List Bill Under a Section 125

[Yagents]

I view it as a loophole regarding ownership of an individual policy. We all know IFP must be owned and paid for by the individual (not the employer). But, UHC knows that a number of small companies are buying and paying for IFP for the employee. Through list bill, UHC can look the other way because it's now the employer's responsibility to collect premium from Employee. That's my take.

Otherwise, it's strictly done for convenience as it has no tax advantages (premium taken post tax from EE)

 

[VolAgent]

IMHO, it was a legal marketing ploy to sell more indie health. The theory is small employers that don't offer a group plan could offer common billing for individual plans to their employees.

The employees pay for it - comes out of their check but the employer pays the bill. This allows the employees to chose their own plan from the carrier's line up.

In theory, it doesn't break any state regulation since the employer is not pay the premium. But you are correct that since the employer isn't paying there are zero tax advantages.

Its a tax savings for the employee, isn't it? 125 is pre-tax dollars, allows them to save taxes on their IFP that they otherwise wouldn't be. Also, a 125 will save the employer the matchin FICA, correct?

 

[Crabcake Johnny]

I don't have the answer to that. I'm not sure individual health insurance premiums are a tax deduction unless you're self-employed.

Can only find this from '03:

USATODAY.com - Individual insurance buyers should check IRS deductions

"Making matters worse, you have to pay the premiums with after-tax dollars. Workers who participate in employer-sponsored plans pay for their premiums with pretax dollars, which means they get more for their money."

 

[VolAgent]

I don't have the answer to that. I'm not sure individual health insurance premiums are a tax deduction unless you're self-employed.

Can only find this from '03:

USATODAY.com - Individual insurance buyers should check IRS deductions

"Making matters worse, you have to pay the premiums with after-tax dollars. Workers who participate in employer-sponsored plans pay for their premiums with pretax dollars, which means they get more for their money."

That's my point. A 125 is pre-tax dollars, thus moving something an employee could not deduct, to being withdrawn from the paycheck before taxes are determined.

 

[somarco]

If the employee agrees to a salary reduction under 125 then they in effect have saved current taxes. Coincidentally it also saves the employer share of FICA, SUTA, FUTA and workers comp premium on the reduced amount.

I believe there are participation requirements associated with 125 plans but could be wrong.

 

[ABC]

When we look at an Individual plan, the IRS does not consider it a qualified group benefit. So then how could it qualify under a section 125?

There is some debate if an employer set up an HRA then the employee could use those funds to pay for a individual plan on a tax deferred basis.

This is serious grey area and it pisses me off when a carrier create a product (list bill) but will not answer my questions.

 

[LGilmore]

"The list bill does not make sense to me unless the employer is actually paying the premium or they can run it under a section 125."

Remember the primary focus of a 125 is to give employees a tax break on their premiums, meidcal outlays and childcare expenses. The advantage to the owner is they also get a break taxwise on the money employees declare for the plan.

I do not know of a full blown section 125 that lets individuals deduct premiums from different plans. You can use medical expenses from any plan as you or dependents are not restricted solely to the employer's plan.

 

[somarco]

There is some debate if an employer set up an HRA then the employee could use those funds to pay for a individual plan on a tax deferred basis.

Got references?

Not saying you are wrong, but HRA money is employer funds. There are restrictions on how the money can be used but I don't recall seeing anywhere that the money cannot be used to pay health insurance premiums.

 

[Yagents]

The only way to get employer paid IFP premiums to be tax free is through an HRA (or be self employed). List bill is for convenience folks. For more HRA info, and premium reim HRA's, go to www.coredocuments.com

 

[Ann H]

I think there's some confusion about what a Section 125 does, and what it cannot do. I do quite a bit of Section 125 for my group clients, but have never done it for an IFP or list-bill of IFPs.

Section 125 allows the payroll deducted premium to be paid on a PRE-TAX basis. So, for instance, if the employee pays a portion of his/her own premium, and that portion is deducted from his/her payroll, then that employee does not need to pay taxes on the payroll-deducted premium.

Also, the Employer does not need to pay the 7.56% FICA tax (FUTA, SUTA, etc.). This can absolutely save the employer some tax money. Say, for instance, that as a group the premium is $10,000 a month, and the group of employees contribute about $4,000. The Employer would save taxes of 7.56% on $4,000 which is $302.40 monthly. In AZ we can't include Worker's Compensation tax, which a previous poster mentioned is allowable in his state.

For each employee, it saves taxes (Federal, State, and their 7.56% portion of FICA taxes). So, if the employee is contributing $200 in this example, and if the average employee is in a combined tax bracket of 25% when you add up Federal, State and FICA, then the employee would save $50 a month in taxes. Of course, not every employee is in a 25% tax bracket.

Also, not every employee can participate. If it's a Sub-S or LLC, the owners cannot participate, and neither can their family members. There are strict non-discrimination rules and participation rules. The rules are hard to meet if it's a very small business. In a group of under 10 lives, where the owner can't participate, nor his wife, nor his son that he employs, then it's hard to meet participation.

Obviously, this is great as a tax break, but difficult otherwise. The cost for a Section 125 is about $250 YEARLY, so tax savings outweighs cost.

The problem with list-bill, however, is how the IRS and state rules are written. I was under the assumption that NON-GROUP plans were not allowed through a Section 125. I have contacted my local expert for a confirmation. I think a few years ago, they allowed a non-group HSA plan's premium to be included, but I don't remember. Another serious red flag is the group vs individual problem. Is this a group plan or an individual plan? The carrier may require the employer to state that 100% of the premium is being deducted from payroll, but is it really? Even if the employees pay 100%, a Section 125 TECHNICALLY converts the money to employer dollars. What if an employee is declined, do they have recourse because it's an employer-sponsored plan for the whole group? What if maternity is not covered under the IFP? Is it subject to Employer mandates? This is a tricky area.

Anyway, I sent an e-mail to my local contact who is an expert in these things, and I'll post what she says as soon as I receive an answer. She tends to be extremely technical, so it will be good to hear what she says.