Jump to content

Trying to Correct a VEBA Problem


mal
 Share

Recommended Posts

A multiemployer group has maintained a 501©(9) trust for several years. It is used to provide SUB, Death, Training, Health Premium and similar benefits to members. A retiring participant can use his VEBA balance to pay retiree health premiums until the account is exhausted.

Due to the increase in health costs the group made a change 5-6 years ago to begin reimbursing participants for certain out-of-pocket medical expenses (deductibles, co-pays, eyeglasses, etc.)

My understanding from an earlier post is that the IRS is using the HRA guidance from June, 2002 as well as Rev. Rul. 2006-36 to disqualify plans that mix the HRA type benefits with traditional VEBA offerings. (Or are they just deeming the medical reimbursements to be taxable?)

Q1- Is my understanding of the IRS position correct?

Q2- If this is correct, it seems that the problem would be mitigated by running a separate HRA plan (at additional costs) under the same trust umbrella. Agree or disagree?

Q3- Any guesses as to the headache and fines involved if the plan reports the problem to the IRS and takes corrective action?

The IRS seems to be splitting hairs on this issue. Why if a group can offer the HRA type benefits under a 501©(9) trust would they insist on a separation of medical benefits from the others?

Thanks in advance.

Link to comment
Share on other sites

Which earlier post are you referring to? Are there rulings or pronouncements from IRS that support your claim that IRS has changed its position?

I believe that your concerns are unfounded and that HRA amounts held within a VEBA may be used to reimburse medical expenses.

Link to comment
Share on other sites

Take a look at the discussion that was initially posted on March 13, 2007. The heart of the argument revolves around IRC 105(b) and the applicable regulations. In Notice 2002-45 the IRS said that an HRA could offer only medical care reimbursements and not other traditional VEBA benefits..."if any person has a right to receive cash or any other taxable or non-taxable benefit", the IRS said the arrangement is not an HRA and reimbursements for medical expenses would be taxable income to the employee.

Hopefully someone will tell me there is no reason for concern, but to this point the reading I've done suggests the IRS will require HRA plans to be a separate plan under the VEBA trust.

Link to comment
Share on other sites

mal:

Reading over RR 2006-36, here is the gist, as I understand it.

HRAs can provide medical benefits only to employees, their spouses, and their dependents.

Any unused amounts remaining in the HRA at the deaths of the employee, his spouse, and his dependents must return to the employer; they cannot be paid out as death benefits.

The same rationale applies to an individual savings account of the VEBA which is dedicated to medical expenses.

Once the employee, his spouse, and his dependents die, any unused balance is forfeited to the VEBA; it cannot be paid as a death benefit.

I don't see why the HRA cannot simply be added to the individual's savings account, if it is dedicated to paying only medical expenses.

Don Levit

Link to comment
Share on other sites

Don,

That's the exact problem we are facing...this is a traditional construction industry VEBA that pays a number of other non-medical benefits. The members have one account from which they can draw unemployment pay, supplement medical premiums, training benefits, death benefits, post-retirement health premiums, and the reimbursement of out-of-pocket medical costs.

Link to comment
Share on other sites

mal:

This is one reserve fund used to pay benefits for the collective participants, right?

It is not separate savings accounts, with separate participants and their respective dependents?

VEBAs can offer benefits both ways: collectively and individually.

Don Levit

Link to comment
Share on other sites

There is no true HRA account, but the VEBA pays benefits that would typically be paid from a stand-alone HRA...in addition to others already mentioned. Account balances are capped at $12,000 and do roll from year to year.

Retirees can use the remainer of their VEBA balance to pay medical premiums to the Union's health plan, or for medical expense reimbursement. In event of death, the surviving spouse may take remainder as death benefit or continue to use it for medical premium payments.

Nothing exotic.

Link to comment
Share on other sites

I do not see where the issue of HRA rulings have any relevance to your situation.

What you explained in your OP is something that I see very often over the years.

Is your situation any different from the situation outlined in PLR 200007021?

http://ftp.irs.gov/pub/irs-wd/0007021.pdf

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

Link to comment
Share on other sites

GBurns:

Thanks for providing this PLR.

The benefits, according to this ruling, need to be in separate accounts to be used only for those particular benefits.

Any benefits that remain at the deaths of the employee and his dependents must be returned to the trust.

For example, on page 3, it states, ""Amounts directed to the 'Premium Account' may be used to pay premiums for health plan coverage. Amounts remaining in a participant's 'Premium Account' upon the participant's death may only be used for health plan premium continuation or redirected to the healthcare reimbursement account by the participant's survivbing spouse or qualifying dependents. In the event there is no surviving spouse or qualifying dependents, any remaining amounts in the 'Premium Account' are forfeited. Any forfeited amounts are used foist to pay administrative expenses and then reallocated on a prorata basis to the accounts of other participants.'

Taking the remainder as a death benefit or to pay medical premiums is prohibited from the same account.

Actually, sub trusts should be set up for each benefit.

Link to comment
Share on other sites

Don

I do not understand why you keep having this concern with Death Benefit and payment to survivors, there was no such suggestion by the OP that the money set aside in this "HRA type" segment would be used for any such purpose, that I can see.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

Link to comment
Share on other sites

I do not understand why you keep having this concern with Death Benefit and payment to survivors, there was no such suggestion by the OP that the money set aside in this "HRA type" segment would be used for any such purpose, that I can see.

That's the problem. Each member has one account balance from which all VEBA benefits are paid. There is no clearly identified HRA portion of the member's balance.

Link to comment
Share on other sites

The traditional "construction industry VEBAs" that I have seen, all have accounts and sub-accounts.

Without accounts, How would they determine funding needed? How can they monitor useage? How would they know if any SUB is available if there is no limit on the amount spent on Training, for example?

I cannot imagine the plan operating with no limits on each segment. Otherwise the money could be overspent or unwisely spent on one item leaving no money for anything else.

If there are limits, I cannot think of how they would monitor them without accounts of some sort.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

Link to comment
Share on other sites

  • 2 weeks later...

To your earlier post: A VEBA can offer HRA benefits along with other benefits, but the HRA cannot offer all other benefits included in a VEBA. That means that if other benefits besides the HRA are included in a VEBA, they are part of a separate "plan", not necessarily part of a separate plan document. The benefit would be separate, the accounting would be separate, and the plan document must make the separateness of the HRA benefit from other benefits not permitted within HRAs clear.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...