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QDROphile

Contacts for Medical Benefits VEBA Funded with Life Insurance

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I am interested in VEBAs that provide medical benefits (retiree medical benefits, so much the better) and use life insurance as a funding vehicle. I would like names of providers or consultants that I could contact. I would also welcome general comments on the arrangement.

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QDROphile:

You certainly have the option of funding medical benefits with life insurance.

Before doing so, however, consider that a VEBA can pay for medical benefits in 2 ways: (1) through tax-deferred accumulations of individual contributions and (2) through insurance claims.

Why would life insurance, which combines these 2 benefits, be more advantageous than the VEBA serving as a tax-deferred accumulation trust, individually, and a unique medical insurer, collectively?

Don Levit

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1. No individual contributions.

2. The arrangement already has a medical insurer.

3. The proposition is that the life insurance will not generate annual unrelated income on the internal earnings.

The goal is to accumulate to help offset future increases in medical insurance premiums.

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QDROphile:

It sounds like you are trying to do 2 things:

1. Use the cash values to help pay for medical benefits.

2. Use the remaining values of the life policies as death benefits.

According to the 1999 EO CPE Text, the IRS states:

"We are seeing an increasing number of employers look for ways to fund post-retirement medical benefits by encouraging employees to pick up part of the cost. Many such plans qualify for exemption, but if amounts are vested in employees as described below, so that there is little or no possibility of an employee forfeiting the amounts attributabe to that employee, the plan will not qualify.

Individual policies are maintained and are credited with a proportionate share of the earnings. Upon retirement, funds in the employee's account must be used for certain purposes, usually medical insurance premiums and medical expenses not covered by insurance. If the employee dies before his or her account is depleted, remaining funds are paid to a designated beneficiary.

Such a payment upon death is not a permissible VEBA benefit."

Don Levit

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No intention to pay death benefits. The assets of the VEBA would be used only to fund medical benefits by paying premiums on a medical insurance policy.

Thanks for your attempts to understand and analyze and I welcome further comments.

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If I understand correctly, the life insurance policies would not be used to fund any death benefit or other post-death obligation of the VEBA on the life insured. Rather, the life insurance would just be an investment for the VEBA, with the death benefit viewed as a return to the VEBA on its investment (i.e., premium payments by the VEBA).

Of course, the VEBA trustees would have to weigh the impact on the VEBA's cash flow needs to pay benefits, as well as the expected rate of return, in deciding if such is a prudent investment. The VEBA document could perhaps direct that such investments be made, giving the VEBA trustees some cover against imprudence claims down the road.

If there is no post-death obligation of the VEBA to correlate to some degree with what the insurer will pay to the VEBA in death benefits under the life insurance policy, does the VEBA have an insurable interest in the life even if it is that of a VEBA member? I don't know, just asking.

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Guest jschneidereit
I am interested in VEBAs that provide medical benefits (retiree medical benefits, so much the better) and use life insurance as a funding vehicle. I would like names of providers or consultants that I could contact. I would also welcome general comments on the arrangement.

Our firm consults on OPEB funding via VEBAs and other trust arrangements. We have designed and managed VEBA funding for several utilities. We would be happy to discuss Trust Owned Life Insurance funding within the VEBA or other OPEB funding strategies. We are Vinings Consulting LLC at 770-422-4800 Thank you

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You don't specify whether you are looking for assistance with the compliance aspects of VEBAs, with the purchase of investment-grade life insurance, or both. I have established several plans of the type you describe, ie, retiree medical VEBAs funded with TOLI.

I worry, however, at your apparent naivete. There are other investment strategies that can minimize or avoid UBIT besides life insurance, including municipal bonds, buy and hold funds, etc. Life insurance is typically not a good investment, at lease off-the-shelf policies. Mortality charges are relatively high unless the policies are purchased on the youngest group members. And the trust will no longer have an insurable interest if those participants leave the plan, so the carrier has to be willing to do a change of insured.

We only employ the strategy you mention when the employer desires to provide a death benefit in addition to a post=retirement medical benefit.

Finally, there are significant legal requirements and funding limitations applicable to such arrangements if they cover Key Employees. cf, IRC sections 419A, 505 and 4976.

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vebaguru:

If the employer decides to provide a death benefit, in addition to a post-retirement medical benefit, can the death benefit be paid to the insured's beneficiary, or must the beneficiary be the VEBA?

Don Levit

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vebaguru:

If the cash values of the policy are used to pay medical benefits, is it legal for the death benefit to be paid to the employee's beneficiary, instead of to the VEBA?

If the policy is used to benefit participants for life and medical benefits, wouldn't this violate the VEBA provisions?

Don Levit

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Perhaps some clarification is needed. A VEBA is a welfare benefits trust (or association), not a benefit plan. The VEBA stipulates the duties of the trustees, including purchasing life insurance and/or making other investments.

It would not violate the terms of a VEBA to pay a benefit that a participant's beneficiary is eligible for and applies for.

The underlying benefits are provided pursuant to a plan or plans. It would clearly not violate the terms of the death benefit plan to pay death benefits directly to the beneficiary. Obviously drafting must agree with practice.

I presume your concern is, "if the policy is paid out entirely to the beneficiary, how will medical benefits be provided?" 2 answers:

1. Once the participant is dead, he is not likely to incur additional medical expenses.

2. Welfare benefit plans are generally drafted to provide that such benefits are not guaranteed by the employer, and are available only to the extent of the plan's available assets.

The reason for paying death benefits directly out of the policy is to make sure that the death proceeds of the policy are received tax-free by the beneficiary. Since the VEBA is a tax-exempt trust, receiving tax-free death benefits and obtaining a tax deduction for the death benefits paid to beneficiaries is meaningless.

Neither IRC section 101 nor any rulings thereunder provide for a pass through of the tax-exempt income to a third party tax-free (although I have seen a pre-Circular 230 opinion letter to that effect).

If assets are in the policy besides the amount due to the beneficiary, a split designation of beneficiary may be done: the correct portion to the beneficiary and the balance to the VEBA trust.

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vebaguru:

Thanks for your reply.

Let us assume a VEBA participant is accumulating in his individual account a fund to pay medical expenses.

Assume the account still has $100,000 in it, and the participant dies with no dependents.

Can the $100,000 go to the participant's beneficiary or estate, with no consequences?

Don Levit

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It may NOT be paid out upon death, but may be paid for reimbursement of unreimbursed medical expenses during the lifetime(s) of his dependent(s) and/or beneficiary(ies). This is why we sometimes keep funds inside insurance policies, so that beneficiaries and dependents can get the funds tax-free without having to submit medical claims.

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vebaguru:

Are you saying that the beneficiaries of the life insurance proceeds can also use the cash values to pay for medical expenses, as long as they don;t actually submit claims to the VEBA?

If that is the case, the beneficiaries are using the life insurance for 2 benefits, death benefits and medical benefits.

Isn't this in violation of the VEBA rules (similar to my prior question about receiving unused medical benefits as death benefits)?

Don Levit

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