Jump to content
Sign in to follow this  
Guest Dolores Lawrence

Multi-purpose VEBA

Recommended Posts

Guest Dolores Lawrence

One of our clients received information on a VEBA that is referred to as an employer-sponsored medical, parking, education, public transportation and dependent care reimbursement plan. It purports to save the employer up to 35% of benefit costs, while increasing employee take home pay. It is accomplished with no needed change in insurers. It appears that the total cost of benefits is moved to employees, who then pay for these benefits pre-tax and then receive reimbursement. The brochure says to fill out a few forms and pay a set up charge per employee. Does anyone have any experience with this product? The brochure references an article in the 6/27/02 Wall Street Journal that appears to discuss DC health plans.

Share this post


Link to post
Share on other sites

That sounds like a different version than what I've seen. The one I saw only included medical (including flexible spending accounts). It moved the entire cost to employees, who paid for them through a cafeteria plan. Then there was a reimbursement from the employer under 105. It was sold on the premise that it significantly reduced employment taxes. But they were essentially "double dipping" on the tax benefit. Health premiums and expenses are already excluded from FICA taxes to the extent that they are paid by the employer or paid by employees through a cafeteria plan. And for tax purposes, neither of those amounts are paid by the employee. So the employer can't reimburse them using Section 105 and therefore the reimbursements aren't excludable from FICA.

Share this post


Link to post
Share on other sites

Here we go again. "Double Dipping" has been the subject of previous threads over the last 2 + years. This is just a "Variation on the theme" as was predicted in the article in the May issue of PlanSponsor.

The "original" version claimed to be able to reimburse the premium that was deducted on a pre-tax basis by claiming that since "insurance premiums" were included in the wording of 213(d) it was a reimbursable expense.

When the IRS investigation, negative press (all those "Double Dipping arrangement articles) and Revenue Ruling 2002-3 make it very difficult to sell the plan, it was changed.

The change was that the reimbursement was now claimed to be from a medical expense reimbursement plan.

However, some of the sales reps realized that medical expenses would not be enough to substantiate the "reimbursement" given to the employees, so they added these other plans.

One group decided to go even further and decided that since the "original" promoter had also run into action from a number of state DOI and Attorneys General, they would try to evade all state jurisdiction by providing their plan through a VEBA.

Why anyone would think that they could use Qualified Transportation Expenses and Qualified Tuition Reimbusement in such a scheme is unbelievable.

However it seems that a number of small employers are believing the sales pitches. The marketing seems aimed at small employers who either have no access to competent legal/tax advice (which is difficult to get anyhow) and not to larger more sophisticated employers.

The first hurdle involves the use of a TPA for the claims adjudication etc. Most states require that the TPA be licensed/registered etc. Is the TPA licensed/registered in the state in which the employer/client is located? The answer is most likely NO.

The second hurdle has to do with State Small Group Health Insurance Law or insurance contract provisions. The majority of states either by law impose a mandatory employer percentage contribution or allows the small group insurer to file its small group product with this percentage as part of the rate structure. Outside of small group this is usually a part of the initial RFQ/Application on which the quoted rates are based and which becomes a part of the contract. If the 100% of the insurance premium is moved to the employee, Where then is the mandatory employer percentage contribution???? If an insured violates a contract and then continues to submit claims and collect benefits, most carriers and state laws view this as Insurance Fraud.

The third hurdle has to do with the Qualified Transportation Expense and the Tuition Reimbursement. Most employers in most parts of the country do not have any employees who would qualify for these plans anyhow, so it really is unusable for most. If however there is an employer in an area where these are applicable and who has enough employees who qualify for these plans there is still a problem. The reimbursement under such plans is already the employee's money regardless of whether or not this scheme is used. If the employer has a Transportation and a Tuition Plan the employee has to get reimbured anyhow and does not need to be a participant in the health insurance anyhow or in any new arrangement and so this scheme is not applicable.

The fourth hurdle is DCAP. Most employees have no DCAP, which makes this of little value in the plan structure. Additionally, an employee does not have to be in the health insurance plan to have DCAP expenses so these employees would have had no deduction, so why and how would the employer use this VEBA arrangement for these employees? In any case DCAP expenses are the employees money that is being reimbursed.

Additionally, the IRS has pointed out that as a general rule you cannot advance medical expenses, the same also applies to Transportation, Tuition and especially DCAP. What is the authority cited for being able to give the employee this money each payday before the expenses are incurred?

By the way, What do they say happens when the employee does not have enough expenses or has no expenses? Does the employee return the "excess" amount advanced? What happens to those employees who left the job or were fired during the year? What happens if the employee does not return the "excess" because the employee only assumed the employer's portion of the health insurance premium because of the understanding that they would get back the money? If the employee gives back, does the employer also give back the employee the amount that the employee paid for the employer??

Have you checked to see how VEBAs are supposed to be set up and what can be provided through VEBAs? 419 limitations on deductions etc? Trust and Trustee requirement? DOL approval? Are VEBAs sold by agents or are the provided by lawyers?

There are other issues that these plans raise but I think that the point has been made that while the structure is legal, the plans might be of no value or even a loss to most employers.

Share this post


Link to post
Share on other sites
Guest Dolores Lawrence

The promoter of the VEBA arrangement is careful to say that insurance premiums cannot be paid through the arrangement, and tries to address the idea that Revenue Ruling 2002-3 is not violated because insurance premiums are not handled through this arrangement.

However, it still sounds like a form of double dipping. Each employee has his salary reduced pre-tax to pay for benefits and a portion of the cost of the VEBA administration. According to the plan information, Human Resources works to classify groups of employees based on their family status. The a salary reduction amount is set equally for members of each group so that reimbursement for qualified medical expenses is conservative when measured against each group's likely expenses.

Qualified medical costs, other than premium, are reimbursed by the employer. For qualified health benefits, the employer makes advances, without interest, on each payday to each participant, equal to a prorata portion of the yearly medical reimbursement amount. Any reimbursement not used b the employee during a plan year and not formally substantiated by years end, is carried over to the next plan year.

The employer also makes advances for other qualified benefits, with substantiation required by the end of the year.

Share this post


Link to post
Share on other sites

Aside from the other issues of TPA licensing, violation of the health insurance contract etc etc.

I suggest that you first read Revenue Ruling 2002-41 and Notice 2002-45 which relate to HRAs. For a plan to be able to roll over unused money to another year, that plan must qualify as an HRA. An HRA cannot be funded by employee salary reduction either directly or indirectly. It also cannot be conditioned on the employee's participation in the health insurance (or presumably any other plan).

Also what authority can they give for being able to advance reimburse the employee for medical expenses, DCAP or any other expense?

What is the claims substantiation process? What does the employee have to turn in? Does this meet the IRS substantiation requirements?

What happens if the employee terminates employment during the year?

There are very many questions that should be asked.

Share this post


Link to post
Share on other sites

Dolores,

On this same VEBA Board there is a current thread regarding Vacation benefits in a VEBA. You might want to read it especially the posts such as the one by mbozek regarding the employer paying the employee then getting reimbursed by the VEBA (of course the same would apply if the VEBA advanced the money to the employer who then paid the employee) thereby creating state regulation of the VEBA.

This is one of the reasons why I asked, Why would anyone want to put this concept under a VEBA? I question their understanding of the whole issue.

You should also look at the new IRS Info-Letters 2002-0113 and 2002-0117 regarding Qualified Transportation Fringe Benefits, which is currently available on "Benefits Buzz". These should give you further reasons to question the viability of these benefits if used in this plan that you have asked about.

Share this post


Link to post
Share on other sites

I trust that you have now seen Revenue Ruling 2002-80 which was published 12/9. It expands on Rev Rul 2002-3 and explains the IRS position on the way medical expenses are treated in the plan that you are looking at.

If you cannot use medical expenses the way that they do, and there are very few if any employees qualifying for tuition, parking or transportation etc, How viable is the plan?

Share this post


Link to post
Share on other sites

Let me posit a "variation on the theme" that I've encountered to get everybody's reaction to it. It seems to have been drafted in a manner intended to avoid some of the problems inherent in some of the other schemes:

1. The employer ceases paying any of the health insurance premium

2. The participant pays the entire amount of the premium through pre-tax dollars under a cafeteria plan

3. The employer establishes a medical reimbursement account for each participant, presumably funded in the same amount as the health insurance premiums it was formerly paying on behalf of the participant under the insured arrangement.

4. The participant is reimbursed with dollars that are not subject to tax for his or her health care expenses that are not covered by the insurance ("Noncovered Expenses").

Admittedly, the only tax savings inherent in this arrangement are that the Noncovered Expenses are paid with pre-tax dollars. However, that saves income taxes for the participant, as well as employment taxes for both the employer and the participant.

Also, I concede that you could achieve the same result, if the employer continued to pay the insurance premiums and employees all made contributions to a health care flexible spending account in an amount equal to their Noncovered Expenses. However, that will never occur in the real world.

I also am not addressing the fact that the amount of the Noncovered Expenses will probably be less than the amount of the insurance premium that the employer was formerly paying. That is because the amount that the employer contributes to (1) pay the insurance premium and (2) to the health reimbursement account can be adjusted to achieve an equitable result.

I just want the reaction of the other readers as to whether this particular arrangement that I've described is viable.

Share this post


Link to post
Share on other sites

Okay, I'll give you my reaction.

1. The employer ceases paying any of the health insurance premium

So far, so good.

2. The participant pays the entire amount of the premium through pre-tax dollars under a cafeteria plan

Okay. This has always been available.

3. The employer establishes a medical reimbursement account for each participant, presumably funded in the same amount as the health insurance premiums it was formerly paying on behalf of the participant under the insured arrangement.

Notice 2002-45 and RR 2002-41 specifically prohibit the HRA balance's being related to employee contributions, as they apparently would be here. However, by establishing an HRA contribution that was not related to the premium the employee was paying, this could presumably be done.

4. The participant is reimbursed with dollars that are not subject to tax for his or her health care expenses that are not covered by the insurance ("Noncovered Expenses").

This is permissible so long as they expenses are for Section 213(d) medical expenses.

Admittedly, the only tax savings inherent in this arrangement are that the Noncovered Expenses are paid with pre-tax dollars. However, that saves income taxes for the participant, as well as employment taxes for both the employer and the participant.

The same end is accomplished by the employer's adopting a flex plan and permitting the employee to be reimbursed with pre-tax funds.

Also, I concede that you could achieve the same result, if the employer continued to pay the insurance premiums and employees all made contributions to a health care flexible spending account in an amount equal to their Noncovered Expenses. However, that will never occur in the real world.

In your model employees don't have to worry about "use it or lose it", but they do have to trade a lower salary for funds in the HRA that may carry over to future years. My guess is that most employees would rather estimate their expenses and keep the rest in their paychecks.

I also am not addressing the fact that the amount of the Noncovered Expenses will probably be less than the amount of the insurance premium that the employer was formerly paying. That is because the amount that the employer contributes to (1) pay the insurance premium and (2) to the health reimbursement account can be adjusted to achieve an equitable result.

If you're not going to address it, neither am I.

Share this post


Link to post
Share on other sites

Kirk

Your scenario seems to be missing a few pieces.

If the employer stops paying the health insurance premium but the employee then assumes the payment of the full premium, that would cause a drastic and sunstantial reduction in the employee's paycheck.

For example if the total premium was $350 per month the employee would take home about $250 less. Unless they were getting that much ($250) per month in reimbursement the employee would be losing.

What happens if the employee has $0 medical expenses?

What is the reason than why any employee would participate?

How would the employer "sell" this loss to the employees?

Vebaguru

Doesn't Rev Ruling 2002-41 and Notice 2002-45 also prohibit HRA participation from conditioned on health insurance plan participation?

In the scenario given by Kirk it seems that health insurance participation is a requirement.

Share this post


Link to post
Share on other sites

GBurns:

Thank you for taking the time to share your views on this topic.

I don't think that the company would be offering this to employees on an elective basis; this is simply what the company is electing to do for (to?) all employees.

You are quite right that this is more unfavorable to the employee if he or she has no expenses. However, I don't see how the employee could force the company to subsidize the premium. The only recourse available to the employee is to quit.

I don't think that the employer would conditioned participation in the HRA upon participation in the insured health plan. However, if the employee purchased his or her own insurance, then the employee couldn't pay that expense with pre-tax dollars under the employer's cafeteria plan.

Share this post


Link to post
Share on other sites

GBurns-

I don't believe that Rev Ruling 2002-41 and Notice 2002-45 prohibit HRA participation from being conditioned on health insurance plan participation. All that is required is passing the 105(h) non-discrimination testing.

V

Share this post


Link to post
Share on other sites

The newly released Rev.Rul 2002-80, discussed in today's Benefitslink newsletter, seems like helpful reading in this discussion.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

×
×
  • Create New...