COBRA Q's
jriley
30 Posts
We have an employee who is terminated, but receiving severance. As part of his severance, which is being paid out on a semi-monthly basis, the company is paying his COBRA premium, less the original contribution he paid while an employee. My two questions are:
- Since he is terminated, although he is receiving severance from our payroll, would his employee contribution for his COBRA be pre-tax as it was when he was an active employee?
- Would the employee have to pay taxes on the COBRA premium paid by the employer (would this be a taxable benefit like a bonus?)?
Thanks for any assistance or reference you can provide!
Jennifer
- Since he is terminated, although he is receiving severance from our payroll, would his employee contribution for his COBRA be pre-tax as it was when he was an active employee?
- Would the employee have to pay taxes on the COBRA premium paid by the employer (would this be a taxable benefit like a bonus?)?
Thanks for any assistance or reference you can provide!
Jennifer
Comments
That being said, plans are generally written to not guarantee taxability or non-taxability of cafeteria plan benefits!
Ok, either people are employees or they aren't. I have not heard of a "non-active employee" unless it's a person on some sort of leave. You say this person is terminated. The only way for the person to NOT be taxed on the contributions is for him to be participating in the cafeteria plan. I'm sure that your flex plan document says that termination of employment (or reduction in hours to render the employee ineligible) means termination of participation in the plan.
If your broker says that there is an IRS regulation about this, I would suggest that you ask that he point you to the documentation. I can't, because I don't believe it exists; however, I would be very interested in his response and documentation/citation. So, please share!
There is no COBRA for the premium-only portion of your cafeteria plan.
There is no such thing as a terminated, non-active employee. And how could a COBRA premium be pre-tax anyway since it's being paid out to the carrier, not a line item deduction from a pay check? The coverage he now has and the COBRA premium are exactly the same as if he were to go out and buy a personal policy and pay the monthly premium. It seems more a matter of common sense and logical deduction than finding it somewhere in a regulation.
Private Letter Ruling 9612008, 3/22/1996, IRC Sec(s). 106
Date: December 18, 1995
CC:EBEO:Br 6 TR-31-2314-95
LEGEND:
Employer = ***
Dear ***
This is in reply to your letter dated October 6, 1995, concerning the federal income tax treatment of medical coverage provided to terminated employees.
The information submitted indicates that the Employer is the sponsor and administrator of an employees' medical expense plan (Medical Plan). The Medical Plan is a welfare benefit plan and provides hospital and medical expense benefits for certain employees and retired employees of Employer and certain affiliated companies.
It is represented that the Medical Plan is a health plan described in sections 105 and 106 of the Internal Revenue Code and that the cost of coverage under the Medical Plan is funded through employer and employee premium contributions to Voluntary Employees' Beneficiary Associations as described in section 501(c)(9) of the Code.
Employer has established a severance plan that provides medical coverage, severance pay and other benefits to eligible terminated employees. With respect to medical coverage provided under the Medical Plan, the severance plan provides as follows: participant shall be entitled, pursuant to any continuation coverage rights under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), as amended , to continue individual and dependent coverage under the Company's medical plan during the 18 months following termination of employment or until the participant or dependents fail to be eligible for continuation coverage under COBRA, if earlier. If such coverage is continued, the Company will pay the same portion of the cost of coverage that it pays for active employees (currently 82% during the first 12 months following termination of employment), and the participant will pay the balance. The participant shall be charged the full expense of coverage (102% of the cost of coverage) during the remainder of the 18 month period.
The issue presented is whether terminated employees who are receiving medical coverage under the Medical Plan and pursuant to the Employer's severance plan, are “employees” for purposes of sections 105 and 106 of the Code.
Section 106 of the Code provides that gross income of an employee does not include employer-provide coverage under an accident or health plan.
Section 1.106-1 of the Income Tax Regulations provides that the gross income of an employee does not include contributions that an employer makes to an accident or health plan for compensation (through insurance or otherwise) to the employee for personal injuries or sickness incurred by the employee, the employee's spouse, or the employee's dependents, as defined in section 152 of the Code.
Section 106 of the Code operates in conjunction with section 105, which provides that amounts an employee receives through accident or health insurance for personal injuries or sickness are includible in gross income to the extent the amounts (1) are attributable to contributions by the employer that were not includible in the gross income of the employee, or (2) are paid by the employer, except as specifically provided in sections 105(b) and (c).
Rev. Rul. 82-196, 1982-2 CB 53, holds that employer contributions to an accident or health plan that provides coverage for an employee and the employee's spouse and dependents before and after the employee's retirement and that also provides benefits for a deceased employee's surviving spouse and dependents are excludable from the gross income of the employee and the survivors under section 106 of the Code. Rev. Rul. 82-196 also holds that the taxation of health benefits paid to survivors of a deceased employee-participant in such a plan is determined under section 105. The ruling in effect considers an employee-participant in an employer-funded accident or health plan to continue to be an “employee” for purposes of sections 105 and 106 even after termination of employment. See also, Rev. Rul. 62-199, 1962-2 CB 38 and Rev. Rul. 75-539, 1975-2 CB 45 which hold that an employer's contributions to an accident and health plan that provides benefits for a retired employee are excludable from the retired employee's gross income.
In Rev. Rul. 85-121, 1985-2 CB 56, an employee was laid- off for a period of time. During the period of layoff, the employer made contributions to its accident and health plan on behalf of the laid-off worker and the worker received health benefit payments from the plan. The ruling states that, as in the case of retired or deceased employees, the employer's contributions to the accident and health plan on behalf of the laid-off worker were based solely upon the employment relationship and the laid-off worker's treatment should, therefore, be the same as that of the retired or deceased employees in Rev. Rul. 82-196. Accordingly, the ruling holds that during the period of layoff, the laid-off worker is an “employee” for purposes of sections 105 and 106 of the Code.
In the instant case, the Employer's contributions under the severance plan for medical coverage on behalf of terminated employees is related solely to and based solely upon the terminated employee's prior employment relationship with the Employer. Thus, the basis for the payments in this case is the same as the basis for the payments on behalf of the laid-off employee in Rev. Rul. 85-121 and on behalf of the retired or deceased employee in Rev. Rul. 82-196.
Accordingly, we conclude that terminated employees who are receiving medical coverage under the Medical Plan pursuant to the Employer's severance plan are “employee” for purposes of sections 105 and 106 of the Code. Employer contributions for medical coverage on behalf of the terminated employees are, therefore, excludable from the terminated employees' gross incomes under section 106 of the Code.
Except as specifically ruled on above, no opinion is expressed as to the federal tax consequences of the transactions described under any other provision of the Code. Specifically, no opinion is expressed as to whether any benefit received under the Medical Plan is excludable from gross income under section 105(b) of the Code or whether the Medical Plan satisfies the nondiscrimination requirements of section 105(h) of the Code, if applicable.
If you are really still worried about it, have your tax people request a determination letter from the IRS - they will tell you if your position is tenable.
To answer JMCAA's question, the premium-only part of a Section 125 plan is not subject to COBRA. The only part of a cafeteria plan which is subject is the FSA part. The terminated employee qualifies for COBRA under the medical plan, if there is a sufficient number of employees and the plan is subject to COBRA. These are separate plans. I was trying to differentiate between the pre-tax aspect of the cafeteria plan and the after-tax aspect of the medical plan. The original question was about the taxability of the terminated employee's contributions.
To the OP, as for the PLR, keep in mind that a PLR is only applicable to the entitity to which it is addressed and is NOT a regulation. It is issued according to the facts and circumstances described in the application. If this PLR is addressed to your company/plan, and facts and circumstances haven't changed in ten years, and you feel comfortable, then fine. Still, I would be hesitant to give tax advice, unless, of course, that is your profession.