Here is a list of reasons to outsource COBRA Administration and why questions from COBRA Qualifiers should be handled by the Administrator as well.  The normal difficulties that employers have adhering to the technical requirements of COBRA have been exacerbated during the past two years as COBRA rules were changed to recognize the complications accompanying the COVID-19 pandemic.  This added complexity is particularly worrisome as an employer’s simple oversight in administering COBRA can result in ERISA penalties, an excise tax, unintended self-insurance of medical claims, and litigation, including class-action lawsuits.  Currently, Costco and McDonald's are facing Class Action Lawsuits for incorrect and incomplete COBRA Notice Letters.

Here is a summary of the rules that have been modified for a response to the Pandemic.

• Updated Model COBRA Notices: On May 1, 2020, the Department of Labor (DOL) published a new model general COBRA notice and a new model election COBRA notice.  The primary update to the DOL model notices is an added section for those considering Medicare in lieu of COBRA.  Use of the model notices, if properly adapted for the specifics of an employer’s group health plan, is considered good faith compliance with the notice content requirements of COBRA.  The model notices are available on the Department of Labor website. 

• Extended COBRA Deadlines: On April 29, 2020, the DOL and Internal Revenue Service (IRS) issued a Joint Notice extending many deadlines relating to COBRA, including the deadlines for an individual to elect COBRA coverage and pay COBRA premiums.  Generally, the deadlines were extended by requiring plans to disregard the period from March 1, 2020, until 60 days after the announced end of the COVID-19 National Emergency (known as the “Outbreak Period”).  The DOL later issued guidance clarifying that a COBRA deadline cannot be delayed for more than one year after the date of the original deadline.  This extension of COBRA deadlines is still in effect.  An employer should consider revising its standard COBRA notices to reflect the extended deadlines or provide a supplemental notice explaining the revised deadlines.

• COBRA Subsidy: The American Rescue Plan Act of 2021 (ARPA) included a provision to fully subsidize COBRA premiums for a period of up to 6 months from April 1, 2021, through September 30, 2021, for individuals who lost health coverage (including dental and vision) due to involuntary termination or reduction in hours since November 2019.  The DOL issued model ARPA COBRA notices and guidance, which required health plans to notify eligible employees about the availability of the subsidy.  The IRS followed with its own expansive guidance on the ARPA subsidy and related tax credit issues for those employers paying for the subsidy.  Though the COBRA premium subsidy ended on September 30, 2021, employers that did not administer the ARPA subsidy provisions correctly may still need to take actions to mitigate their risks (COBRA’s existing penalty structure also applies to failures relating to ARPA subsidies).

• Increase in COBRA Litigation: Even before the above changes went into effect, our firm noted the explosion of class action litigation under COBRA.  These cases usually alleged a purely technical violation of the content requirement of the COBRA notice, showing little or no actual harm to the plaintiff class members.  As the complexity of COBRA administration has grown in the past two years, these class action lawsuits will likely continue to take advantage of the situation.  Consequently, it is essential that employers take steps to mitigate their exposure.

To be clear, using the Department of Labor Model Notices for all our clients has been a commitment kept by MoneyWise since the 1980's when COBRA was signed into Employment Law by President Reagan.  Complaints from participants come early and often and to be honest, there have been a few requests over the years from both clients and brokers to "update" the language of the letters as well.  Most of the templates for Loss of Coverage Events are 8 or more pages.  When something like ARRA (2009 American Recovery and Restoration Act) or ARPA (2021 American Rescue Plan Act) and now potentially BBBA (Pending Build Back Better Act) come along, the number of pages nearly doubles.  In many of the situations when a complaint about the letter content is raised, we agree but we stand firm on using the Model Notices.  Here's why.

In recent years, we have followed several cases brought to Federal Courts alleging that the COBRA Rules were violated due to the content of the Notice Language used by employers.  These employers include Lowe's, Starbucks and now Fiat Chrysler.  Here is a LINK to the claim made against Fiat-Chrysler.  Yes, it is 23 pages long but taking just 5 minutes of scanning the very orderly argument posed by the attorney for the claimant, it is clear that using the Model Notice is just a mater of common sense.  Here's why.

Of course, leaving out any of the required elements is a "rookie mistake" that either shows ignorance of the rules themselves or an assumption that the recipient of the letter understands some aspects of their rights or benefits that are required to be spelled out ... like who to contact about COBRA or benefit questions.  So, the 8 plus pages of a Qualifying Event Notice that IS the Model Notice does everything required and therefore should be complete and eliminate this type of claim.  So, the liability that remains is related to getting the letters sent, documented and requests for status change are responded to in a timely manner.

Using the language in the Model Notices and all their variants (there are over 65 different letters related to COBRA) keep the process compliant though somewhat confusing.  Plan language is certainly in the eyes of the experience of the person reading.  Having read thousands upon thousands of cases over the years related to many areas of employment law and then sharing some of those with others to read ... like this one linked above usually results is groans of "it's 23 pages long".  Hmmmmm.  That sounds a little like the groan of a COBRA Qualifier that says "it's 8 pages long".  Yep.  But it is ALL in there ... just like the old Prego Spaghetti Sauce commercial, "It's in there!"

What plans are subject to the ARPA requirements? These new requirements apply to group health plans subject to COBRA (both fully and self-insured) as well as health plans subject to similar continuation coverage requirements under applicable state laws (commonly known as “mini-COBRA” laws). Although not entirely clear, these requirements also appear to apply to dental and vision plans as well as health reimbursement arrangements (HRAs). However, they do not apply to health flexible spending arrangements (FSAs).

Who is eligible? 
Premium subsidy relief is only available to “assistance eligible individuals.” An assistance-eligible individual (AEI) generally includes any individual (i.e., the covered employee and his or her dependents covered under the plan immediately prior to the event, but excluding domestic partners) who loses health coverage due to a reduction in hours or involuntary termination from employment (other than by reason of gross misconduct) and whose COBRA maximum period has not expired by April 1, 2021. This includes the following groups:

• Individuals who become eligible for COBRA during the COBRA subsidy period (defined below) (e.g., an employee who is involuntarily terminated on April 3, 2021) 
• Individuals who previously elected COBRA but dropped coverage for any reason (including for failure to pay premiums) and whose eligibility for coverage would have extended through the COBRA subsidy period
• Individuals who previously did not elect COBRA but are eligible for coverage during the COBRA subsidy period (e.g., an employee terminated in January 2021) 

How does an individual enroll in subsidized coverage?   
AEIs enroll in subsidized coverage through the normal COBRA enrollment process. For AEIs who were previously eligible for COBRA but did not enroll or who dropped coverage, a new 60-day special enrollment period must be provided, commencing on April 1, 2021, and ending 60 days after the notice of election (discussed below) is provided to the AEI. Although not entirely clear, this special enrollment requirement does not appear to apply to plans subject to state mini-COBRA laws.
Importantly, this special enrollment period does not extend or create a new maximum COBRA period. For example, if an AEI was originally eligible for a maximum of 18 months of COBRA coverage starting on February 1, 2020, COBRA coverage will only be available through August 31, 2021, and the AEI will only be eligible for five months of subsidized COBRA coverage (from April 1 to August 31).


Can AEIs be allowed to elect a different coverage option?   
Yes, if the employer allows. Under COBRA, continuation coverage is typically limited to the same coverage the individual is enrolled in at the time of the qualifying event. However, under ARPA, AEIs may be allowed to elect, within 90 days of notification of this right, to enroll in a coverage option different from the one they were enrolled in at the time of the qualifying event, provided that:

• The premium for such coverage is equal to or less than the premium for the coverage in which the AEI was enrolled at the time of the qualifying event.
• The alternative coverage does not qualify as “excepted benefits” coverage (e.g., standalone dental coverage).
• The alternative coverage is also offered to similarly situated active employees.

How long does the subsidy last? 
The ARPA subsidy is available from April 1, 2021, through September 30, 2021 (the COBRA subsidy period). For COBRA coverage outside this period, qualified beneficiaries will have to pay premiums according to the employer’s standard payment procedures. For AEIs who already paid their COBRA premiums for any period to which the subsidy applies, employers must refund those premiums within 60 days of the date the payment was made.


Does the employer bear the cost of providing the subsidy? 

No. Generally, the employer will be able to claim a refundable payroll tax credit equal to the aggregate value of unpaid COBRA premiums against the employer’s Medicare hospital insurance tax liability (or similar tax under the Railroad Retirement Tax Act). Although unclear, it appears that the subsidy applies to the entire COBRA premium, including any administrative surcharge (generally 2%). ARPA includes a mechanism by which tax credits may be advanced, although the specifics of how that process will work are still unclear.
The entity entitled to claim the tax credit varies depending on the plan involved. For most group health plans, the entity claiming the credit is the employer. For small plans subject to state mini-COBRA laws, the entity entitled to the credit will generally be the insurer, and in the case of multiemployer (i.e., union) plans, it will be the plan. However, ARPA is silent as to who or how the credit is claimed in the context of multiple employer welfare arrangements (MEWAs) and third-party payers such as professional employer organizations.


When does the subsidy end? 
Subsidies end on the earliest of (1) September 30, 2021; (2) the date on which the AEI becomes eligible for coverage under another group health plan (other than coverage consisting solely of excepted benefits, a health FSA, or a qualified small-employer HRA) or Medicare (“disqualifying coverage”), regardless of whether the individual actually enrolls in such coverage; or (3) the end of the AEI’s maximum COBRA period (typically 18 months). AEIs who become eligible for disqualifying coverage must inform the employer or face a penalty. 


What are an employer’s notice obligations? 
​ARPA requires employers to provide the following three notices:

• A COBRA election notice to all individuals (not just to AEIs) who become entitled to COBRA during the COBRA subsidy period; which, among other things, must inform the individual of the availability of the COBRA subsidy and, if allowed by the plan, the right to switch to a lower-cost coverage option. Employers may satisfy this requirement by either modifying the plan’s existing COBRA election notice or via a supplemental notice.
• A COBRA election notice to AEIs who became eligible for COBRA prior to April 1, 2021, as well as those who previously did not elect COBRA or who dropped COBRA who are eligible for the new 60-day special enrollment period. This notice must satisfy the same content requirements as described above and be provided by May 31, 2021.
• A notice informing AEIs of the date on which the COBRA premium subsidy will expire (if expiring before the end of the COBRA subsidy period), which must be provided within the 30-day period that begins 45 days before the subsidy expiration date. This notice requirement does not apply if the subsidy is expiring due to the AEI becoming eligible for disqualifying coverage or to AEIs covered under state mini-COBRA laws.

Under ARPA, the Department of Labor (DOL) is required to issue model notices by April 11, 2021, but as of publication of this alert, model notices have not yet been issued.

What should we do?  Employers and plan administrators need to act quickly in order to ensure timely compliance and avoid penalties. Specifically, they will need to:

• Monitor guidance from the DOL and IRS for further developments and clarifications, including model notices.
• Decide whether to adopt the alternative coverage election feature. It is unclear whether employers adopting this feature will need to amend their plans and update other relevant plan documents.
• Prepare and/or update existing COBRA notices to include the required information. Employers and plan administrators who use a COBRA third-party administrator (TPA) should coordinate with their TPA to determine who will be responsible for preparing and sending out the notices. Note that the COVID-19 time extension relief does not apply to these notices.
• Begin identifying individuals who qualify for the subsidy and send the required election notices to their last known address on record. Currently, there is no mandate to locate any missing AEIs who may have moved or relocated following their termination from employment.
• Employers will need to retool their payroll systems or coordinate with their third-party payroll providers to allow for the efficient recapture of the subsidy via the payroll credit.
• Coordinate with their insurance carrier to make sure they provide coverage for AEIs for whom no premium payments are being received.
• Refund any COBRA premiums paid by employees that were eligible for the 100% subsidy, within 60 days.

Finally, employers who subsidize COBRA coverage (e.g., as part of a severance package), should consider whether and how the subsidy may impact current and future arrangements.  If you have questions regarding the ARPA COBRA premium subsidy or would like assistance with implementing these requirements, please contact Help@MoneyWiseSolutions.com.

When the Affordable Care Act’s (ACA) Individual Mandate provision was reduced to zero at the beginning of 2019, many of the country’s employers viewed it as the end of the requirement. Some states, however, saw an opportunity to stabilize their market and create revenue streams that would support health initiatives within their own borders. In fact, New Jersey, the first state in 2019 to pass its own individual mandate, expects to collect $90 million to $100 million in penalties. The state plans to direct those funds to its new Health Insurance Premium Security Fund, which is designed to help pay the claims of New Jersey residents who are catastrophically ill.

Washington, D.C. also passed an individual mandate for 2019, and other states are lining up.

New Jersey
Beginning in 2019, New Jersey residents are required to secure health insurance or pay a fine of either 2.5 percent of their household income or $695 per adult and $347.50 per child, whichever is greater.

Just as was necessary with the federal mandate, New Jersey’s mandate requires employers with employees or COBRA participants who have resided in the state at any time over the past year to provide information on insurance coverage. This includes the submission of Forms 1094 and 1095 for New Jersey residents, in addition to the standard ACA IRS filing.

New Jersey requires Federal Forms 1095 and 1094, including applicable resident information, to be submitted to the state by March 31, 2020.

An important factor to keep top of mind: Any out-of-state employer that employs residents of New Jersey has the same filing requirements as businesses located in New Jersey.

Washington, D.C.
While the individual mandate will apply to most District residents, there are several exemptions that individual tax payers may be eligible for, including:

• Residents with income low enough that they aren’t required to file a DC tax return
• Member of a federally recognized Indian Tribe
  
• Those already covered under the Immigrant Children Program or the District’s Healthcare Alliance
• Members of religious groups, recognized by the federal government, who are opposed to and do not accept insurance support and benefits
• Those who work in the District but reside in neighboring states

Failure to meet minimum health insurance requirements will expose District residents – and employers offering coverage – to potential fines. In the District, these fines will be determined by the end of September each year. For the 2019 tax year the penalty is the greater of $695 per adult individual and $347.50 per child or 2.5 percent of a household’s income. The initial round of penalties will appear in 2020 and will be assessed based on information for the 2019 tax year.  Similar to New Jersey, the new mandate means that employers who employ District residents must file Forms 1094 and 1095 with the District.

Coming in 2020
Vermont, Rhode Island and California have all passed individual mandates for 2020. Other states that are considering adopting a state-based mandate include Connecticut, Maryland, Hawaii, Minnesota and Washington.

While many unknowns remain, MoneyWise expects that states adopting a mandate requiring individuals to carry coverage will need a way to validate that an employee has coverage either on the exchange or through their employer. This latter validation will likely come through a state tax form. And, while many states, like New Jersey, will likely assume forms and penalties that mimic the federal ACA’s forms and penalties, it further complicates a posture of compliance to avoid expensive penalties.

A Section 125 Premium Only Plan or "POP" allow employees to decide to set aside a portion of their pre-tax salary to pay for their insurance premium contribution for most employer-sponsored insurance plans, including HSA's, term insurance, and FSA's.

Sponsoring a Section 125 Premium Only Plan not only comes with benefits, but also documentation requirements.

At MoneyWise Solutions, Inc.,  we offer the expert help you need to stay in compliance and the first step is to keep these important documents up to date.

To be compliant, your 125 Cafeteria plan must have a

1.  Plan Document
2.  Summary Plan Description (SPD) and
3.  Ongoing Compliance to ensure the plan is not biased towards higher earners.

Our fee is $150 per year for a complete set of documents.  We also offer Discrimination Testing, for an additional $75 fee, to ensure your plan does not discriminate in favor of highly compensated employees.  To get started, simply go to this PayPal LINK to pay for the form and then fill out a Premium Only Setup Request form.

We appreciate your business!  Call or e-mail Questions!

The Department of Labor (“DOL”) posted new model notices on its website which employers may use to satisfy notice obligations under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), along with a short series of FAQs regarding the model notices.  The main changes to both the general and the election model notices clarify the interaction between Medicare and COBRA.  A newly inserted paragraph does not reflect any changes in the law, but provides more information to employees about when they can enroll in Medicare and under what conditions enrolling in Medicare can terminate COBRA coverage.
In particular, the DOL notes that employees who become eligible for Medicare while they are working may enroll immediately, or they may delay enrollment to an eight-month special enrollment window that starts at the earlier of 1) the date that the employee’s employment terminates, or 2) the date that the employee’s group health plan coverage through the employee’s employment terminates (which would include COBRA coverage). 
If an employee terminates employment, elects COBRA coverage, and delays signing up for Medicare for at least eight months after termination, the employee may be subject to a Part B late enrollment penalty and/or a gap in coverage when the employee eventually signs up for Part B Medicare coverage.  If an employee elects Medicare coverage while receiving COBRA coverage, the employer’s group health plan may terminate the employee’s COBRA coverage. 
However, if an employee is already enrolled in Medicare Part A or B before the date that the employee enrolls in COBRA, then COBRA coverage does not terminate on account of the Medicare enrollment.  The DOL also notes that Medicare will generally pay first (i.e., will be the primary payer) and COBRA will pay second when both Medicare and COBRA cover the same health expenses.
Key Takeaway
Even though the DOL updated the COBRA notices, the sample notices have been and continue to remain deficient in many areas.  Further, the DOL has made it abundantly clear that use of the notices are not mandatory, but would be considered good faith compliance – except only by the DOL.  Because qualified beneficiaries have an independent right to sue under ERISA for COBRA violations, the recent trend in COBRA notice litigation will not be affected.  Use of the DOL COBRA notices does not insulate a plan sponsor from becoming a target of COBRA notice litigation. 
If a plan sponsor has undergone furloughs, the threat of COBRA notice litigation will only increase due to the larger number of outstanding notices and the larger number of potential plaintiffs.  This puts more pressure on plan sponsors to properly review and vet their COBRA notices.

A former employee says that he and others did not receive proper notice of the Consolidated Omnibus Budget Reconciliation Act (COBRA) in a newly filed Best Buy class action lawsuit.  Lead plaintiff Daniel Pruitt alleges in his complaint that in order to save money paying for insurance coverage for former employees, Best Buy failed to provide proper notice.  Pruitt claims that this failure is a violation of federal employment law, specifically the Employee Retirement Income Security Act of 1974 (ERISA).  According to the Best Buy class action lawsuit, Pruitt is a former employee who elected into the company’s health plan. Upon his separation from employment, he received a COBRA notice. However, Pruitt says that when he received the COBRA notice from Best Buy, he was confused because of the lack of required information.  According to the complaint, Best Buy provided some information about employees’ rights to continue health insurance coverage. However not all the required information was present, which resulted in confusing and misleading workers.

Pruitt says the company’s failure to include all required information resulted in his inability to elect COBRA continuation of his health insurance coverage through Best Buy. As a result, he says he lost coverage and incurred additional health care costs.  “Best Buy, the plan sponsor and plan administrator of the Best Buy Health and Welfare Plan (‘Plan’), has repeatedly violated ERISA by failing to provide participants and beneficiaries in the Plan with adequate notice, as prescribed by COBRA, of their right to continue their health coverage upon the occurrence of a ‘qualifying event,’” states the Best Buy class action lawsuit.  Best Buy’s COBRA notice omits several important pieces of information, alleges the complaint. These items include an address indicating where COBRA payment should be mailed. Further, plan administrators are not identified.
“Defendant’s COBRA enrollment notice merely directs plan participants to a ‘catch-all’ general H.R. phone number to enroll in COBRA, and website, operated by a third-party disguised as Best Buy’s HR department, rather than explaining how to actually enroll in COBRA,” alleges the Best Buy class action lawsuit.  In addition, the notice does not include information about how people who claim COBRA benefits can lose their benefits. The notice allegedly fails to provide all required explanatory information required by law.

Just so you know, Benefit Services by MoneyWise Solutions, Inc. only uses the DOL (U.S. Department of Labor) Model Notices in our letter productions when available.  Here is why.

​In a growing wave of class action lawsuits, plaintiffs are targeting employers who have allegedly failed to provide proper notice of health care coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”).  The wave prompted at least six new lawsuits in 2019 alone, and some have already netted seven-figure settlements.  To avoid this litigation trend, employers should take a hard look at their COBRA notices to ensure they comply with governing regulations.

COBRA requires employers who sponsor group health plans to allow plan participants to continue coverage at their own cost when a “qualifying event” occurs that would otherwise terminate coverage.  29 U.S.C. § 1161(a).  The most common “qualifying event” is termination of employment, but there are several others, including the death or divorce of a covered employee.  Under COBRA, plan administrators must provide an individual with notice of the right to continued COBRA coverage (a) when the individual first joins the plan and (b) when a qualifying event occurs.  29 U.S.C. § 1166(a).

That COBRA notice must explain the right to continue coverage “in a matter calculated to be understood by the average plan participant.”  29 C.F.R. § 2590.606-4(b)(4).  Federal regulations specify 14 items that the notice should include—for example, an explanation of how to enroll in COBRA.  29 C.F.R. § 2590.606-4(b)(4)(i)-(xiv).  In addition, the Department of Labor (“DOL”) has published a model COBRA notice.  Use of the DOL model notice “is not mandatory.”  29 C.F.R. § 2590.606-4(g).  But according to DOL official publications, use of the model notice represents “good faith compliance with COBRA’s general notice content requirements.”

The recent wave of class action lawsuits challenges whether employers’ COBRA notices were sufficient.  While the precise allegations differ, the plaintiffs generally allege that the notice they received did not include all the information set forth in the regulations or in the DOL’s model notice, and that the average plan participant could not understand the notice.

​Failure to comply with COBRA’s notice requirements can be costly, especially in the context of a class action.  COBRA provides a statutory penalty up to $110 per day per person for failure to provide the required notices.  29 U.S.C. § 1132(c)(1).  The penalty adds up quickly.  Take, for example, a class of 100 employee who lost their coverage one year ago and received a deficient COBRA notice.  The penalty for the employer could be several million dollars, before accounting for an award of legal fees and costs (which COBRA allows).

​Thus far, employers have been unsuccessful in defeating these COBRA notice lawsuits at the pleading stage.  Some employers have argued that the plaintiff lacked constitutional standing to sue because the alleged defects in the notice—often seemingly innocuous—did not cause any concrete injury.  Other employers have argued they were in substantial compliance with the DOL regulations.  To date, however, those arguments have not convinced courts to dismiss complaints at the pleading stage.  A few of the lawsuits have already settled for seven- and six-figure numbers.  The rest are proceeding forward.

There are steps employers can take now to minimize the risk of being swept into this COBRA notice litigation.  To begin, employers should check whether their COBRA notices contain the 14 items suggested by the regulations.  See 29 C.F.R. § 2590.606-4(b)(4) (i)-(xiv).  Employers should also draft their notices in as simple, straightforward language as possible.  In addition, employers should seriously consider using the DOL’s model notice to gain the protection of “good faith compliance.”  Even when using the model notice, it may be appropriate to supplement with additional, plan-specific information.

Regardless of whether your COBRA notices could use minor or major changes, now is the time to make those changes.  Doing so could save you from a class action complaint.

This may be the best plan for employers under 50 FTE's that are NOT required to offer and plan and want to manage their costs ... simply.

MoneyWise can full administer these plans as well.

Benefits of the Plan
A Section 105 Plan allows a qualified business owner to deduct:

• Health insurance and dental insurance premiums for eligible employee(s) and family. This also includes qualified long-term care insurance.
• Out-of-pocket medical, dental, and vision care expenses for eligible employee(s) and family.
• Life, disability income, contact lens, hearing aid, Medicare Part A, Medicare Supplemental, optical/vision, and cancer insurance premiums for eligible employee(s).

Qualified Filing StatusesWhile the above rulings specifically address family employment in a sole proprietorship, corporations and partnerships may also take advantage of a Section 105 Plan. Additionally, employers seeking to offer non-related employees a medical benefits package may also implement such a plan. Here is how a Section 105 Plan works within the various filing statuses.
Sole Proprietorships
Section 105 works well for sole proprietors who are able to legitimately employ a spouse who is active in the business. An employed spouse will be treated as any other employee, with the business owner offering medical benefits as part of the employee's compensation package.
Partnerships
A partner in a partnership will operate similarly to a sole proprietorship. The spouse of the partner must be a bona fide employee, thus receiving the benefits of the plan. However, a partnership between a husband and a wife will not qualify for the plan.
C-Corporations
Unlike the sole proprietorship or partnership, it is not necessary for spousal employment to occur within the corporation. The corporate entity may provide and deduct benefits for the owner-employee director. Although sometimes misunderstood, even if a business is incorporated, all the proper components must be in place in order for a Section 105 medical reimbursement plan to be in compliance with Internal Revenue Code, DOL, and ERISA.
S-Corporations
S-Corporations can qualify for the Plan without spousal employment; the owners/shareholders are considered employeees if they are active in the business. Restrictions apply to any shareholder owning more than two percent: they will be unable to receive medical benefits on a completely tax-free basis. These benefits are subject to state and federal income tax, but are not subject to FICA taxes. Family members (ncluding children and spouses) who do not have ownership are treated as if they did. Thus, they are not able to receive the benefits on a completely tax-free basis either.
Limited Liability Company
Treatment of a Limited Liability Company (LLC) with respect to a Section 105 medical reimbursement plan depends upon how the entity files for purposes of its federal tax return. They may file as a partnership, a corporation, or a sole proprietorship. Once the filing status is determined, the appropriate rules for each filing status apply.
Plan YearSection 105 Plans generally run on a calendar (tax) year, January-December. Tax deductions are then taken during tax filing the following year.
Carry OverRevenue Ruling 2002-41 includes an option for a Section 105 Plan to manage and capitalize on future deductibility of unused portions of a medical expense account. If an employee does not use their maximum, they can carry it over to future years, insuring future deductions for "shock" years of healthcare expenses.
The Carry Over applies to all employees on the plan. The maximum amount available under this benefit will accumulate over plan years and will be managed on an employee-by-employee basis. The business owner may choose to set a maximum Carry Over amount. Meanwhile, employees who utilize the Carry Over will have the amount available to them until the business ceases to exist, the plan terminates, there are zero Carry Over dollars remaining, or the employee becomes ineligible.
Employee Compensation Under a Section 105 PlanThe Internal Revenue Code allows self-employed business owners to compensate employees for services rendered in various forms. The most common form of course is cash wages, subject to the appropriate withholding taxes. In addition to wages, the IRS Code clearly explains that an employer may compensate employees in the form of medical benefits for services rendered. Pursuant to the Code, eligible and qualifying paid-for benefits are tax-free to the employee.
When the business owner compensates employees in the form of cash wages and medical benefits, they must ensure that the combination of the two equal the employee's total compensation package. When establishing benefit maximums, it is vital that the business owner understands that the benefits and the cash combined may not exceed what would normally be considered reasonable compensation for the job the employed-spouse is doing. The following example illustrates how a typical compensation package is determined...
...Jim owns his own business. Jim's wife, Mary, provides a valuable service to the farm by helping out in the field, running errands, and keeping the books. Jim decides to formally employ Mary and take advantage of a Section 105 medical plan (Health Reimbursement Arrangement). When establishing a compensation package for Mary, Jim evaluates her experience and the vital role she plays in the business. Jim compensates Mary $19,668 total per year in the following way...
1. Reimbursement for family health premiums:$9,859
2. Reimbursements for uninsured medical expenses:$5,809
3. W-2 Cash Wages:$4,000
TOTAL$19,668By allowing for a federal, state, and FICA tax deduction of the $15,340 of reimbursed expenses, Jim would receive $5,484 in actual tax dollar savings by taking advantage the Section 105 Plan.
NOTE: If Jim's farm files its taxes as a corporation, he would be the employee and a similar tax savings plan could be established without hiring Mary.
Qualified Medical ExpensesMedical expenses included under this type of plan are those defined in Section 213 of the Internal Revenue Code. As a general rule, medical care includes amounts paid for diagnosis, cure, mitigation, treatment, or prevention of a disease. Appropriate expenses include, but are not limited to...

• Health Insurance Premiums
  
• Dental Care Fees
  
• Hospital Bills
• Deductibles
  
• Vision Care Fees
  
• Laboratory Fees
• Physician Fees
  
• Chiropractor Care Fees
  
• Orthodontia Costs
• Prescription Costs
  
• Psychiatric Care Fees
  
• Medical Supplies Costs

Managing the PlanThe most important concept surrounding a Section 105 Plan is legitimate employment between spouses or any other named employee. This issue is closely scrutinized by the IRS, and it is absolutely vital that the relationship be in existence. Fabricated relationships are absolutely discouraged. Therefore, the following items must be in place to ensure the plan operates smoothly and the tax advantages are maximized:

• A written employment agreement
• A log of hours worked by the employee
• An established cash (salary) compensation payment amount and schedule

In addition, it is recommended to:

• Name the insured (it is preferred that the insurance policy be in the employee's name).
• Maintain separate checking accounts (one for business use and the second for personal use).
• Pay for medical expenses (all medical expenses for the family should be paid by the employee from her/her personal account), and document all payments.