Discriminatory Fringes

[Snaggletooth]

A friend is a 100% shareholder of a Sub S Corporation, with 200 employees in 8 different states. He provides group medical insurance, provision of which is governed by an employee handbook. The insurance is NOT a section 125 cafeteria plan.

However, in order to recruit and keep certain people, he offers to pay their insurance completely. Others he will tell Human Resources to deduct only $15 per week on some people, while others are paying $50-$60 per week. He says the insurance company doesn't care, since the policy coverage is the same.

I told him the IRS will beat him up so bad he would have to shut down if they ever found out. He says he realizes he can't discriminate under a section 125 plan, and has intentionally turned down section 125 so he can pick and choose who to pay coverage for. I told him to read "Fringe Benefits" in the Circular E (there are a couple volumes of this). He brought it to me and challenged me to find where he has violated any regulation in the Circular E. I could NOT find anything to support my case.

Where is the violation, my friends??

[abby]

Boli

You may want to look at the Employment Division on your state website.

I don't have an answer at my fingertips, but I remember when I used to some HR work with bookkeeping, that a lot of the requirements were State Determined.

I think, in most states, you are allowed to treat a whole class of employees differently from another class, but you can't discriminate within a class - pick and choose - who you will cover.

Sorry I can't be more help. I'll be interested to see what the full answer will be.

[jainen]

whatever he agrees to

Certainly he can offer different compensation to different workers. He may not get a tax benefit, but it's a free country. Some workers may not like those terms and they don't have to work there.

Of course he can't discriminate against protected classes such as race, disability, and so on, and he has to follow minimum wage and health & safety rules. And he has to pay whatever he agrees to.

[Snaggletooth]

Jainen

Thanks for the response. You're really not that bad a fella... well, maybe not THAT bad.

The way I understand it, any deal he wants to make with compensation is OK. They will get a W-2 and IRS will get their money. Medical insurance, however, is deductible by the corporation and EXEMPT to the employees, so it has always been my belief that IRS has been sticking its nose into this issue and insisting on non-discrimination.

He is aware that he can't discriminate within "Classes" of employees, and admits this. However, he is the type that will create 500 classes for 600 employees, and of course drive his Human Resources people bonkers. He does things like this to create administrative bungling and then can't imagine why his HR people and accounting people can't get their work done. But this is a different issue and I won't waste any more time with it. Besides, I'll bet y'all know SEVERAL people like this.

Hope I can hear from others.

Thanks, Ron J.

[jainen]

I'm not others

I'm not others, but I got a couple more points. First, compensation is all of the benefits he gives his workers, not just salary, and unless it's a union shop he can make 600 different deals with 600 different employees. If his medical insurance doesn't meet IRS standards then he can't deduct it and/or it's not exempt to the employees--but if that's the way he wants to do it, go for it.

Second, for purposes of discrimination the classes are set by law. If he doesn't know what those classes are he can look at the poster on the wall of his break room.

[Unregistered]

I have heard several times that you can't discriminate with health insurance premiums. I even had an IRS agent bring it up once in an audit. I said show me. That's as far as it went. I can't say I have ever read where you can't discriminate.

[OldJack]

I have heard several times that you can't discriminate with health insurance premiums. I even had an IRS agent bring it up once in an audit. I said show me. That's as far as it went. I can't say I have ever read where you can't discriminate.

The taxpayer is correct that he can discriminate in any way he wishes as long as the health insurance plan premiums are with a 3rd party insurance company. It has always been considered a negotiated part of wages with an employee. The only health insurance plan that cannot discriminate is self-insurance plans and the code 125 plan.

[JON]

Old Jack

The 1980s they tried legislation that would prevent discrimination for health insurance coverage. After a couple of years of wasted effort and volumes of proposed they did not act on it. You can discrimnate and there is no qualifications, unless you are covered by a seperate section like 125. Some states do have their own laws. In the land of 10,000 taxes there is some old provision that most have decided to ignor.

[OldJack]

Jon

Yes JON I remember those old days also. Other plans that probably you can't discriminate with is like the new HSA (Health Saving Account), but I really have not look at those yet as none of my corporate clients have set those up and most of my 1040's are corporate clients.

[Bees Knees]

Section 105(h) prohibits discrimination for self-insured medical reimbursement plans. Those are the plans where the employer reimburses the employee for costs not covered by insurance.

Section 106 is employer provided health insurance. There is no similar non-discrimination rules found in code section 106.

Section 125(b) for cafeteria plans also has a similar non-discrimination rule similar to code section 105(h).

Even though the Internal Revenue Code does not have a non-discrimination rule for health insurance benefits provided by an employer, I have read where other laws may kick in, preventing discrimination. Particularly, I have heard that ERISA laws could apply. And of course, each state also has their own set of rules. I would also think COBRA might have something to say. Bottom line, I think the employer should be careful about messing with playing favorites.

[oceanlovin'ea]

number of employees

I thought S-corps could not have more than 100 employees. How can he be a s corp?

Linda F

[Bees Knees]

That's 100 shareholders. S corps can't have more than 100 shareholders. They can have a million employees if they want, but no more than 100 shareholders.

[oceanlovin'ea]

Got me

there. I need to read more carefully. Maybe I was posting late at night. That sounds like a good excuse, doesn't it?