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Nonexcludable, taxable benefits paid by a VEBA


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A VEBA provides some nonexcludable, taxable health and medical benefits -- coverage for domestic partners and other nondependents.

It's very clear how to handle this situation for active employees. The benefits are Form W-2 compensation, fully subject to all payroll taxes and income tax witholding, and the FICA and FUTA wage bases are coordinated with the regular compensation paid by the common law employer.

But, what about retired beneficiaries? What happens when a VEBA pays taxable benefits to someone who's retired? Even though the individual is treated as an "employee" for the purpose of excluding eligible health care benefits, the employer-employee relationship no longer exists. Do the benefits constitute wages? Does the VEBA report the taxable benefits reported on Form W-2 or on Form 1099? If the VEBA uses Form 1099, which version should it use (1099-R? 1099-MISC?)?

Lori Friedman

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In researching and dealing with the same situation, we came to the conclusion that the plan would have to issue a form W-2 to the participant if the employer was unavailable to do so.

Our conclusions as to the taxable benefits reportable on forms 1099 are:

1. Death proceeds that do not qualify under IRC 101(a) (form 1099-R);

2. Disability income payments (form 1099-R);

3. Education expenses not eligible for exclusion under IRC 127 (form 1099-MISC);

4. Excess assets distributed in connection with a trust liquidation (form 1099-MISC).

5. Medical, legal and other professional services paid from the trust are reported as paid to the payee (not the participant or beneficiary) on form 1099-MISC.

Hope this help.

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vebaguru,

"5. Medical, legal and other professional services paid from the trust are reported as paid to the payee (not the participant or beneficiary) on form 1099-MISC."

Why is the 1099 isssued to the payee instead of the plan participant? The amount paid to the payee was paid on behalf of the participant, and should be no different from any other payment for medical services rendered to a plan participant except for being not excludible as expenses of medical care for a dependent.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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  • 2 weeks later...

GBurns-

The IRS requires reporting payments to medical providers in excess of $600. This is covered in the 1099 instruction booklet. The instructions do not require that payments to medical providers be reported to 2 recipients. To the extent that a payment is taxable to the employee, it is reported on W-2.

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The vast majority of medical providers provide services through a corporate entity, whether it be the hospital, the pharmacy, the eyeglass store, the clinic or medical practice. Where is there any requirement that a 1099 be issued to a corporate entity?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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On page 18 of the "Instructions for forms 1099 et al" located at 1099 Instructions under the instructions for form 1099-MISC. It states that "Payments to a physician, physicians’ corporation, or other supplier of health and medical services. Issued mainly by medical assistance programs or health and accident insurance plans." Such payments must be reported if they equal $600 or more.

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I did not see a page 18 that related to 1099-Misc.

But note page 59 of 93 which is also page Misc-5 which contains the instructions for Box 6 and the bold faced "Caution" that states "Payments made under a flexible spending arrangement (as defined in section 106©(2) or a health reimbursement arrangement which is treated as employer-provided coverage under an accident and health plan for purposes of section 106 are exempt from the reporting requirements of section 6041."

The instructions have to be taken in their entirety taking into consideration the facts and circumstances of the plan and payment etc.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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GB: Payments by a health care plan or employer to a medical provider who provides medical services to employees are taxable income to the provider which is reported on a 1099 form under IRC 6041 if it exceeds 600. The payment to the providers from a flex plan are not taxable income to the plan participants subject to tax reporting.

mjb

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  • 7 years later...

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