How This Tax-Free Wellness Scheme Can Put You in Hot Water
It was 2002 and I remember a group of advisors pushing what sounded like the best possible method for an employer to handle their group health insurance premiums. Simply put, they pointed out that the IRC (Internal Revenue Code) allowed employees to make their contributions for health insurance on a pre-tax basis. In fact, this is a well-known item and very common; it is allowed due to code section 125.
The savings to both employers and employees can be substantial because it removes the employee’s share of health insurance from payroll thus eliminating the payroll burden. These advisors also pointed out that employers are free to reimburse employees directly for the cost of certain health expenses without being taxable to the employees. This scheme proposed that the full cost of the health plan be paid by the employee, which would generate significant tax savings to both the employer and employee. Then the employer would reimburse employees for their premium which resulted in a tax-free benefit to the employee and a great financial gain to the employer. It wasn’t long until the IRS got word of this, promptly shutting it down and issuing revenue ruling # 2002-3.
Well, here we are seventeen years later and there’s a similar program being promoted – sometimes purporting to use a little-known loophole allowed by the ACA. The current version is tied to the employer providing an MEC plan which the employee pays for via pre-tax deductions and then providing wellness or other benefits without any taxable compensation issue. The IRS is once again aware of these new schemes and this time they’ve issued Chief of Counsel Advice (known as CCAs) on these programs. Please keep this in mind if you or others in your firm are approached by someone offering something that sounds like one of these schemes. Alert your broker and ask the marketer who is trying to sell you the program what Revenue Ruling or other guidance they site that would allow this.
As always, if it sounds too good to be true, it probably is. Be sure to avoid such schemes if you have any doubts at all. If you get caught up in this scheme, then you’ll not only have a tax mess to overcome but employee relations will be severed, and back payroll taxes and fines will quickly multiply. As a follow-up action item, make sure if you’re taking pre-tax deductions for your health insurance plan that you have a Section 125 plan formally in place. Many employers implemented pre-tax premium payments years ago but have long since misplaced their Section 125 plan document. Tell your broker if you’re unable to locate your plan so they can find a vendor who can restate the plan and bring you up to date.
Questions? Contact a member of the ‘A’ Team today.
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