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Disqualified VEBA


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12 replies to this topic

#1 Guest_named_RSNOW_*

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Posted 02 September 2003 - 04:27 PM

Does anyone know what the process and tax results would be if a VEBA becomes disqualified ? Would the employer receive back any money from the VEBA or would VEBA proceeds be distributed to the actual participants. What would be the tax results (if any) ?

#2 mbozek

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Posted 02 September 2003 - 04:45 PM

Why would there be any refund? Check the plan document for plan consequences of disqualfication. The tax consequence of disqualfication is that the VEBA income will be treated as taxable at either the trust or corporate tax rates.
mjb

#3 Guest_named_Harry O_*

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Posted 02 September 2003 - 07:22 PM

I agree with mbozek. I would also think that the refund could well be a reversion under section 4976 and subject to a 100% excise tax (as well as income tax).

#4 Kirk Maldonado

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Posted 02 September 2003 - 09:34 PM

It seems like the reversion might violate ERISA also.
Kirk Maldonado

#5 401 Chaos

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Posted 03 September 2003 - 08:36 AM

I agree with the others. A VEBA is simply a tax-exempt entity that allows contributions to grow tax-free. A VEBA is not generally funded with pre-tax dollars so "disqualification" of a VEBA is different from disqualification of a qualified pension plan where there are pre-tax contributions that may potentially be kicked out and subjected to income taxes. Employer contributions to a VEBA are generally only deductible to the employer if they are considered ordinary and necessary business expenses under Code 162 and I believe in certain cases where a VEBA's tax-exempt status was denied (or I suppose revoked), the employers were allowed deductions for contributions provided they qualified under the ordinary and necessary requirements. In short, the VEBA's tax-exempt status is a separate issue from deductiblity of employer contributions.

In addition to checking the VEBA documents, also note that Reg. 1.501©(9)-4(d) provides that upon dissolution or termination a VEBA must use all assets remaining afer satisfaction of liabilities to provide--either directly or through insurance--life, sick, accident or other benefits to participants in a nondiscriminatory fashion in order to avoid certain prohibited inurement concerns. I do not know the facts surrouding the disqualification but I cannot imagine the Service allowing the entity to avoid these distribution requirements without additional penalties if the entity was initially intended to function as a VEBA.

Edited by 401 Chaos, 03 September 2003 - 10:12 AM.


#6 GBurns

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Posted 03 September 2003 - 10:08 AM

The responding posts now cause me to ask ask RSNOW.. Are you sure that this is a VEBA? Why?
George D. Burns
Cost Reduction Strategies
Burns and Associates, Inc
www.costreductionstrategies.com(under construction)
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#7 Guest_named_RSNOW_*

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Posted 03 September 2003 - 10:57 AM

My VEBA ignorance makes it hard to carry on much of a discussion. What prompted my post was an advisor has a client who is a participating in a VEBA (or maybe the correct term is his employees are participants in a VEBA) and the advisor for some reason thinks it might be disqualified. The advisor was asking us if we knew the tax consequences (we don't) and whether any income returned to the employer (if any) could then be sheltered under a qualified retirement plan. Obviously I'm not giving any advice here given my ignorance, but it prompted me to want to learn a bit more of what would happened if a VEBA was disqualified. Thanks for the responses. Was there some proposed regs or something issued recently designed to curb abuses of VEBAs ? (I kind of got the impression the advisors concern might be in response to some IRS issued guidance).

#8 GBurns

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Posted 03 September 2003 - 02:13 PM

RSNOW,

It seems that it is very popular for "advisors" to throw out these opinions without any explanations or support for their position.

Any person who responds to whatever it is that is thrown out without explanation or support, will always be fighting aloosing battle, because they really have no idea what is it that they are trying to find and cannot know when they have found it etc.

Try to get the client to get this advisor to explain and support his statements, then you will have something to research.

I do not recall anything being issued recently about VEBAS. However, there have been items from the DOL and a number state Depts of Insurance about alleged ERISA and "Union" health and welfare benefits plans which are sometimes MEWAs. Some were sold as being VEBAs, which is why I asked if you were sure?
George D. Burns
Cost Reduction Strategies
Burns and Associates, Inc
www.costreductionstrategies.com(under construction)
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#9 mcw

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Posted 03 September 2003 - 10:40 PM

The way I understand it, you can be a VEBA and MEWA. VEBA is your status under the IRC (501©(9)) and MEWA is what you are under ERISA and state insurance laws. Am I wrong?

With regard to your recent law question, there are some proposed regs that deal with what is a geographic locale (prop reg 1.501©(9)-2). They say that it is considered a single geographic locale if it is within 3 contiguous states. I am not sure how recent this is. This leads to another questions. Does anyone know what has to be within the 3 states. Is it the employer or the covered employees? What if the employer is located in one of the three states but has employees outside of those states?

One last question - practically, can you even have a MEWA now with all of the state insurance laws?

#10 vebaguru

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Posted 05 September 2003 - 12:07 PM

What has happened recently is that the IRS issued Regulations under IRC section 419A(f)(6). Certain 10-or-more employer plans were funded through VEBA Trusts, some with determination letters and others without.

The litmus test: does the plan have a recent determination letter from IRS? If so, it is a VEBA; if not, it is likely a taxable trust.

It is certainly possible to have a VEBA/MEWA without being hassled by state insurance departments, so long as all benefits are provided through licensed insurance carriers. It is not possible to have a self-funded health plan as a VEBA/MEWA without problems.

#11 401 Chaos

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Posted 05 September 2003 - 12:14 PM

VEBAGURU,

Could you expand on the "problems" associated with self-funded VEBA/MEWA arrangements. While I know such arrangements are subject to myriad regulations, reporting requirements, and other compliance concerns, are there new rules or changes that make their existence a problem where you have a legitimate professional / trade association that has established such an arrangement and plays by all the rules? Thanks.

#12 GBurns

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Posted 05 September 2003 - 01:47 PM

Vebaguru,

Why would there not be problems with the state DOI for fully-insured plans that are MEWAs? I have not seen any state that makes a differentiation and the DOL "treatise" issued earlier this year also makes no distinction that I remember seeing.
George D. Burns
Cost Reduction Strategies
Burns and Associates, Inc
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#13 vebaguru

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Posted 18 September 2003 - 01:44 PM

401 Chaos- The distinction is not at the DOL level, it is at the state insurance department level. If you are complying with their insurance laws, they don't care whether it is a MEWA or not.

G Burns- The legitimacy of the arrangement is irrelevant: ERISA will not pre-empt state laws regulating such plans. While many states exempt single-employer plans from licensing and regulation, I don't know of any that permit a MEWA to offer or provide guaranteed benefits without complying with their state insurance laws.

To answer your question directly, many states have enacted new MEWA laws (I have read the statutes from Texas and Indiana and they are very inclusive.) Others have issued regulations, or simply chosen to treat MEWAs as "insurers" and the benefit plan as a "policy"under their insurance code, requiring posting of capital, licensing, filing of products before offering for sale, etc.