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Guest CCiolino

Employee pay-all VEBA's

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Guest CCiolino

Can anyone recommend a website for information on employee pay-all VEBA's. I am looking for basic information. Thanks.

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What is an "employee pay all VEBA" , why would anyone want one and where do you get one?

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What is an "employee pay all VEBA" and why would anyone want one?

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Guest CCiolino

It is my understanding that the ability to establish a VEBA for the sole purpose of employee-only contributions exists. I am interested in the use of this approach to allow my active employees to contribute for the eventual funding of their retiree medical coverage. However, there does not appear to be a wealth of information available with regard to this approach. Hence, my message. As my understanding came from a presentation from a consultant, I may just have to pay their fee to find out more. My corporate tax attorney is also researching, and I will post another message if/when any useful information is discovered.

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i have heard the term employee pay all veba used in conjunction with a cafeteria plan as a way to get pre tax contributions into a veba trust.

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Guest b2kates

The original VEBAs were employee only pay. They actually predate the internal revenue code.

for funding post retirment medical, look out for IRC 419A.

why wouldn't an employee establish an MSA?

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As I see it you cannot set up a VEBA for the purpose of employees paying anything. The VEBA has to set up to provide a benefit. How the payment for the benefits is funded (employer paid, employee paid etc.) is an issue separate and apart from the purpose of the VEBA.

This reminds me of the current problem that a number of state DOIs are trying to erase, that of agents and promoters selling people VEBAs for health insurance. As they point out the agent etc cannot sell a VEBA for insurance and in fact cannot sell a VBA anyhow (they cannot be sold) but the agent etc can sell health insurance and the client could have a VEBA set up that provides health insurance but the 2 do not go together in the way that it is promoted.

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REg 1.501©(9)-2(a)(2)(ii)(D) specificaly permits VEBA benefits to be provided based upon employee contributions, or benefits based upon different levels of contributions provided that comparable benefits are provided for equal contributions. But the employee contributions have to be made to a cafeteria plan in order to be made pre tax. A VEBA can provide sick and accidents to its members either by reimbursement or through the payment of an premium to insurance co or HMO. -3©. An employer may establish its own veba which is exempt from state law. However deduction of employer contributions is limited under IRC 419A. Most small employers join multi employer vebas that offer benefits to 10 or more employers to avoid the limitation on employer deductions for single employer vebas but these multiemployer vebas are subject to state insurance regulation. Most of the VEBA products are offerred through insurance companies and promoters of deferred compensation schemes for small business and some are considered tax shelters required to disclose information to the IRS.

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Employee pay all VEBAs make a lot of sense in several contexts. The most recent one is the case of defined contribution health plans. In that scenario an employer would annouce to its employees that it was no longer providing health insurance for its employees, and that the employees' compensation would be increased immediately by the amount of premiums paid by the employer until now. The employees could then either purchase coverage on their own (which could still be on a pre-tax basis using a premium reduction plan under IRC 125), or they could purchase after tax.

The employee pay all VEBA would permit employees to direct all such funds into a VEBA trust and to have a choice between high-deductible and low-deductible health plans. The amount of employee contributions going for premiums would be pre-tax; the other employee contributions would either be after-tax or would be subject to the "use-it-or-lose-it" requirements of the proposed 125 regulations.

The advantages of employee pay all arrangements are simply: the income inside the VEBA for retiree medical benefits would not be subject to UBIT. And, an improvement over some current unfunded or unprotected DC health plans, funds would actually be guaranteed to be there for employees when needed.

The comment by Burns above, "* * * you cannot set up a VEBA for the purpose of employees paying anything * * * is simply incorrect.

And the comments by mjb that "Most small employers join multi employer vebas that offer benefits to 10 or more employers to avoid the limitation on employer deductions for single employer vebas but these multiemployer vebas are subject to state insurance regulation" is misleading and irrelevant to the thread. His additional assertion that "Most of the VEBA products are offerred through insurance companies and promoters of deferred compensation schemes for small business and some are considered tax shelters required to disclose information to the IRS" is incorrect. He is confusing apples and oranges.

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Veba: No employer is going to use a VEBA to fund employee health ins. through an employee pay all plan because of the risk that the employee payments will not be sufficient to pay the premiums for the health ins of the employees, leaving the er/VEBA with a potential liability for the short fall. If the employer/VEBA avoids liability for the shortfall then the employees dont get the benefits they were promised. As the premium increases each year for inflation, more and more employees will drop out, making the premiums prohibitively expensive for the remaining participants. The only way to avoid premium increase would be to reduce coverage which is what wil happen when employees can get health ins. some where else.

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What you have given is a reason not to do an employee pay all health plan without a VEBA. The Employer has no risk with the VEBA is the plan and trust are drafted properly: the Employer's obligation is limited to its requirement to withhold funds from the employees' paychecks and deposit them to the fund on a timely basis. The "shortfall" would be the VEBA's liability.

You seem to be assuming some form of self-funded plan or group rating arrangement for the employer, but most employee pay alll plans are in lieu of self funded or employer provided plans. They frequently consist of employees' purchasing individual health policies. But they could also consist of employees depositing funds into individual accounts for which the employer would bear no responsibility.

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I dont know how you can say the er has no risk in setting up the VEBA since, as sponsor, er will have to adequately disclose the risks associated with setting up the plan including the possibility that the contributions may not be sufficient and will be subject to annual increase and cancellation of the policy if their are insufficient funds. The ER could be sued on the grounds that the plan was never established on an actuarially sound basis. If there is a shortfall then the trustee of the veba ( e.g,. employer or employee of employer acting as the fiduciary) will have to decide whose insurance gets funds and whose does not and then defend such actions. And who will pay for all of the legal advice to be given to the trustee, the adiministration expenses and annual reporting? The employees of course because their contributions will be the only source of funds.

You also seem to be ignoring the effect on employee morale that would result from the increase in annual premiums/cancellation/reduction of benefits. If a VEBA was such a great idea it woud be adopted by the major F500 cos that want to get out of paying for health ins. It is simplier for ers to lower benefits /raise ee premiums under an unfunded plan than engage in an emplyee pay all veba that will be distraction and legal headache.

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mjb: I dont know how you can say the er has no risk in setting up the VEBA * * *

VG: What I said that the employer didn't have risk if it was structured properly.

mjb: The ER could be sued on the grounds that the plan was never established on an actuarially sound basis.

VG: As I stated earlier, you seem to be operating on the assumption of a self-funded health plan. VEBAs exist for many other purposes.

mjb: * * * the trustee of the veba ( e.g,. employer or employee of employer acting as the fiduciary) will have to decide whose insurance gets funds and whose does not and then defend such actions.

VG: What are you talking about? If an employee pays his premiums under the employee pay all, the trustee will forward those funds to the insurance company. This is not a decision-making process.

mjb: And who will pay for all of the legal advice to be given to the trustee, the adiministration expenses and annual reporting? The employees of course because their contributions will be the only source of funds.

VG: No more than under a 401(k) plan without a match. Employers can pay those fees or not, depending on how the arrangement is structured.

mjb: You allso seem to be ignoring the effect on employee morale that would result from the increase in annual premiums/cancellation/reduction of benefits.

VG: For the third time: you are assuming a self-funded health plan with negative experience. This is what we call a straw man. No such arrangement was given.

mjb: If a VEBA was such a great idea it woud be adopted by the major F500 cos that want to get out of paying for health ins. It is simplier for ers to lower benefits /raise ee premiums under an unfunded plan than engage in an emplyee pay all veba that will be distraction and legal headache.

VG: VEBAs have been utilized by many Fortune 500 companies for various programs: self-funded health plans, funding retiree medical benefits, providing life insurance, disabilty coverage, severance benefits, education benefits, etc. for their employees. While I am no fan of employee pay all plans, I do believe in VEBAs and their uses.

Your arguments are similar to those of someone selling nonqualified deferred compensation as an alternative to a qualified retirement plan. The "distractions and headaches" (merely some extra accounting and tax returns similar to a 401(k) plan) are offset by advantages to employer and employees.

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Vebaguru...

A VEBA could be set up to provide the desired benefits. The employee funds pay for the benefits that the VEBA is set up to provide.

The VEBA is not set up for the purpose of the employee contribution/funds.

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GB: A VEBA could be set up to provide the desired benefits. The employee funds pay for the benefits that the VEBA is set up to provide.

The VEBA is not set up for the purpose of the employee contribution/funds.

VG: Are you trying to say that an employer cannot establish a VEBA for the purpose of holding employee contributions/funds in trust? Because if you are, I strongly disagree. The "desired benefits" can be any permitted benefit for which the employees funds are available. The employees funds could be used to purchase health insurance, dental insurance, vision care coverage, prescription plan, disability insurance, etc. In other words a VEBA is an ideal vehicle for providing consumer-driven health plans, wheter or not it is an employee pay all VEBA.

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