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VEBA contributions Accrued or Cash-Basis ?


Guest RSNOW
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Can VEBA contributions be accrued or do they have to be made on a cash-basis ?

Thanks for any input. Let me know if I need to provide more info.

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I have seen two different appraches. The accrual base taxpayer can accrue at yearend but must contribute within 75 days like old profit sharing rules. The National Presto case stopped the ability to accrue also you've got to follow the 419/419A qualified asset account rules so be prudent.

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What does the accounting method of the employer or plan sponsor have to do with VEBA contributions?

To accrue contributions as in National Presto was a different isssue as far as I can remember. It had to do with accruing (accumulating) the contibutions instead of depositing them, and had nothing to do with accounting methods (accrual or cash basis). 2 different meanings of accrual.

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Cash basis taxpayers must pay all expenses by the end of the fiscal year. (Retirement plans may be funded after the end of the year due to a special statutory rule.) Accrual basis taxpayers must pay any liability incurred, including contributions to a VEBA, by the end of the fiscal year prior to filing their tax returns.

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Arent there two separate issues- Under IRC 419©(1)(A) welfare benefit contributions paid or accrued as a qualified direct cost by an employer for a taxable year are deductible. The qualified direct cost is limited to the benefits provided by the employer as if the cash basis method of method of accounting is used. 419©(3)(A). IRC 419©(1)(B) provides that any additions for future claims may be deductible to the extent permitted under IRC 419(A)(b).

An employer could delay making contributions indefinitely on accrued claims in a tax year but an accrual basis taxpayer can only deduct amounts actually paid out as benefits in a taxable year regardless of the amounts which have been accrued as liabilities during the year.

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The issue is generally the deduction for claims incurred but not reported (IBNR) at year end.

My understanding is that in the past it was difficult to take a an accrual basis deduction for IBNR for a self-insured medical plan. There was no obligation on the part of the plan -- and the "all events" test would generally not have been met -- unless and until the participant actually reported the claim.

As a result, many employers used VEBAs to accelerate their deductions. They could use the 419/A rules to take a deduction for any cash contributed to the VEBA by year end -- provided it was within the 419/A limits.

I believe that it is now possible, in some cases, to take the deduction for claims IBNR without a VEBA. The contractual arrangements with HMOs and other service providers often create a legal obligation that satisfies the "all events" test before the claim is reported.

I believe that the change from the VEBA to accrual basis method is sometimes considered a change from the cash to the accrual basis and requires that the appropriate forms be filed.

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Guest Harry O

What am I missing?

Section 419(a)(2) clearly says that contributions to a welfare benefit fund are only deductible FOR THE TAXABLE YEAR IN WHICH PAID. See IRS general information letter to Mark Sokolsky dated 7/10/89 (reprinted in BNA Pension Reporter 7/31/89) that closes the loop by pointing out the obvious that there is no counterpart to section 404(a)(6) which would allow contributions to be deductible for a year as long as they are made prior to the due date of the tax return for such year.

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In the situation I'm talking about the 419 rules would not apply, because contributions would not be made to a fund. The employer would simply accrue the deduction for a liability that had been incurred by year end.

If you can meet the "all events" test of 461, then you don't need to use a fund and 419 in order to increase your deduction for expenses that have been incurred but not yet reported to the plan at year end.

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