Section 125 Question

AnneLa

Some of our employees opt out of taking medical insurance with us. Those employees get a quarterly payout called "Medical Buy Back Plan". Currently, we do not have any taxes taken out of these quarterly payout checks, they're simply run through payroll without deductions. I seem to recall reading somewhere that in order to maintain our Section 125 status, employee buy back plan dollars would have to be taxed. Can someone with more expereince in this area point me in the right direction with an explanation or a reading reference please?

NaeNae55

Anytime an employee receives cash, with few exceptions, the cash is taxable. See Publication 15 (Circular E) and Publications 15-A and 15-B (you can download these from the IRS site).

I am not sure how your cafeteria plan and this option affects your Section 125 plan, but I am certain that employees who receive cash when choosing it over health insurance have a taxable benefit. I am less certain, but I think your employees who choose the health insurance also have a taxable benefit, since they had the option of cash. You should probably contact your accountant or the IRS for more information. Sorry I couldn't be of more help.

Good luck!

Scott Ruth

Cash back for not electing health insurance coverage is taxable, just as any cash the employer pays an employee. In fact, if an employee has the ability to choose between employer provided health coverage (generally a nontaxable benefit) and cash (taxable), a section 125 plan (aka cafeteria plan) has been created. What you are doing may not make those nontaxable benefits taxable, but you should straighten out the taxation of the cash benefit. Your exposure is the penalties under the IRS income tax withholding and employment tax withholding statutes. You should consult your tax attorney, accountant, and/or payroll provider to help straighten this out.

System

I worked for a group of attorneys who had the buy back plan which was paid quarterly. The ess' had to submit medical documentation that proved viable health expenses to be reimbursed. I do not know how this was addressed in the A/P, but apparently it was legal because the firm was never audited and the CPA never advised differently. Laws may have changed, so I would check with a CPA if you have or know one about the legal aspects. Some companies even adopt larger deductibles and reimburse the employee for a portion of those expenses for cost containment purposes.

AnneLa

Thank you for your responses.