueless and could not answer any questions.   If it turns out it is taxable down the road and he has to pay back taxes on it, it will be a burden for him.

 

I also would like to understand this issue so I can advise people if they ask.

[Jack from Ohio]

I agree.  But this person is also a friend and tells me his boss is clueless and could not answer any questions.   If it turns out it is taxable down the road and he has to pay back taxes on it, it will be a burden for him.

 

I also would like to understand this issue so I can advise people if they ask.

I have a steak dinner that says it is taxable.  A "clueless" boss would not even understand "105 Plan" much less have one in place.  The boss is operating on "Barbershop" tax information.  Just remember, if you know (no matter how you found out) that the information on the return is inaccurate, you are open to preparer penalties. 

[mrichman333]

Jack, your right about the boss, I'm sure he has no idea of how to set things up.

 

One thing I didn't point out though was this employer has under 50 full time employees so he is not subject to the ACA.  Does that make a difference?

[Jack from Ohio]

Jack, your right about the boss, I'm sure he has no idea of how to set things up.

 

One thing I didn't point out though was this employer has under 50 full time employees so he is not subject to the ACA.  Does that make a difference?

Nope.

[kcjenkins]

Jack, your right about the boss, I'm sure he has no idea of how to set things up.

 

One thing I didn't point out though was this employer has under 50 full time employees so he is not subject to the ACA.  Does that make a difference?

Can you get any info from ADP?  

[jklcpa]

Even if ADP wasn't administering the plan, it's possible that a smart customer service rep would catch this and code it to be reported as taxable wages, BUT I've also had dealings with the less-than-smart reps that will report the compensation which ever way the client tells them.

 

mrichman333, it doesn't make any difference about the 50-or-less employees, but if the company has an HRA plan, that in itself is considered a medical plan and the employees applying for individual coverage would need to know this when filling out the application.

 

I agree with Jack that it sounds like this employer doesn't know what he's doing, and the reimbursement was reported incorrectly. At least the employee called and questioned it so that it can be corrected before any more time passes.

[Richcpaman]

MrRichMan:

 

The employer does NOT know what he is doing, and ADP doesn't either.  And ADP doesn't care whether the W-2's are right or not, and they are "off the hook" as far as they are concerned.  Read ADP's/Paychex/any other payroll prep firm contract, it is ALL on the employers..."

 

The paystub is wrong.  *IF* the employer has all the Sec 105 stuff in order, and the employee's plan is fully ACA compliant, *maybe* he is in good shape.  Not very likely.

 

Also, your employer has to file form 720 and pay the $2 an employee PORCARI tax since the sec 105 plan is now considered an employer plan and subject to the tax.

 

Rich