"Advance Reimbursements" and "Loans" For Uninsured Medical Expenses Are Gross Income: IRS

December 30, 2002 (PLANSPONSOR.com) - The Internal Revenue Service (IRS) has released Revenue Ruling 2002-80, stating any amount paid to employees as an "advance reimbursement" or "loan" for uninsured medical claims is not excluded from gross income under section 105(b) of the IRS Tax Code.

All monies given to an employee as an “advance reimbursement” or “loan” are counted as gross income, and thus should have the appropriate employment taxes withheld, regardless if the employee incurred any uninsured medical expenses during the year.

The revenue ruling examined two possible scenarios an employer might encounter when determining the proper way to handle “advance reimbursements” or “loans.”

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Scenario One

An employer provides health coverage to its employees providing for accident or health coverage through a group health insurance policy.

The employer automatically deducts the cost of the coverage from its employees enrolled in the insurance, thereby applying the salary reduction amounts to the payment of the premiums for the group health insurance policy for the employee during the year.

To restructure the salary reduction for the group health insurance policy, the employer makes payments to an employee in amounts that cause the employee’s after-tax pay from the employer to be the same or approximately the same as what it would have been if there were no salary reductions to pay premiums for the group health insurance policy. These payments would be characterizes as “advance reimbursements” of the uninsured medical expenses.

Even though the payments are made as an “advance reimbursements” for payments to an uninsured medical expenses, those amounts are paid to the employee regardless of whether the employee incurs expenses for medical care or suffers a personal injury or sickness during the year.

The employers “advance reimbursement” plan is therefore not an accident or health plan because it is not an arrangement for the payment of amounts to employees in the event of personal injuries or sickness.

In addition, the exclusion from gross income under Section 105(b) applies only to amounts paid specifically to reimburse medical care expenses and does not apply to amounts that the employee would be entitled to receive regardless of whether or not the employee incurs expenses for medical care.

Any amount the employee received for uninsured medical expenses given in the “advance reimbursement” should be treated as additionally compensation with the proper tax withholdings taken from the employee’s gross wages.

Scenario Two

Similar facts as the first scenario, only the employer reimburses an employee’s health insurance premiums through “loans” rather than “advance reimbursements.” Although the employer characterizes the payments to the employee as “loans,” it is understood that the employee will never become obligated to repay any of the “loans”. Under this plan, when the employee submits uninsured medical claims, the employer treats the reimbursements as an offset against that amount of the “loans.”

The plan is implemented by making “loans” to the employee sufficient to cause the employee’s after-tax pay to remain essentially unchanged. The “loans” only become due and payable at the time the employee submits claims for uninsured medical expenses.

Again, the exclusion from gross income under Section 105(b) applies only to amounts paid specifically to reimburse medical care expenses and does not apply to amounts that the employee would be entitled to receive regardless of whether or not the employee incurs expenses for medical care.   Proper withholding should be taken out of the employee’s gross wages for the full amount of the loan.

A full text of the Revenue Ruling can be found at  http://www.irs.gov/pub/irs-irbs/irb02-49.pdf .

RIA Offers Solution To Boost Lifecycle Fund Utilization

June 11, 2004 (PLANSPONSOR.com) - Plan sponsors are constantly confronted with the problems of increasing participation rates in 401(k) plans and making sure participants make the right investment decisions once there, problems that Manning & Napier Advisors, Inc have a solution for.

Speaking to a plan sponsor’s heart, Manning & Napier Advisors, Inc identifies the simple problem with the complex answer. “If you are the sponsor of a 401(k) or other type of participant-directed plan, you know the problem. Many participants are confused about investments.” Yet, the firm’s white paper, A Solution to Participant Confusion:Help DC Plan Participants Make Better Investment Choices Using Tiered Communication and Life Cycle Funds, says the solution does not necessarily have to be complex and is as easy as offering lifestyle fund options in 401(k)s.

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“Participants cannot save their way out of inadequate investment returns,”said Patrick Cunningham, Managing Director of Client Relations and a memberof the firm’s Executive Group. “Helping your employees earn a higherinvestment return, even by a percentage point or two, can have a majorpositive impact on their preparedness for retirement.”

Plan sponsors may approach the easy answer with trepidation, given that traditionally the utilization rate of these funds remains in the single digits. However, Manning & Napier said utilizing a strategy outlined in the white paper, they were able to increase participation rates among lifestyle funds to better than 50% of a plan’s participants.

The Rochester, New York-based registered investment advisor offers three case studies of companies that dramatically increased the use of lifestyle funds among plan participants through Manning & Napier’s two-tiered communication strategy, the lynch pin of which is to offer participants a clear, concise decision, Would you like to make the asset allocation decisions yourself or delegate them?”

Manning & Napier found with this clear message, “most participants who chose to invest in life cycle funds used them appropriately.” Quantifying their results, the firm said an average of 57% of participants in the case studies invested all of their accounts in a single, diversified life cycle fund, while an additional 10% invested all of their accounts in two adjacent life cycle options on the risk spectrum. Further 14% invested across both sides of the two-tier menu in a consistent manner.

To further drive home the message to participants, Manning & Napier found the communication strategy to be most effective in on-site group meetings. Speaking to the three case studies detailed in the white paper, the firm said, “These plans had the ability to hold group meetings and, as a result, participants used the professionally managed life cycle funds broadly, with over 50% of plan assets directed to these offerings.” Without the onsite meetings, Manning & Napier said utilization of lifecycle funds will not be nearly as high, “Many companies, including many large plan sponsors, cannot offer on-site group meetings. With the message in hardcopy and Internet form only, there will likely not be 50%+ utilization. “

Further, the white paper examines details of an approach that integrates everything from menu design, fund selection, and communications in an effort to reach out to the participants most in need of professionally-managed allocations.A copy of the 24-page report,A Solution to Participant Confusion, is available at http://www.manningnapieradvisors.com/www/news_detail.asp?ID=60 .

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