From the Hotline: Pre-Tax Premiums

Question: Can a company deduct premiums for a voluntary cancer, hospital indemnity, and/or accident policy on a pre-tax basis?

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Answer: These types of policies may be included under the employer’s cafeteria plan (also called a § 125 plan) that allows employees to make pre-tax contributions, but only if they are group (not individual) policies offered to all employees. The majority of voluntary specific-disease policies and hospital indemnity policies are offered only in the individual insurance market and are not available as group policies. Even if available as a group insurance policy, employers usually exclude voluntary benefits from their cafeteria plans to avoid potential complications under the Employee Retirement Income Security Act (ERISA).

ERISA plans are subject to numerous requirements, including plan documents, summary plan descriptions, and annual reports (Form 5500). Voluntary benefit plans, however, generally are exempt from ERISA as long as the employer does not contribute to, or sponsor or endorse, the plan. Offering voluntary benefits through the cafeteria plan is considered an employer endorsement which may trigger ERISA compliance requirements.