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Deductible contributions to individual accounts?


Don Levit
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Folks:

I am curious if contributions made to a VEBA would qualify under a cafeteria plan?

The IRS Publication 15-B states, "Generally, a cafeteria plan does not include any plan that offers a benefit that defers pay. However, a cafeteria plan can include a qualified 401(k) plan as a benefit."

The VEBA can serve 2 purposes; (1) an insurer; (2) a way to accumulate savings in individual accounts for medical expenses.

Premiums paid to the VEBA as an insurer would qualify unbder a cafeteria plan, for pay is not deferred (it is "absorbed" by the VEBA, as would premiums to a commercial insurer).

However, could an employee accumulate dollars in his individual account, only to pay for qualified medical expenses?

Is it deferred pay, if any unused balance is forfeited back to the VEBA?

Don Levit

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  • 1 month later...

I am curious if contributions made to a VEBA would qualify under a cafeteria plan?

A VEBA would be an appropriate funding vehicle for a Cafeteria Plan.

However, could an employee accumulate dollars in his individual account, only to pay for qualified medical expenses?

Yes.

Is it deferred pay, if any unused balance is forfeited back to the VEBA?

Under the use it or lose it, forfeiture of deferrals is certainly possible. Not sure what you mean by "deferred pay".

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vebaguru:

The premiums paid to the VEBA cannot be used by the participant.

However, the dollars in his individual account can be used by the participant for qualified medical expenses.

However, any dollars unused in his account at the death of the employee and any dependents must be returned to the VEBA.

The fact that dollars can revert to the VEBA, does this make the individual account "deferred compensation" for dollars not used in the current year for medical expenses?

Don Levit

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Don,

If "The premiums paid to the VEBA cannot be used by the participant", How does money get into "his individual account"?

If "The premiums paid to the VEBA cannot be used by the participant", How is it that "the dollars in his individual account can be used by the participant" ? This seems contradictory.

If unused dollars are returned to the VEBA they cannot be "deferred compensation" since the participant has no means of getting the funds.

Maybe I am just not understanding what you are trying to describe.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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The model you describe does not make sense, as pointed out by GBurns.

A reversion (or forfeiture) of funds at death does not make the amounts "deferred compensation" because they are not paid out the the participant's beneficiary (except upon filing a claim for unreimbursed medical expenses).

And if the funds are carried over to a future year (HRA model rather than FSA), they can be used by the participant's beneficiary or dependents in future years without becoming deferred compensation (under 409A) since there is a specific exemption provided for welfare benefits in that section.

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GBurns:

It does sound contradictory, so let me explain.

There are 2 distinct contributions to the VEBA.

One contribution is a premium payment, which provides for claims paid by the VEBA as an insurer for all the participants.

The second, distinct contribution goes to the individual participant's savings account to be used for medical expenses just for that individual.

As I mentioned earlier, the VEBA can be used in 2 ways.

First, as a non commercial insurer, paying qualified claims for all the participants.

Second, as an accumulation vehicle for individual participants to pay current and future medical expenses.

Don Levit

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