As healthcare costs continue to rise, innovations in the marketplace continue to produce new products and ways to finance your medical insurance. One that you may have heard about recently (or are likely to soon hear about) is being touted as a tax overlay system sometimes called a “Classic 105 Plan.” The arrangement claims to reimburse 75% of unreimbursed medical expenses for employees. The program is supposed to save the employer money in premiums by raising deductibles, copays and out-of-pocket maximums.
Once the plan design has been leaned up, employees can choose to make a significant pre-tax salary reduction (in some cases as high as $15,000-$20,000 per year). The reduction amounts are held by a TPA and made available for medical reimbursements. Any unused portion in the account is forfeited at the end of the year. To make up for the significant reduction in the employees’ take-home pay, the employees are given a loan by the TPA each payroll period in an amount close or equal to the salary reduction amount. No taxes are paid on this amount because it is considered a loan, however there is no evidence that the loan is ever intended to be repaid. The loan is secured by a life insurance policy on the employee, held by the TPA. Fees paid to the TPA for the arrangement are between $150 and $200 each month, taken from the employees' pre-tax salary reduction.
While the program claims to be ERISA, ACA and HIPAA compliant, our compliance team and other legal experts have serious concerns that this type of arrangement is not compliant with federal law, including the IRS Code. This type of arrangement can also have significant implications for the employee’s social security, the employer’s fiduciary duties under ERISA, and in some instances may subject the parties to criminal liability.
Rest assured that HCW is always reviewing the health and welfare benefit landscape, and we will continue to vet new programs and funding arrangements to ensure that the decisions your company is making are best fitted to your benefit strategy.