Contributions for Self -Insured Plans

[Guest Bob Wolff]

Here is the situation...

Company is self-funded and they base employee contributions on their maximum exposure.

Company has a good year and wants to return a portion of the contributions back to their employees.

How do handle this, given that (a) a company will not know the total medical costs for 6-12 months after the plan year is completed due to claims lag and (B) by the time total costs are known, many employees are no longer with the company?

Thank you for your advice.

------------------

[Guest Jeff Kropp]

If the benefits are funded through a tax-exempt VEBA, I doubt that any amounts contributed to the trust may revert to the employer or employees (in the absence of unique circumstances, such as a plan termination). I would advise you to consult a benefits attorney before proceeding, or at a minimu, check the regulations on VEBAs.

[Guest BENEFISH]

Bob, there is a lot more to your question than you may have anticipated, and unfortunately, the answer is not simple. Jeff opened a can of worms with the VEBA issue and you know that if there is an open can of worms, the BENEFISH can't resist the bait!

DOL plan asset regulations (as well as other pronouncements) provide that employee contributions are "plan assets" and as such, should be held in trust (ERISA Sec. 403(a)). The trust may or may not be a "VEBA" or tax-exempt trust. Regardless of the type of trust, plan assets can only be used to provide benefits under the plan. They cannot innure to the benefit of the employer and cannot be used in a manner inconsistent with the terms of the plan. In most cases, employers are not aware that employee contributions are automatically deemed to be plan assets and do not maintain a trust. This may be your client's situation. This gets even more confusing if you rely on the IRS' determination that pre-tax contributions are not employee contributions to the plan, but rather are salary reductions. Even the DOL seems to go this direction in its non-enforcement of plan asset regulations with regard to cafeteria plans (ERISA Technical Release Nos. 88-1 and 92-01); however, current DOL enforcement policy does not relieve the employer of its obligation to ensure that participant contributions are used to provide benefits.

The can of worms gets even larger if there are any issues related to deduction limits under IRC Section 419A.

Quick Suggestion: Don't give the money back. Don't charge more next year. There will likely be a bad year ahead and the "excess" contributions will come in handy then.