Right now, there are three major shifts occurring in the VB market that you must adapt to in order to survive in the future.  Today, we will talk about the first of those three: the shift from pre-tax to post-taxing of VB plans. 

This is because of IRS regulations that outline the taxability of the pre-taxed policies or those that have an employer defined contribution.  Any benefit payment in excess of unreimbursed medical expenses is now considered a taxable event to the policyholder and employer. 

When do benefit payments exceed unreimbursed medical costs?  The answer is approximately 80% of claims.  Two common examples are wellness claims and first-occurrence benefits.  Most wellness benefits are in excess of doctor visit co-pays; and most first-occurrence benefits exceed the amount of unreimbursed medical costs at time of claim (i.e., they receive $5,000 in first-occurrence prior to incurring that much in out-of-pocket costs).

A recent memo from one of the top ten brokers in the country, reads as follows: “Last year, the IRS issued a memorandum that changed the way we look at the taxability of fixed indemnity plans such as Critical Illness, Accident insurance, and Hospital Indemnity coverage, when these benefits are purchased with pre-tax dollars or purchased by an employer for its employees [i.e., defined contribution]…For this reason, we recommend that employers offer these plans on a post-tax basis, or if premiums are paid for by employers [defined contribution], that wages are grossed up accordingly, to eliminate the tax liability associated with offering these benefits.”

In addition, a market leading carrier recently gave the following guidance: “If the premiums are paid on a pre-tax basis through employer contributions or employee pretax salary reduction through a cafeteria plan, then whether the benefits are taxable depends on the individual’s unreimbursed medical expenses.  If the amount paid under the policy does not exceed the individual’s unreimbursed medical expenses, then the amount received is not includable in the employee’s income.  However, if the amount received under the fixed indemnity policy is more than the individual’s unreimbursed medical expenses, then the excess is taxable.”

They even gave a mathematical example:  “The plan pays $200 for a medical office visit.  If the covered individual’s unreimbursed medical expenses as a result of the visit were $30, then $30 would be excluded from the employee’s income and the excess amount of $170 would be taxable.”

Are you making sure your clients and policyholders are educated about the tax liability and consequences?  What would happen if a competitor knocked on your client’s door and provided this information to them?  What would your answer be to your client as to why you kept them on pre-tax – without educating them on the liabilities associated with it on the majority of claims?  At Piedmont, our zero-bill solutions are only used in a post-tax environment.  So we not only eliminate the bill, but the tax liabilities associated with pre-tax plans as well.  For this upcoming enrollment season, make sure your clients are aware of the risks associated with their pre-tax plans, or better yet switch them over to a post-tax model before someone else does.  To learn more, please contact us at Piedmont.  And thank you for using Piedmont, the Original Payroll Deduction Alternative!