How the "double dip" for Health Insurance works

By Todd Martin, JD Reinhart Law

Dear Ric,

The “double dipping” scheme that was used under 125 was developed by smart but sleazy benefits people, not like us.  Here is how the prohibited double dip worked: 

(1)  The employer deducts the full amount of the health insurance premium from the employee’s paycheck on a pre-tax basis through a 125 plan.  Lets assume that health premium was $300/ month.  Assuming a 33% tax bracket the employee saves $100 in tax.  This is just fine and permitted by section 125 of the code.  

(2)  The employer then later reimburses a portion of the health premium to bring the employee’s take-home pay up to what they would have received had they not paid the health premium.  In this case the employer reimburses $200 of the health premium and cites Code section 106 and Revenue Ruling 61-146 as the rationale for claiming that this reimbursement is not subject to tax.  If the employer had paid the premium up-front they would have had to pay $300.  The IRS shut this down with Revenue Ruling 2002-03. There were several variations on this scheme that have been referred to as the “son of the double dip” that involved “advance reimbursement” and a “loan” to employees to achieve a similar result.  These were shut down in Revenue Ruling 2002-80.   

Here is how a permitted double dip works: 

Ric goes to Dairy Queen and orders a large vanilla cone.  Knowing well that the high school kids working there will skimp on the cherry shell, he orders a double dip cone.   This is not only permitted but it is in fact a very smart technique.