The Internal Revenue Service (IRS) has issued another revenue ruling (Rev. Rul. 2002-80) to underscore its position that employees may not pay for health insurance on a pre-tax basis and then be reimbursed by their employer on an after-tax basis.

Rev. Rul. 2002-80 expands upon Rev. Rul. 2002-3, both of which call for the elimination of "double dipping" by employers and employees who claimed both a tax benefit from a salary reduction used to purchase health insurance, as well as from employer reimbursements of those amounts. The IRS has ruled that such reimbursements are taxable transactions.

In its most recent ruling, the IRS has addressed two situations that it viewed could continue to create tax avoidance scenarios. Under one situation, the employer maintains a group health insurance plan with coverage paid for by employees with pre-tax deductions, as well as a medical expense reimbursement plan (MERP) for uninsured medical expenses. The MERP, in turn, would provide an "advanced reimbursement" that would keep an employee's after-tax pay equal to what it would have been prior to the health plan coverage—and would not be included in the employee's gross income.

At the end of the year, if the MERP had not been used, the employer would "forgive" those advanced funds. Overall, this resulted in a decrease of taxable wages for the employee and an increase in FICA (Federal Insurance Contributions Act) savings for the employer. In Rev. Rul. 2002-80, the IRS underscores that advanced payments such as these that are not used for medical expenses do not meet the criteria specified under Code Section 105 and, as a result, are subject to income and employment taxes.

In a second situation, the IRS pointed to conditions similar to those as in the first, but with an employer calling the advanced payments "loans." Furthermore, in this situation, these "loans" were not payable until an employee submitted uninsured medical expenses for reimbursement. Then, as was the case in the first situation, these monies would be forgiven if not used. Using the same rationale, the IRS ruled those monies would be subject to taxation.

Pharmacy Benefits Being Placed "Under The Microscope"

Changes in plan design, instituting percentage-based co-insurance, and introducing tiers of coverage can help control overall plan costs. For example, a study last year by the RAND Corporation found that increasing co-payments resulted in substantial savings. When single co-payments were doubled to $10, the study found, annual costs were reduced by 22%. Because of cost-savings, an increasing number of companies are using three-tier plan design where an employee, for example, might pay $10 for a generic drug, $20 for a preferred brand, and $30 for a non-preferred brand. A 2002 Kaiser Family Foundation study has found a 57% increase in companies using three-tier plans over the previous 24 months.

Companies, however, always need to recognize that changes in plan design should ensure that employees do not forgo medication that's essential to their well-being and, ultimately, create situations leading to even greater medical costs.

Edie Houck, a human resources supervisor at a utility company in Minnesota, says her company has managed cost containment and employee well-being through honest communications.

Looking ahead, pharmacy benefits costs are expected to receive even greater cost-containment attention as employers—like J.B. Hunt Transport, Inc.,—study administrative data. Hunt Transportation found that 10% of its employees filled 72% of all prescriptions. As a result, it has launched a disease-management program to help those employees.

Benefits Managers Link Absenteeism To Productivity Loss

Of the 86 human resources and benefits professionals surveyed at the 15th Annual Benefits Management Forum and Expo, 66% linked absences to productivity loss, 20% pointed to increased benefits costs, and 6% said the loss of workdays impacted their company's profitability. Another 6% of the respondents said they believed absenteeism impacted all three of those areas at their companies.

Although 75% of those surveyed said physician recommendations are used to determine the duration of time loss to disabilities, 9% said they rely solely on employees to make that determination.

Forty-seven percent of the survey respondents said that the Family and Medical Leave Act (FMLA) had no impact on absenteeism, 31% said they believed the FMLA contributed to absences, while 22% said they had no opinion either way.

IRS Approves Sick Day Exchange For Defined Plan

In the letter, dated August 26, 2002, the IRS concluded the exchange: (1) will not result in actual or constructive receipt of income to eligible employees in accordance with Code Section 451; (2) is not a contribution made pursuant to a salary reduction agreement within the meaning of Code Section 401(k)(2)(A) and Section 1.201(k)-1(a)(3)(i) of the income tax regulations, but is a non-elective employer contribution; and (3) is not includible in the employee's gross wages for purposes of the Federal Insurance Contributions Act (FICA) under Code Section 3121.

The employer, which has both union and non-union employees, allows its workforce to accumulate up to 90 days of unused sick leave. Any amount in excess of that number is forfeited. Employees with certain years of service may receive cash in lieu of unused sick leave.

However, under the Sick Leave Exchange (SLE) program, unused accumulated sick leave will be used by the employee as needed, accumulated for future use, exchanged for a contribution to the company's retirement plan, or forfeited if unused days exceed 90. The new program does not give eligible employees the right to receive payment for unused sick leave.

The proposed SLE program will permit employees who have accumulated 30 days of sick leave to elect to contribute up to five days of unused sick leave to their retirement plan at the rate of 20% of the employee's regular gross pay. Employees would be fully vested at all times in the contributions made under the SLE.

Although private letter rulings are case specific and may not be considered precedent setting, they can provide guidance on how the IRS would view similar arrangements.

29 Million Workers Choose To Have Flexible Schedules

These findings were extrapolated by the BLS from a supplement to the May 2001 Current Population Survey. Other survey highlights include:

• Of the 28.8% of workers with flexible work schedules, 11.1% worked flexible hours as part of a formal employer-sponsored program.

• Men were more likely to work flexible schedules than women (30% vs. 27.4%).

• The proportion of full-time employees who usually work a non-daytime schedule declined to 14.5% from 18%.

• The prevalence of shift work was greatest among workers in service-oriented occupations, such as protective service (49%) and food service (40.4%), and among those employed as operators, fabricators, and laborers (25.4%). Alternative shifts were least common among managers and professionals (6.7%), those in administrative support occupations (8.4%), and workers in farming, forestry, and fishing occupations (5.6%).

• In private sector industries, the percentage of workers on alternative shifts was highest in eating and drinking establishments (46.2%) and lowest in construction (2.5%) and finance, insurance, and real estate (4.6%).

• More than half (53.3%) of those working an alternative shift did so because it was the "nature of the job." Other reasons included: personal preference (13.3%); conducive to family life (8.9%); better pay (6.9%); and because it allowed time for schooling (3.3%).

Paid Time Off Most Frequently Offered Benefit

The BLS also found that 51% of employees in private industry participated in medical care plans, and 48% were covered by retirement income benefits. Life insurance was available to 54%, with accidental death and dismemberment available to 41% of employees.

Other benefits frequently offered in private industry include non-production bonuses (48% of employees), and work-related educational assistance (38%). Less prevalent benefits included: severance pay (20%); wellness programs (18%); job-related travel accident insurance (15%); and long-term care insurance (7%).

Of the 51% of employees with medical care coverage, premiums were fully paid by the employer for 32% of those with single coverage plans and 19% of those with family coverage. The majority of medical plan participants were required to contribute a flat monthly amount, averaging $54.40 for single coverage and $179.75 for a family.

Employee contributions for single care medical coverage were not required for 25% of professional, technical, and related employees, for 28% of clerical and sales employees, and for 38% of blue collar and service employees. For family coverage, the percentages were 15%, 16%, and 23%, respectively.

Full-time employees were more likely to have benefits coverage than part-timers. Fifty-five percent of full-time employees were covered by retirement benefits, compared with 18% of part-time employees. For health care benefits, 61% of full-time employees were covered by medical care plans, compared with 13% of part-time employees.