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More on Health Insurance and Section 125 Plans

Question:

This is a follow-up on the posting of December 16 regarding health insurance:

Must a health insurance policy be held by the organization in order to qualify health insurance premium payroll deductions for tax-free treatment under a Section 125 cafeteria plan? or can the employee hold the policy?

Also, must the employer pay at least a portion of the premium, or can the full amount be withheld through payroll deduction?

Answer:

I'll give this question "my best shot" -- employee benefit plans are not my forte. Further, there may be some insurance industry regulations or requirements of individual insurance firms that can affect this issue (e.g., I believe that Golden Rule Insurance here in Wisconsin does not permit a church to own (or even reimburse premiums) the policy).

Having said this, I do not believe that the Code stipulates the owner of the insurance plan nor requires partial payment by the employer. However, before a church and its pastor jumps into such as arrangement, its leadership is well-advised to clearly understand and communicate the specific requirements of Section 125 -- especially its use-or-lose-it component.

Comments

  1. Premiums for either a group policy or an individual policy can be eligible under a cafeteria plan, however they are different accounts.

    The most basic would a premium only plan (also known as a POP) where the employee's portion of the premium is automatically payroll deducted and the organization pays the premium on the employee's behalf.

    In the case of the individual plan, the employee would have to submit documentation to show that they have paid their individual premium.

    Concerning the insurance companies - I do not believe they care whether a premium is deducted pre-tax or post tax as long as the premium is paid.

    The issue you really need to be concerned about is whether the pre-tax reimbursement is eligible or not. I hope that helps.

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