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Frequently Asked Questions (FAQs) - Premium Conversion Plans

This section is used to respond to questions presented by employers that need more in depth information than is contained in the general information section. By asking questions using our "Contact Us" links throughout the site, you not only obtain a prompt answer, you also help others by giving us a better idea of what you want to know. If the information is useful to you, chances are, it will be useful to another employer.

This continual improvement process will help us better meet your needs. If you cannot find your answer here, please let us know.


Table of Contents

Before you Subscribe

  • We already have plan documents, isn't that enough?
  • Another company offers a "free" Premium Conversion Plan so why should I pay for one?
  • We have had a plan for years and don't need any ongoing support?

    Plan Design Considerations

  • What if my medical plan doesn't renew for several months?
  • Can I allow employees to use the Premium Conversion Plan for outside insurance premiums?
  • Should disability coverage be offered on a tax-free basis?
  • How do I handle the $50,000 limitation on tax-free life insurance coverage?
  • How can I determine if a cancer and dread disease plan is eligible for tax-free treatment?

    Ongoing Plan Management

  • May a participant drop coverage in the middle of a plan year?
  • May an employee make changes to benefits during a spouse's open enrollment period?
  • What is the definition of a dependent for purposes of the qualifying events which allow benefit changes?
  • What impact does this plan have on deferred compensation plan?

    Compliance Rules

  • What effect does the Premium Conversion Plan have on the preparation of W-2s?
  • What if the plan doesn't pass the non-discrimination test?

    We already have plan documents, isn't that enough?

    Some vendors only provide Section 125 plan documents, and may create in their customers a false sense of security that the documents and some forms are all that is needed to properly implement and administer one of these programs. While this process need not be difficult, there are substantial penalties for failure to follow the rules.

    Any plan document prepared before March 2000 may be out of date. Nondiscrimination regulations must be followed. IRS Form 5500 must be filed each plan year. Changes in elections may only be permitted when certain qualifying events occur (and these rules have changed at least four times since January 1, 2000.

    Failure to comply with all of the requirements could result in additional taxes, penalties and interest for both the employer and the employees. Don't take a chance. The comprehensive services available through the BenefitsWorkshop can help protect you and your employees from these potentially costly and embarrassing problems. The FICA savings on employee contributions alone should more than cover the cost of our services. So why skimp? Let us help you avoid the compliance pitfalls.

    Our simple calculator will show you that with just a few participating employees, the plan will pay for itself through the reduction in employer matching FICA contributions. And your employees will save even more.

    If you want to be secure in the knowledge that you have chosen a resource that specializes in these programs, simply sign up with the BenefitsWorkshop Premium Conversion Plan. With the 30 day money-back guarantee, there is no risk.

    Another company offers a "free" Premium Conversion Plan so why should I pay for one?

    The cliches are endless. There is no free lunch. You get what you pay for. If it is too good to be true...

    Is there a "catch"? Why not find out? Ask the vendor these questions?

  • Will the vendor require that every one of your employees sit down with someone who wants to sell them something? (This is not a Section 125 requirement.)
  • Are these sessions conducted while employees are "on the clock"? (This is a cost!)
  • If the employees buy something from the vendor and they decide they don't want it after a month or two, can they cancel?
  • How does the vendor get paid?
  • If you aren't paying for service, how much service will you get?
  • Is the plan "free" after the first year?

    Now ask yourself, are your goals the same as the vendor of the "free" plan? Why not pay the small price to guarantee quality service and support without hidden costs, potential risks and conflicts of interest? Our simple calculator will show you that with just a few participating employees, the plan will pay for itself through the reduction in employer matching FICA contributions. And your employees will save even more.

    If you want to be secure in the knowledge that you have chosen a resource that specializes in these programs, with no hidden agenda, simply sign up. With the 30 day money-back guarantee, there is no risk.

    Our purpose in offering this information is simply to help employers ask the right questions and make informed decisions when comparing "free" plans to the services provided by FlexBwn Corporation.

    We have had a plan for years and don't need any ongoing support?

    If you have not updated your plan recently, your plan documents and some of your administrative procedures may be out of date.

    Prior to March 2000, the IRS had only issued temporary regulations governing Section 125 plans. Those rules were used by attorneys and vendors to develop plan documents and administrative procedures for employers implementing and managing these programs.

    In March 2000, the "final" regulations were published. The most substantive changes related to the qualifying events that allow employees to change elections during a plan year. Even those rules have been clarified several times since that date.

    If your plan does not reflect the new rules, your plan document could be obsolete and your Human Resource people could be making decisions that do not follow the latest regulations.

    BenefitsWorkshop monitors changes and notifies you via e-mail whenever action is warranted. The latest plan documents and administrative guidelines can be downloaded anytime, at your convenience. If you have multiple locations, we can also help you disseminate the necessary information. No more lost files or inconsistent procedures. Simply allow the us to assist in the management of your plan and your concerns about written compliance can be eliminated.

    What if my medical plan doesn't renew for several months?

    There is no need to wait. Your initial Plan Year can be shorter than 12 months. Therefore, if your medical plan renews on January 1st, you can implement a Premium Conversion Plan on the preceding July 1st (or any other date) and enjoy he tax savings for several months before the first full 12 month Plan Year begins. For the second and subsequent Plan Years, the open enrollment period for the Premium Conversion Plan will coincide with the medical plan enrollment period.

    Can I allow employees to use the Premium Conversion Plan for outside insurance premiums?

    The only insurance that is eligible to be tax-free under a Premium Conversion Plan are Qualified Benefit Programs sponsored by the employer, available to all eligible employees and with premiums paid by payroll deduction. Premiums for individual coverage or coverage obtained from a spouse's employer are not eligible.

    Should disability coverage be offered on a tax-free basis?

    That depends. Disability coverage is eligible, but the IRS will tax either the income spent on premiums or the benefits if the employee becomes disabled.

    If the employees pay for disability coverage with tax-free income, the cost is lower and this could boost participation. However if the premium is paid with tax-free income under a Premium Conversion Plan (or if the premium is paid by the employer), the benefits will be taxable. This will effectively lower the amount disabled employees would receive.

    So it is a trade-off either way. If the premium is taxed, the benefit isn't, and vice versa. One solution may be to offer coverage with higher limits to allow employees to offset the taxes on the benefits.

    How do I handle the $50,000 limitation on tax-free life insurance coverage?

    The $50,000 limit applies to employer-provided coverage, and any premiums paid by the employee under a Premium Conversion Plan are considered to be provided by the employer. Therefore, you need to include any employer-provided coverage when you evaluate coverage levels.

    You have two choices. Either the employees must pay income taxes on the actual premiums or on the imputed value of any coverage over $50,000. The first option may be easy if coverage is purchased in fixed amounts, like in $10,000 increments. The premiums for coverage over $50,000 could then be paid with after-tax payroll deductions.

    If the amount of coverage is not offered in fixed increments, as in a "times salary" plan, the process is more difficult. For example, if the employer provides life insurance coverage equal to the employees' annual salary, lower paid employees (below $50,000) would have no taxes due on the premiums. If the employee earns $60,000 per year, the first $50,000 is tax-free, but the employee must pay income taxes on the "imputed" value of the additional $10,000 of coverage. The amount that is taxable is calculated using a Table provided by the IRS. If the employees may purchase additional life insurance in amounts equal to multiples of their salary, the employees that originally fell under the $50,000 cap may now exceed the limit and have additional taxes due.

    The good news is most payroll systems and payroll service providers can easily handle the calculation. The addition taxable amounts would show up on each paycheck and income taxes would be withheld. The amounts would also be reported on the employees' W-2s.

    How can I determine if a cancer and dread disease plan is eligible for tax-free treatment?

    This one is simple. Merely contact the cancer insurance company or their representative and ask if the plan is eligible to be offered tax-free under a Section 125 plan. And get the answer in writing.

    May a participant drop coverage in the middle of a plan year?

    Only if the employee or a dependent experiences a qualifying event. Click here for more information.

    May an employee make changes to benefits during a spouse's open enrollment period?

    Yes, provided all of the rules described here are followed.

    What is the definition of a dependent for purposes of the qualifying events which allow benefit changes?

    Generally, the definition is the same as that used for income tax purposes. It can be spouse, natural and adopted children, step and foster children, even parents in some situations. See page 8 of IRS Publication 501 for more information.

    What impact does this plan have on deferred compensation plan?

    In most cases, there is no impact. In some cases, however, an employee's maximum contributions to the deferred compensation plan may be affected. Most deferred compensation plans have maximums which equal the lesser of a percentage of the employee's taxable income or a flat amount. The flat amount applies to employees above a certain income. The percentage applies to lower-income employees. If a lower-income employee participates in a Section 125 plan, the maximum deferred compensation plan contribution is lower, since it is a percentage of taxable income. Most lower-income employees do not contribute the maximum into a deferred compensation plan, so few if any people would be affected. You should just be aware of this possibility and make adjustments to deferred compensation plan contributions where necessary. The tax savings affected employees will realize from participation in the Premium Conversion Plan will far exceed any "lost" tax savings due to the reduction in the deferred compensation plan maximum.

    What effect does the Premium Conversion Plan have on the preparation of W-2s?

    Box 1 of the W-2 excludes any premiums paid with tax-free income under a Internal Revenue Code Section 125 Premium Conversion Plan.

    What if the plan doesn't pass the non-discrimination test?

    You must reduce the benefits received by Key Employees to a point that they, in total, receive no more than 25% of the total benefits received by all employees. For the purposes of the Premium Conversion Plan, this means the Key Employees may have to pay a portion of their premiums with taxable income.

    Still have questions? Click "Contact Us" to your left.


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