Friday, September 18, 2015

Dubious 105 Tricks

Recently, a colleague asked me if I'd heard of the "Classic 105" plan. I admitted that I had not, and he began to describe it to me.

I burst out laughing.

This scheme had it all: Section 105, Dead Peasant insurance, dubious policy loans, the works.

So, he sent me some links to get me started, and I began my own search to augment those. What I found was, um, intriguing.

Here's the concept in a nutshell (emphasis on "nut"):

"My employer claims that signing up for this "105 Classic Plan" will allow me to make %30+ of my income tax free. The jist [sic] of it is that they will take $560 per (bi-weekly) pay period out of my check, somehow "make it tax free" and refund most of it back through some vague "loan" that I apparently don't have to pay back.

This will reduce my income taxes pretty massively... but not only that, the company making my money untaxable claims it will pay 75% of all my out of pocket medical expenses up to $12,000."

So, there's the Section 105 part, but how, exactly, does this 75% reduction actually work?

For that, we go to the fine folks at Hill, Chesson & Woody, a company that also administers various benefit plans, and which did its own "due diligence" regarding the Classic 105 design.

They were able to dig through the chaff, and determine that:

"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."

And there's the "Dead Peasant" component.

Here's why my alarm bells went off: both sections are illegal (the former due to The ObamaTax, the latter through other legislative action).

Keeping kosher means never mixing milk and meat, nor ingesting pork products of any kind. I've always wondered, then, if a bacon cheeseburger would pass muster because the two negatives would cancel each other out [ed: this is a joke]. Perhaps the folks behind the Classic 105 scheme figured on the same calculation.

In the event, I turned to my own experts for their opinions.

My gurus of all things FSA/HRA/HSA, the folks at FlexBank, assured me (once again) that Section 105 reimbursement plans (where employers essentially pay for their employees' individual medical plans) have been verboten for several years now, no matter how pretty the packaging.

The tax implications posed another set of challenges, especially regarding the "Dead Peasant" nature of the life insurance portion. So, I once again turned to my favorite tax-blogger, Joe Kristan (who's helped us with this particular subject before). He notes:
"Without seeing all the plan documents, I will only point out the most obvious reasons this won’t work:
► Debt forgiveness is a taxable event.
► Life insurance is a taxable benefit unless it fits the narrow exclusion for $50,000 in term life.
►It is almost certainly an “overall scheme” that is treated as a non-compliant group plan under ACA guidance (FAQs about Affordable Care Act Implementation (Part XXII)), triggering the $100 per employee daily penalty."
Seems pretty dispositive to me.

But there's another piece that was niggling at me, and I finally figured out what that might be: what life insurance carrier is going to issue such a policy? There are only two possibilities: a group term plan, or individual policies.

I reached out to the field rep for one of our group non-medical carriers, and asked if this was even doable in that configuration. The short answer: no, because it would require that each participant execute an Absolute Assignment form, and he wasn't aware of any carrier that would accept one. Does that mean that no such carrier exists? No, but good luck finding one.

I also spoke with the underwriter at our primary life insurance carrier, who confirmed that absent insurable interest at time of issue, she wouldn't sign off on such a plan. Of course, there'd be nothing stopping the insured from changing the beneficiary post-issue, but that seems likely to provoke some major questions from the participants.

The bottom line is that this particular program fails to pass the smell test. I understand that there are agents still pushing it, perhaps out of ignorance, perhaps for other motives. Regardless, this isn't a plan I'd ever recommend to my clients.

Which is a shame, really: remember, the first ‘A’ in “ACA” is supposed to stand for "Affordable." So why would Uncle Sugar cut off a simple, cost-effective method for reducing the net cost of individual plans (by axing 105's)? I think the real shame here is that folks have to come up with these complicated, questionable schemes in order to make that "Affordable" a reality.
section 105, hra, classic 105, dead peasant, tpa
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