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Pre-tax Contributions for Non-Employer-Sponsored Health Plans Through Section 125?

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Pre-tax Contributions for Non-Employer-Sponsored Health Plans Through Section 125?

New guidance issued from the Department of Labor and Internal Revenue Service states that insurance that is not sponsored through group coverage and includes an employer contribution is NOT an eligible expense through IRS Section 125 plans.

There are a number of tax schemes and organizations that are working to create a product or avenue to avoid the new regulations that would allow tax-free treatment through list bill or employer-sponsored Section 125 plans.  However, there are states that are aggressively taking action such as Massachusetts who have used guidance that will disallow this tax treatment on their Exchange on the Commonwealth as of June 30th, 2014.

The Commonwealth has implemented state law that actually requires employers to provide a Section 125 POP plan for a group-sponsored plan but has retracted all reference to previous guidance for individuals who do not have employer-sponsored coverage.

Below is a Q&A that was posted on the Health Connector’s website:

Q&A on New Guidance related to S. 125

  1. What is the new federal guidance related to S. 125 plans?
    The IRS and Department of Labor released guidance on September 13, 2013, that indicates, among other things, that Section 125 plans may no longer be used by non-benefits eligible employees to purchase non-group health insurance on a pre-tax basis and without an employer contribution.  However, there are still many coverage options available to you that are outlined in this Q&A.
  1. How is this different from the information I received previously?
    Previously, you were provided notice that the Commonwealth had set up a Section 125 plan with Mosaic Insurance Exchange through which non-benefits eligible employees could purchase non-group health coverage on a pre-tax basis. However, because of the issuance of the federal guidance on September 13, that is no longer the case.
  2. What do I do if I was offered an S. 125 plan?
    If you were offered a Section 125 plan through the Commonwealth and you used that plan to purchase insurance in 2013, you can continue to use your Section 125 plan to pay premiums on your insurance policy until the policy expires on June 30, 2014. However, you cannot sign up for a new Section 125 plan after January 1, 2014.  When your current Section 125 plan expires, you can purchase health insurance through the Health Connector. You may be eligible to receive federal subsidies to assist you in the purchase of health insurance.  For information on applying for health coverage, go to MAhealthconnector.org. You can also call 1-877-MA-ENROLL.
  1. Can I get insurance through the new exchange/marketplace?
    Yes, the new exchange/marketplace is the Massachusetts Health Connector MAhealthconnector.org. You can sign up online or through calling 1-877-MA-ENROLL. You may be eligible for advanced premium tax credits or state subsidies depending on your income. (As an example, individuals with a household income of up to approximately $46,000 and a family of four with a household income of up to $94,000 may qualify for tax credits.)
  1. How do I sign up?

You can sign up online by visiting MAhealthconnector.org.  You can shop for different products depending on the level of benefits and cost-sharing you feel most comfortable with. There are tools on the site to help you choose which plan is best for you.

  1. Will my coverage on the exchange/marketplace be pre-tax?

No, the coverage that you buy on your own through the Massachusetts Health Connector will not be pre-tax. However, you could be eligible for advanced premium tax credits or state subsidies if you meet certain income thresholds.

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