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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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Under Section 125 (cafeteria plans) if an employer

Resolved Question:

Under Section 125 (cafeteria plans) if an employer offers a cash payment to employees in lieu of electing that employer's group health insurance, should the employer require an annual affirmative election of the cash in lieu of coverage during open enrollment and at the same time require the employee to show proof positive of health insurance through a different source?

If the employee forgets to make such an affirmative election during an open enrollment can the employer allow a retroactive election after the open enrollment has closed and the new plan year has commenced without jeopardizing the plan's tax qualification status?
Submitted: 7 years ago.
Category: Tax
Expert:  Ed Johnson replied 7 years ago.

Dear XXXXXform LNSU,

If the company pays a person a fee in lieu of coverage, you do not then have the right to make sure he is covered. He may elect to not be covered. The issue is that by his opting out of coverage, you save money by not providing expensive medicle care.

The tendency of people is to "Manage the Money" and "make" the employee use the money for what it is intended. But the real intention is that it benefits the company to not pay the medical benefits. Take me for example. I am retired military. I am automatically covered by medical insurance. I consitently get paid to not take benefits with what ever company I work for. I use the money as I choose.

During open enrollment, the employee has the option to enroll in medical benefits, or to take the payment in lieu of coverage; so in the case of open enrollment, it can and should be required to reaffirm as you say or to elect again to take payment in lieu of coverage.

However, if some one has not elected to take benefits, there is a 2.5 month grace period.

Customer: replied 7 years ago.
Reply to Ed Johnson's Post: Thanks for your answer. I have not accepted it quite yet. I'd like to know what IRC or CFR citations you are basing your reply on, specifically the two points that 1) 'paying a fee to employees not to take our group coverage does not give us the right to determine if they have alternate coverage' and 2) your reference to a 2.5 month grace period. I'm not aware of any grace period.

Your referenced citations would be helpful. Thanks.
Expert:  Ed Johnson replied 7 years ago.

Dear XXXXXfrom LNSU,

Thank you for your feedback. It caused me to re-read your question. Do to the back log in here, I was moving very quickly and mis-enterpreted part of your question. Here is a detailed explanation of my answers and a re-statement of one part.

REGARDING THE GRACE PERIOD: The grace period referes to the carry over of contributions from the previous years; and the enrollment of new hires or newly eligible who have up to 60 days to enroll. Simply forgetting to enroll before the new plan year knocks him out of the plan. You can pay this person in lieu of benefit however.

REFERENCE: IRC section 125 (4)

REGARDING THE PAYMENT IN LIEU OF BENEFITS: This is my interpretation and application of a body of laws, not just one law. There is nothing in IRC or USC that specifically states, that you cannot check on how that particular payment is used, except that there may be some case law to substantiate. You wil lnot find the magjc sentence that says: "Employers may not ensure the payments received in lieu of benefits must be used to purchase alternative health plans". You won't find it. You are asking us for an opinion about your circumstances, based on my knowledge, experience and training regarding employment and tax related law.

REFERENCE 1: IRS Publication 525, Chapter 5: and Publication 15-B

Quoting from the IRS topical discussions on this subject:

"enerally, qualified benefits under a cafeteria plan are not subject to FICA, FUTA, Medicare tax, or income tax withholding. However, group-term life insurance that exceeds $50,000 of coverage is subject to social security and Medicare taxes, but not FUTA tax or income tax withholding, even when provided as a qualified benefit in a cafeteria plan. Adoption assistance benefits provided in a cafeteria plan are subject to social security, Medicare, and FUTA taxes, but not income tax withholding. If an employee elects to receive cash instead of any qualified benefit, it is treated as wages subject to all employment taxes...."

Becasue the IRS classifies this as wages or other compensation, it follows that the employer cannot direct the person how to use the money. It would be a violation of "Right to Privacy Rules" and Title VII. Elements of the FLSA and Equal Pay act also apply to my position on this issue.

The issue is related to timing of the benefit. Some companies provide this benefit as a matter of policy ,without proving coverage.

In your question, you asked if an employer should. I beliieve it is uneforceable and companies should not. There are proponents for both sides. The proponenets claim the issue is corporate fiduciary responsibility to ensure employees are covered.

You can make it a requirement before the fact. That is, in order to qualify or be eligibile for the company's alternative plan for payment in lieu of benefits program, you can require the employee to show proof of coverage. However, there is no gaurantee the employee is going to maintain the coverage. How would you police that? There is also no requirement to ensure the employee is covered by an alternative plan. Once the emlpoyee is receiving the payment in lieu of benefits, it is wages. Once they are no longer participating in the corporate plan, it is a private matter.To require ongoing proof of coverage beyond the open enrollment program would be descrimination (Document Descrimination).

 

 

 

 

 

 

 

 

 

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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