A double-dip arrangement is a purchase price problem

If you plan to sell your company in the next few years, a double-dip reimbursement arrangement on your books is a purchase price problem as much as it's a tax problem.

The pitch is recurring FICA savings at no net cost, with take-home pay unchanged. If you've run that through your P&L, it's sitting in EBITDA. Say it's $200,000 a year and you're valued at eight times. Savings that don't stand up to scrutiny cost you $1.6 million at closing, before anyone calculates a dollar of back tax and penalties.

Buyers, your diligence doesn't need the IRS to do anything. The arrangement is visible in the payroll register and the cafeteria plan document.

A liability you can size gets priced into the deal. One you can't size gets escrowed, or it follows the seller out the door as a specific indemnity. Representation and warranty policies exclude known issues, so once it's on the diligence list, insurance isn't the answer either.

I've read the opinion letters behind several of these arrangements. None of the ones I've read quotes Treasury Regulation 1.105-2, or even §105(b) verbatim. Those are the two provisions that decide the question.

If you're on either side of a transaction, start with the payroll register. I'm glad to walk through what to look for.