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Residual Acct Balance as VEBA Death Benefit?


Guest ScarletKnight
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Guest ScarletKnight

Is anyone changing how their retiree premium reimbursement plans work following PLR 200638027? In that case, a plan provided reimbursement of medical premiums and out of pocket medical expenses for retirees. The Service found that the plan did not qualify as a VEBA because it provide a non-permissible benefit (among other reasons). The non-permissible benefit was the refund of any remaining amounts in a participant's account after the participant's death (or the death of the participant and spouse if the participant was married) to the participant's (or spouse's) beneficiary. The Service said that this variable death benefit was not a life benefit because the amount was not fixed, there was no current protection and no insurance type protection. Has anyone encountered this?

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Guest americasVEBA.com

Revenue_Ruling_2006_36.pdfp4090_0706.pdfIn order to distinguish the overal plan the Service needed to quantify the type of plan. There are only three tax-advantaged methods to reimburse an individual for healthcare expenses under 213(d); HSA, FSA, or HRA. By default the HRA is the only plan that can do this hence the plan must comply with all of the requirements of an HRA. HRAs must be fully employer funded and must not pay cash benefits of any type in order to satisfy the IRS guidance pertaining to HRAs. The VEBA, in this example, funds the HRA.

The Service issued Rev. Rul. 2006-36 (see attached) describing this scenario. This is not "new" guidance it is simply a reiteration of the original guidance from June of 2002. Also, last summer the IRS publshed direction for public sector employers in its July FSLG Newsletter (attached). Again, a reiteration of the original Code.

For additional information about these plan designs see the America's VEBA Solution website at www.americasVEBA.com

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americasVEBA.com:

Thanks for providing the link.

I don't see, though, how the ruling on HRAs has any bearing here, other than neither the HRA nor the VEBA can be used as a savings vehicle.

ScarletKnight:

Does the VEBA provide some sort of cash benefit, in the event all the medical expenses are not used?

If that is the case, you may want to look at setting up individual savings accounts outside the VEBA.

By providing matching dollars from the VEBA based on the participants' savings account balances, the plan may pass the legal guidelines.

Don Levit

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Guest americasVEBA.com

If the plan reimbursed only premiums it could be set up differently and avoid the HRA rules but if it reimburses medical expenses under 213(d) it must be an HRA. I suspect this is the reason the Service tossed out the tax status of the plan reviewed.

The plan funded with the VEBA must be an eligible benefit plan under the Code. In order to provide 213(d) reimbursements the plan can only be an HRA, FSA or HSA. The FSA has the use-it-or-lose-it rule, so that doesn't work, and the HSA requires the HDHP and cannot recieve contributions post Medicare eligibility, so that doesn't work. This leaves the only logical conclusion that the plan must be an HRA which requires compliance with the rules and regs pertaining to HRAs. This is why the HRA is pertinent to the question.

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americasVEBA.com:

You're right. I was focusing on the medical expense reimbursement, while forgetting about the premium reimbursement.

If we are looking at a self-funded employee-pay-all VEBA , without the premium reimbursement feature, do you think the VEBA may be a way to pay medical expenses, by offering a match (similar to a 401(k) match) of one's (outside the the VEBA) savings account balance?

Don Levit

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Guest americasVEBA.com

This is the golden question. I wish there were a way to do this as we get the question every day. The Service has insisted that if a plan reimburses 213(d) expenses that it must qualify as an FSA, HSA or HRA (see earlier response). If the HRA is the "plan" then it must be funded entirely by the employer without contributions by employees in any fashion. Constructive receipt is the determinant here.

You can certainly set up an after tax program that an employer contributes some type of a match. Employer contributions into that ype of a plan would need to be shown as wage on the employee's W-2. You may run into an issue with resticting the use of the funds though as this would be cash compensation to the employee and not part of a "plan".

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americasVEBA.com:

I guess I didn't make myself clear.

Assume we have an employee-pay-all VEBA, which provides a self-funded health insurance plan.

The funds for the benefits come from 2 sources: (1) the premiums the employee pays into the VEBA and (2) similar contributions into an outside savings account, such as a a Roth IRA.

Starting in year 2, the VEBA provides a match for all qualified medical claims, such as all 213(d) expenses exceeding $5,000.

Example:

Employee pays in $2,000 into the VEBA and $2,000 into the Roth IRA each year.

Year 3, his Roth IRA balance is $5,000.

The VEBA match is $4 that year.

He is covered for $25,000 in qualified medical expenses, of which $5,000 comes from the Roth and $20,000 from the VEBA.

Don Levit

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