Section 125 Cafeteria Plan
A Section 125 Cafeteria Plan is an employer-sponsored plan that allows employees to pay for certain qualified medical expenses – such as health insurance premiums – on a pre-tax basis. It is called a cafeteria plan because, like walking through a cafeteria and selecting various dishes to eat, employees can choose the types of healthcare options they want, such as medical, dental, vision, and other benefits, and decline the ones they don’t.
Program Implementation
Employers take the extra step of implementing the coversehealth.com program through a Section 125 Cafeteria Plan. While the implementation and administration of a Section 125 Cafeteria Plan result in additional obligations on the employers, it allows them to offer the coversehealth.com program on a pre-tax basis. This ultimately can benefit both the employer and the employee. Rather than first paying taxes and then using the remaining funds to pay for the coversehealth.com program, the Section 125 Cafeteria Plan is implemented and paid for with pre-tax funds.
Program Testimonials
Program Frequently Asked Questions
How does the pre-tax funding work? How does it benefit both the employer and the employee?
Employers and employees are responsible for federal (and often state and local) taxes on wages (i.e., FICA and FUTA). When the coversehealth.com program is paid with pre-tax funds, that premium cost is eliminated from the wage evaluation for both employers and employees. Because a portion of the wages is directed on a pre-tax basis to the coversehealth.com program premium, that portion is not subject to the taxes on wages.
Does the 2017 IRS Memo support the coversehealth.com Program?
Yes, the April 24, 2017 memorandum supports the coversehealth.com program. It confirmed the long-standing IRS rule laid out in Revenue Ruling 69-154 that governs indemnity payments, excess benefits, and the taxable reporting. The memorandum confirms the income tax treatment of benefits under the coversehealth.com program. Since the premium is paid on a pre-tax basis through a cafeteria plan, the claimed benefits would be subject to individual income tax to the extent that they exceed unreimbursed medical expenses.
Are claim payments received pursuant to the Limited Benefit Health Insurance Policy taxable?
The taxation of benefit payments is determined on an individual basis. Generally, any claim payment from the Limited Benefit Health Insurance Policy that exceeds the costs of a participant’s out-of-pocket medical care expenses, as determined by Section 213(d) of the Internal Revenue Code, may be taxable. However, each participant’s individual tax situation is different, including each participant’s utilization of benefits and healthcare expenses. A 1099 is not issued by the employer or insurance plan. Claim payments are self-reported and taxation depends on the person’s individual situation. Often, if claims are self-reported, the claim payment may be offset with a participant’s eligible out-of-pocket medical expenses.
What are the tax evaluations for the employer at year-end?
Typically, the employer will not have any tax evaluations. Once an employer pays the health insurance premium on a pre-tax basis, the evaluation is ordinarily terminated. The employer should include the pre-tax premium totals in the W-2 for each employee in line 12 DD. However, the employer is not responsible for issuing any 1099 or for involvement in any explanation of benefits or claim payments to the employees.
What are the tax evaluations for the employee at year-end?
Each employee is unique. An employee will need to evaluate the benefits received under the coversehealth.com program (and any other health benefits plan) with the costs incurred in receiving medical care. coversehealth.com provides each employee with comprehensive information through the Indemnity Plan Tax Advice Line.
This is a free-of-charge service which gives employees information about tax treatment based on tax brackets, filing status, and benefits/costs. Employees can ask questions or set up meetings with tax professionals, at no cost, to answer any questions.
Will the coversehealth.com Program negatively impact employees’ taxes (ie. Tax Return)?
Ordinarily, it does not. Employees can still be eligible to receive earned income credits and refunds. The evaluation will be based on the pre-tax wages, the pre-tax premiums, the benefits received, and the costs incurred. These questions can all be answered directly through the Indemnity Plan Tax Advice Line.
coversehealth.com platform reduce Social Security benefits?
As with 401(k) plans, major medical, dental, and vision plans, the employee’s premium for the Limited Benefit Health Policy is paid for on a pre-tax basis through the use of a Section 125 Plan. Given that an individual’s Social Security benefit is based on various factors, including an individual’s lifetime earnings and age when they started working and for how long they worked, each person’s calculation is different. Generally, however, the coversehealth.com platform should have a minimal impact as the premium amount for the Limited Benefit Health Insurance Policy is not large enough to impact over 20+ years of average earnings.
How is the coversehealth.com Program able to automatically enroll employees?
The IRS has permitted this practice in a 2002 Ruling, and affirmed the approach in proposed regulations under Section 125, issued in 2007. Then, in the implementation of the ACA, this practice was proposed to require employers of over 200 employees to automatically enroll eligible employees in their group plans. In addition, the employer is required to give notice to the employee that such enrollment is occurring and the date of its effective date for the enrollment election. Thus giving the employee a reasonable amount of time to elect out of such coverage. The standard time to give employees to elect out of coverage is 30 days.
Is the coversehealth.com Program subject to COBRA?
The coversehealth.com Program is a fixed indemnity plan and thus is not subject to COBRA.
Is health information kept confidential?
Yes, all information is kept confidential in accordance with HIPAA.
Do the insurance companies within the coversehealth.com Program act as an agent of the company in making payments to the employees? (Agency Relationship referred to in the April 2017 IRS memorandum)
The coversehealth.com indemnity plan is fully-insured, meaning the employer pays a premium to shift the risk of loss to the insurance company. This plan doesn’t require the employer to pay additional amounts to the employee or insurer, regardless of any triggering events. The plan is not self-insured, so the employer won’t receive any money back if the actual claims are less than the premium payment. There is a risk-shifting with this plan, and it is not an agent of the employer.
Is there a W2 sent to the employees to show how much they have received in indemnity claim payments?
No, there isn’t. No tax document is issued to the employee or the IRS with any information pertaining to the indemnity plan. However, for companies that are required to report the amount in Box 12 under code DD, the insurance premium amounts will be reported there.
As for the indemnity claim payment, that is not reported anywhere on the W-2 unless the company chooses to report it in Box 14 for informational purposes only. Most companies do not utilize Box 14 and it is not required.
