funded welfare plan - has never filed 5500 or 990

[JanetM]

We recently acquired a company (stock purchase) that has this "plan" - and I use this term loosely.

Contributions are paid into Trust at $2 per hour worked. The money sits in the Trust until the insurance bill arrives. Insurance bill for fully insured health/dental benefits is paid from Trust. Trust currently has $280,000 in assets - was put in place in 1980.

Since 1996 is has been handled by company in CA. The insurance salesman who handles this for the 22 participants says there is no filing required because the benefits are fully insured.

After many hours of frustrating dialogue we have convinced him that interpretation is wrong. 5500 and 990 must be filed.

Question to all of you out there - how would you handle this? Am wondering about how far back the filings should go? Is EPCRS good idea?

This issue was identified during due diligence - Insurance guy told them nothing needed to be done.

Any thoughts? Any Criticism?

[Guest b2kates]

Janet

Obviously you have multiple issues:

1. is there truly a separate trust, if no trust maybe no 990.

2. who is the trustee?

3. yes 5500 and 990 likely due: may qualify for the 5500 for the delinquent filer program, but will not be cheap.

4. I do not know of a delinquent filer program for 990, nor anyway to retroactively; ie 20 years qualify the trust as tax free.

5. Did this company have certified audits in the past-might be able to enlist CPA firm to sort this out.

Best of luck

[mbozek]

Janet: You need to retain counsel to determine what type of trust is the vehicle- A grantor trust in which the employer is the owner and all income from the trust is taxed to the employer, An irrevocable trust which is a separate taxpayer subject to income tax or a VEBA trust which is a tax exempt organization-- But a VEBA trust must get a letter from the IRS designating it as a 501©(9) txo-- no letter, no tax exemption. A c9 can make contributions of ins premiums to pay for benefits under the plan.

Ther is one possible way to thread the needle- If the funds are deposited in a grantor trust established by the employer then the funds could be used to pay benefits under 105(h). I dont know if 105(h) benefits can include insurance premiums. After you figure out what is the taxable status of the trust you must determine what is the extent of the tax liability for open years of the taxapayer- remember there is no s/l if a tax return has not been filed. After you have figued out the extent of tax liability then you can decide how to proceed. By the way who will pay the back taxes?

I dont know if 5500 needs to be filed if there are fewer than 100 participants- but this is the least of your worries.

[BeckyMiller]

If it is decided after the efforts described above that this is a funded plan for which Forms 5500 were due, look at the revised delinquent filer program. Though it will be costly to prepare the required Forms 5500, the fines have been substantially reduced. See http://www2.dol.gov/dol/pwba/public/pubs/0...fact_sheet.html

The total penalty for a small plan is only $1,500 regardless of the number of years filed.

The IRS has agreed to cooperatewith the 5500 relief program, but that doesn't cover the 990.

If you have to file Forms 5500, realize that there is no statute of limitations under ERISA for these forms. But, the penalty for failure to file only applies to forms required to be filed after December 31, 1987.

[JanetM]

I shall run screaming into the night - It really is worse than I expected. The 990 and trust taxation are going to be the nightmare.

The Trust document does not reference what kind of Trust this is under the IRC. Considering that it was drafted by company atty in 1980 I am not surprised.

The document does state all assets are to be used for the exclusive benefit of the participants. It also states that in the event of amendment or termination it shall not revert to the employer.

There is clause allowing the Trust to pay all reasonable charges and fees, including legal expenses for services rendered to the Trust.

Guess the Moral of the story should be: When in doubt, buy assets, not stock.

[mbozek]

Janet: your client really needs to retain expert counsel in this matter. The terms that you describe are associated with ERISA plans or plans holding assets in a 501© (9) trust ( for which no reversion to the employer is permitted) but a complete review is needed. Again I believe that c9 trust is reqired to get an letter from the IRS approving its status in order to be a VEBA.

[JanetM]

Thanks for the help. Too bad for me - I am the client. I will be discussing this again (still) with our legal dept. and ERISA councel.

At least I can walk into the meeting and give them the worse case senario.