Setting Reserves: Self Funded Health Plan

[Guest mcronin]

This question concerns a self-funded health plan that qualifies as a church plan. Are there any rules or regulations concerning how much in employee funds you can hold in reserve and how long you can hold employee funds in reserve?

[Guest Danny Miller]

I'm not sure this is going to answer your question, but I'll try. Because ERISA doesn't apply to a church plan, the plan asset rules contained in ERISA aren't applicable to it. This means that the rules established under the plan asset regs that indicate by when employee money must be actually contributed to a welfare plan do not apply.

It sounds like, from your question, your asking how long employee money can be held by the employer before being actually credited to the plan (I assume this is what you meant by held in reserve). If I'm understanding your question correctly, the answer is that, absent state fiduciary or payroll law requirements that would cause the money to have to be contributed more quickly, the money can be held by the employer "in reserve" without having to comply with the ERISA 15 day rule. If you want to hold the money in this way, I do advise that your plan document and any associated trust expressly permit the holding in this manner.

If I'm not understanding your question correctly, please clarify it for me, and I'll take another stab at an answer.

[Guest mcronin]

Thanks for the reply, however, I am not sure we are talking about the same type of reserves. Here is the background to my question. Our actuaries are in the process of helping us revise and set our reserve philosophy on our self-funded health plan moving forward. In general terms, reserves meaning the amount set back for purpose of paying claims. In setting this policy, our actuaries raised the question as to whether there are rules concerning how long employee contributed funds may be held in the reserve and whether there is a cap on the amount. Hope that clarifies things. Thanks.

[vebaguru]

I believe that the relationship of the employees to the self-funded health plan is akin to the relationship of a policy beneficiary to an insurance company. Once the employees' monies have been paid into the plan, they are no longer employees funds.

Think of it as though the coverage were fully insured. The employer pays x amount toward the policy premiums and the employee pays y amount. Once the insurance company receives x and y, there is no requirement to separately account for those funds, they are simply premium income.

PS: Speaking as an actuary, your actuaries should already know the answer to this question.

[mbozek]

There is no cap on reserves because the church is exempt from income tax-- the limits on reserves under IRC 419A only apply to employers who claim a tax deduction for the contributions under IRC 419. Churches are exempt from the rules for 419. There is a limit on contributions to the accounts of key employees under 419 for medical and life insurance benefits. The 419 contributions must be combined with contributions to any dc plan under IRC 415©. See 419(d). Key employees in a np are limited to officers making over $130,000.

[vebaguru]

419A(d) requires separate accounts for retiree medical and retiree death benefits, but only contributions to the post-retirement medical account are treated as annual additions under the 415 dollar limit.

The term "key employee" means "an employee who, at any time during the plan year, is * * * an officer of the employer having an annual compensation greater than $130,000" * * *. The definition of officer is given in Regs 1.414-1, T13, and is based on facts and circumstances, not title.

Code Sections 419 and 419A are specific limits on tax deductions for welfare benefit plans. Since a tax-exempt entity does not need deductions, it need not comply with Sections 419 and 419A.