Guest Article

(From the February 16, 2004 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Rules Insurance Proceeds Excludible from VEBA's Gross Income

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(Thanks to Stephen LaGarde of the Employee Benefits-- Tax group for preparing and submitting this article.)

In PLR 200404055, the IRS concluded that the proceeds from an insurance policy purchased by a VEBA to indemnify itself from certain retiree health benefit liabilities would not be included in the VEBA's gross income. While we believe this is the correct result, the PLR provides no technical basis for its conclusion.

PLR 200404055 involves a VEBA that provides benefits under a medical and dental plan covering an employer's active and former employees. The VEBA proposes purchasing a noncancellable accident and group health insurance policy that would reimburse the VEBA for part of the benefits the VEBA pays to retirees and their beneficiaries. (Benefits paid to active participants would not be covered.) Policy benefits would equal a percentage or dollar amount of the eligible medical expenses under the plan in excess of a specified deductible, and would be paid to the VEBA. Individual retirees and their dependents would have no rights and would receive no benefits under the policy. Without clearly explaining why, PLR 200404055 concludes that policy benefits will be excluded from the VEBA's gross income.

Strangely, PLR 200404055 includes a representation that the employer "does not intend to take a deduction for the single premium funding necessary to purchase the Policy." It is not clear whether this means that the employer agreed to forego the deduction under IRC § 419 for the amount it paid to the VEBA that was used by the VEBA to pay the premium, or that the employer simply agreed not to deduct the VEBA's payment of the premium from trust assets. Informal discussions with the IRS reveal that this ruling was not reviewed at high levels within the agency. For that reason, further guidance may clarify these issues.

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The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have questions or need additional information about this article, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Copyright 2003, Deloitte.

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