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Tag: Constructive receipt

HRB Health Care Solutions Banner

As you start off the new year and plan your health care budget we wanted to pass along a couple of definitions and some considerations as you head into this new year.

First some definitions:

Cafeteria Plans

The IRS defines Cafeteria Plans as:  

A cafeteria plan is a separate written plan maintained by an employer for employees that meets the specific requirements of and regulations of section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pretax basis. Participants in a cafeteria plan must be permitted to choose among at least one taxable benefit (such as cash) and one qualified benefit.

A qualified benefit is a benefit that does not defer compensation and is excludable from an employee’s gross income under a specific provision of the Code, without being subject to the principles of constructive receipt. Qualified benefits include the following:

  • Accident and health benefits (but not Archer medical savings accounts or long-term care insurance)
  • Adoption assistance
  • Dependent care assistance
  • Group-term life insurance coverage
  • Health savings accounts, including distributions to pay long-term care services

Constructive receipt. 

The IRS states Constructive Receipt isIncome is constructively received when an amount is credited to your account or made available to you without restriction. You do not need to have possession of it. If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations.

Why do we care?

In a recent article posted on Flexiblebenefit.com we care because at times, employers offer cash payments to their employees who choose not to sign up for employer health insurance coverage.  These cash payments are taxable to employees who waive the coverage but employees who elect the coverage may also be liable for the taxed on a cash payment that they did not receive.  This is where constructive receipt comes into play. By definition, employees may need to consider the amount of the cash payment as income because the person has control over the money even though they did not take the money. Control exists because the employee has the option to waive the coverage in return for a cash payout. That is Constructive Receipt. The money would have to be recorded as income and treated generally like a cash bonus. Employers will need to withhold the appropriate payroll taxes as if the bonus was paid. This will need to be reflected in the employee’s W2 that may have already been sent to the employees.

Can this be avoided?

Yes – This can be avoided if the employer makes the cash payment available through a Cafeteria Plan. If the employer sets up their health care coverage under a Cafeteria Plan, then the employ has a choice between taking a plan or taking the cash payout. If the employer offers a cafeteria plan then employees that take advantage of that coverage may do so tax-free according to flexiblebenefit.com.  The key to this working is to make sure that the Cafeteria Plan documentation addresses this so that the tax implications can be avoided.

Please contact our office if you have any questions or wish to inquire about Cafeteria Plans or other ways you can protect your employees and offer best practice health coverage.

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