Sect. 125 Plan Funding

Full Throttle

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Midwest
Here's the situation: new business, 10 employees, expects to grow rapidly. No plan in place currently, but wants to bonus out money for the employees to purchase their own coverage. I've heard conflicting things from TPA's over the past few years as far as what can and can not be done from the employer bonus standpoint.

First, I know there has to be a formula for the bonus that is the same for a particular class of employees (% of compensations, flat bonus, ect). That's not the issue.

Here are the two opinions I received:

#1: An employer gives everyone a $200 a month bonus in their paycheck, the employees have the option to defer that through the Section 125 plan. If they don't, it's taxable as income. The employer has to bonus out the $200 per month regardless as to whether or not an employee already has coverage through a spouse's group plan.

#2: The employer can bonus the $200 directly into the Section 125 plan and open it up only for individual premium reimbursement/HSA reimbursements. That way, employees who are not purchasing individual coverage (or contributing to an HSA) obviously won't get reimbursed.

Are both options possible? I know #1 is legit. I've heard #2 is legit from some TPA's and I've heard from others it is not. Thoughts?
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Also, I know an HRA plan could effectively act as the #2 option, but that has it's own down sides. No option for employees to defer additional amounts and no option to put the bonus in an HSA accont. The employer could set-up both a Section 125 plan and a Section 105 plan, but now the employees heads are spinning and my phone is ringing when they try to get reimbursed.
 
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Here's the situation: new business, 10 employees, expects to grow rapidly. No plan in place currently, but wants to bonus out money for the employees to purchase their own coverage. I've heard conflicting things from TPA's over the past few years as far as what can and can not be done from the employer bonus standpoint.

First, I know there has to be a formula for the bonus that is the same for a particular class of employees (% of compensations, flat bonus, ect). That's not the issue.--Not necessarily true. The employer can develop bonuses any way they want. Bonus is compensation.

Here are the two opinions I received:

#1: An employer gives everyone a $200 a month bonus in their paycheck, the employees have the option to defer that through the Section 125 plan. If they don't, it's taxable as income. The employer has to bonus out the $200 per month regardless as to whether or not an employee already has coverage through a spouse's group plan.--employer can bonus whomever he/she wants.

#2: The employer can bonus the $200 directly into the Section 125 plan and open it up only for individual premium reimbursement/HSA reimbursements. That way, employees who are not purchasing individual coverage (or contributing to an HSA) obviously won't get reimbursed.fund one HSA, must fund all.

Are both options possible? I know #1 is legit. I've heard #2 is legit from some TPA's and I've heard from others it is not. Thoughts?
- - - - - - - - - - - - - - - - - -
Also, I know an HRA plan could effectively act as the #2 option, but that has it's own down sides. No option for employees to defer additional amounts and no option to put the bonus in an HSA accont. The employer could set-up both a Section 125 plan and a Section 105 plan, but now the employees heads are spinning and my phone is ringing when they try to get reimbursed.


A couple of things.

The employer is going to spend $2000 per month in compensation and maybe save$300 or so? But then needs to turn around and pay for a 125 plan. May not be worth it.

At this point, might be worth it to just get a group plan with HSA as an option. Employer policy is not to fund hsa account, let the employees do that. Employer can then "bonus" anyone he wants and that money can go into the hsa account, deposited by the employee.
 
I agree with Lee.
Better off writing them as a group. If the case plans on growing how does the owner intend to recruit any quality employees without a group health?
 
Guys, thanks for responding.

Leevena - I should have been more specific, my state has very strict rules on how the bonus arrangement can work.

ABC & Leevena - the employer is savy and know what he is doing. He built this business up before and sold out for over $10 million. He is now rebuilding the same business again to pass on to his kids. He said health insurance was always a cost item that he struggled with, since he had no control over what he paid once at the state minimum contribution level is met (50%).

The individual bonus route gives him complete control over that expense year to year. That's the major reason for going this way.
 
The employer could set-up both a Section 125 plan and a Section 105 plan, but now the employees heads are spinning and my phone is ringing when they try to get reimbursed.

Why not keep it simple? Introduce supplemental insurance which pays first dollar benefits and employees can purchase using pre-tax deductions through the employer's benefit bank. Employees can pair the first dollar benefits with a high deductible plan from the individual market.

The employer gets cost certainty, and your agency avoids complicated reimbursement support.
 
What product do you use for first dollar benefits? The only one I have seen that I could see using in that role is Colonial's medical bridge product. An accident/hospital indemnity/critical illness policy isn't going to fill the gaps adequately. Even then, the group is young & healthy and the employer wants it to get to the employees in the form of an HSA contribution.
 
There is no supplemental insurance program that will fill every gap. Each policy option fills a specific portion of the spectrum. Medical Bridge is a common option. Also if the group is young and healthy an accident plan might be very popular.

The employees would be in control of which health exposures they wanted to address. Every employee need is different.

With supplemental insurance all employees would benefit from the $200/month bonus. If the employer ties the bonus to an HSA wouldn't the employees then need to have a high deductible plan in order to take advantage?
 
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