Premium payment plan (IRC Section 125)

Paying for premiums with pretax dollars

Section 125 of the Internal Revenue Code (IRC) allows the employer to deduct money from the employee's paycheck before certain payroll taxes and income taxes are calculated. This rule allows for deductions to include employee contributions for the following PEBB benefits:

• Medical coverage
• Medical Flexible Spending Arrangement (FSA)
• Limited Purpose FSA
• Dependent Care Assistance Program (DCAP)
• Health savings account (HSA)

Eligible employees are automatically enrolled in the premium payment plan upon enrollment in PEBB medical (WAC 182-08-197).

Can employees opt-out of pretax premium payments?

Employees may change their premium payment status by completing and submitting the PEBB Premium Payment Plan Election/Change form to their payroll or benefits office during the following time frames:

• Within their first 31-days of becoming eligible for the employer contribution toward PEBB benefits,
• During annual open enrollment (November 1-30), or
• No later than 60 days after a qualifying special open enrollment event.

Learn more on the paying for benefits on the Public employees website.

Employees enrolling nontax qualified dependents in PEBB benefits

Under federal law, employer contributions for health insurance do not need to be included as gross income for federal income tax. However, if an employee's enrolled PEBB dependent does not qualify as a tax dependent for tax purposes under Internal Revenue Code (IRC) Section 152, as modified by IRC Section 105(b), employers must report the fair market value of the dependent’s health insurance as gross income.

Employees adding a dependent who does not qualify as a dependent for tax purposes (e.g., state-registered domestic partner (SRDP), SRDP's child(ren), extended dependent) to their employer-sponsored insurance must identify their family tax status for the upcoming calendar year by completing and submitting the Declaration of Tax Status form to their benefits administrator.

Learn about tax issues related to nontax qualified dependents.

Payment options and tax treatments while on FMLA

In conjunction with IRS proposed regulations, payment options may be offered under an IRC Section 125 to an employee who chooses to continue group health coverage while on unpaid Family and Medical Leave Act (FMLA) leave.

For purposes of PEBB benefits, employers may offer either of the following options:

• Prepay
  • This option allows employees to pay in advance for the insurance premiums due while on FMLA leave.
  • Employers cannot require that employees prepay for the leave period.
  • Pretax advance payments cannot be made for any time period in the next plan year (a plan year is January-December).
  • Prepayments can be made on a pretax or after-tax basis, depending on the employee's premium payment plan status for the plan year. However, payments made by personal check will be treated as a posttax payment.

• Pay-as-you-go

  • This option allows employee to make premium payments on the same schedule as if payroll deductions were occurring.
  • Pay-as-you-go contributions are made on a posttax basis unless they are taken from any taxable compensation paid the employee during the leave period.

Personal checks considered taxed employee contributions

When employers are unable to deduct the pretax employee contribution from an employee's paycheck, employers should make arrangements with the employee to pay through other methods. If any portion of the employee contribution is paid using a personal check, it will be treated as a posttax payment.

Examples where payroll deduction may not be available include:

• Employee on approved leave, who is maintaining eligibility for PEBB benefits by using eight hours of paid leave per month, but their pay does not cover the total pretax deduction.
• Employee on approved leave without pay for more than a month, but is maintaining eligibility (e.g., FMLA and PFML that runs concurrently with FMLA).
• Quarter-to-quarter or semester-to-semester faculty who is not working for a quarter/semester or more but is maintaining eligibility through two-year averaging.
• Seasonal employee who is not working but is eligible for off-season coverage.

Learn more about paying for benefits.

​De minimis default policy when employment is terminated

When a pretax health insurance payroll deduction has been taken from an employee whose employment has been terminated and is no longer on the employer's payroll, the deduction should be refunded at the deduction gross amount.

For example:

• A pretax deduction of $16 may only cost the employee $10.30 after saving income tax, OASI, and Medicare.
• Employers may refund the entire $16 and not change the pretax federal reporting already completed.
• Refund the total amount from the account that retains health insurance deductions to be paid to the Health Care Authority's (HCA) PEBB Program.

The administrative costs to make extensive corrections and complete changes for federal depositing and reporting outweigh the very minimal future benefits for employees and lost tax revenue to the IRS. This policy has been reviewed by the IRS and is in compliance with IRC Section 125.

Reporting on premium payment plan participation

Individual payroll systems are responsible for submitting information to the Health Care Authority (HCA) on an annual basis. The HCA will provide a form for you to input this information.

The HCA compiles and submits this information to the Internal Revenue Service (IRS) via form 5500 Annual Return/Report of Employee Benefit Plan.

The HCA input form will require the following information:

• Number of total employees,
• Number of employees eligible to participate in the plan,
• Number of employees who actually participated, and
• Total cost of the fringe benefit plan (total payroll contributions qualifying under the plan).

The form and instructions will be sent to payroll system offices by October 31 of each plan year. Copies of the completed forms will be due to the HCA by January 31 for the previous plan year.

Premium payment plan FAQ

How will an employee on paid annual or medical leave be handled under the premium payment plan?

Payroll contributions for employees on annual or medical leave will be treated no differently than other active employees.

How will employees on approved leave without pay be treated?

Employees who self-pay for coverage while on leave status will be covered under the employer coverage upon the date of return. The employee contribution will begin the first of the month in which the employee returns to work with eight or more hours of pay status. The employee will be reimbursed any self-pay premium paid for that month.

How will premium deductions for employees on FMLA be handled?

Employees may prepay to employers, but prepayment should not cross plan years. Employer contributions will continue up to the first 12 weeks of approved family leave. Employees must also continue to pay the employee premium contribution to maintain eligibility. HCA cannot track prepayment on an employee-by-employee basis. Arrangements for prepayment will be made between the employer's payroll office and the employee. The HCA's eligibility system will not reflect the arrangement.

What will be the effective date of transfers between employers?

The employer losing an employee will use an effective date of the last day of the month in which the transfer occurred. The losing agency is responsible for the employer contribution for the entire month. The gaining agency will use the first of the month following the transfer.

How will the higher education institutions handle employee premium deductions for summer coverage?

The method used will be driven by the employer. The payroll contribution system will be that used for FMLA.

How will employee’s (on workers compensation) active claims be treated for payroll contributions and the premium payment plan?

Implementation of payroll contributions will have no impact on the rules for eligibility for those on worker’s compensation coverage.

Will we need to track whether people elected the premium payment plan on the insurance system?

The intention is to track people only on payroll systems. This means that when the HCA's insurance system creates payroll contribution levels for payroll systems, it cannot indicate which of these payroll contributions are for nonpremium payment plan contributions.

What are the rules for when an employee can change premium payment plan status, and how will the employee make the change?

An employee can only change his or her premium payment plan status during annual open enrollment each year, unless there is a qualifying event that triggers a special open enrollment (PEBB Policy addendum 45-2A). PEBB may also remove an employee from the premium payment plan deduction, with notice, when it is necessary to prevent excess tax deferral.

Will premium payment plan benefits affect deferred compensation allowable maximums?

Maximum allowable deferred compensation levels for certain employees at the lower end of compensation levels may be reduced under various pretax deferral programs such as Sections 457 and 403B.

Related rules and policies

• WAC 182-08-180: Premium payments and premium refunds.
• WAC 182-08-190: "State agencies and employer groups that participate in the PEBB Program under contract with HCA must pay premium contributions to the HCA for PEBB insurance coverage for all eligible employees and their dependents." No relief is provided in rule for situations where the employee doesn't provide their contribution.
• WAC 182-08-199: When may an employee enroll, or revoke an election and make a new election under the premium payment plan, medical flexible spending arrangement (FSA), or dependent care assistance program (DCAP)?
• WAC 182-08-200: Which employing agency is responsible to pay the employer contribution for eligible employees changing agency employment or for faculty employed by more than one institution of higher education?
• WAC 182-12-114: How do employees establish eligibility for public employees benefits board (PEBB) benefits?
• WAC 182-12-116: Who is eligible to participate in the salary reduction plan?
• WAC 182-12-131: How do eligible employees maintain the employer contribution toward public employees benefits board (PEBB) benefits?
• RCW 41.05.050: A PEBB affiliated employer "...shall provide contribution to insurance and health care plans for its employees and their dependent..." There is no relief offered in the law to a situation where the employee doesn't provide their contribution.