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benpat3

Reimburse medical expenses

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If a plan has a VEBA set up and along with providing other benefits reimburses medical expenses, does the Plan have to set up a seperate HRA, funded by the VEBA, that only reimburses medical expenses in order for these reimbursements to not be included in the participants gross income?

A VEBA may provide life, sickness, accident or other similar benefits. It seems to me that a VEBA may reimburse medical expenses without having to have an HRA set up. I have read Rev. Rul. 2005-24 which states "[t]his ruling applies to any purported employer-provided medical reimbursement arrangement, regardless of how the arrangement is characterized..." Is this sentence in Rev. Rul. 2005-24 the reason why an HRA must be set up within a VEBA to reimburse medical expenses.

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Observing the VEBA rules simply avoids income tax on the fund's investment earnings.

Observing the rules of IRC 105 (such as HRA rules) is necessary to keep the employees/beneficiaries from being income taxed on the reimbursement of medical expenses out of the fund.

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The VEBA should set up sub trusts in which each of the benefits will be paid from.

There should be no commingling of these sub trusts.

If a particular benefit has been doscontinued, once all the participants have been paid, the remainder of the discontinued sub trust can be rolled over to another sub trust.

Don Levit

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The VEBA should set up sub trusts in which each of the benefits will be paid from.

There should be no commingling of these sub trusts.

If a particular benefit has been doscontinued, once all the participants have been paid, the remainder of the discontinued sub trust can be rolled over to another sub trust.

Don Levit

Thanks for the replies, I guess my next questions is Why? What authority requires there be sub trusts? I look at the VEBA regs and other information and I do not see anything that specifically requires the sub trusts.

As for the tax implications, I am looking at something from CCH that states under a VEBA "employees may be taxed on benefits at the time of distribution, to the extent that statutory exclusions do not apply." So based on this statement in regards to reimbursing medical expenses, the VEBA must utilize IRC 105(b) by setting up an HRA in order for medical expense reimbursments not to be included in gross income.

Is it under this reasoning that requires the sub trusts? Is it the individual statutes, allowing the amounts to be excluded from gross income, that require the sub trusts?

Thanks.

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Your original post suggests that the VEBA provides other benefits as well as medical reimbursement. You'll need to keep track inside the VEBA how much of the funds, per employee, are for medical reimbursement (keeping in mind the nondiscrimination rules of 105(h)) and how much for other benefits. This may be why Don Levit suggests 'subtrusts'. By having separate depository/brokerage accounts taken in the name of the VEBA, you might be able to reduce the manual recordkeeping chores significantly.

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That was an excellent explanation, John.

Also, I would add that the only time commingling of these benefits would be permissible is when, say, medical benefits are discontinued, all liabilities have been paid, then any residual could be used for a different benefit.

As far as sub trusts go, I got that idea from PLR 200119064, which states "sub-trusts CU are maintained pursuant to a collective bargaining agreement within the meaning of section 419A(f)(5), and no account limits will apply as long as the assets of each sub-trust are not available to pay any benefits provided by the other sub-trusts."

Don Levit

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That was an excellent explanation, John.

Also, I would add that the only time commingling of these benefits would be permissible is when, say, medical benefits are discontinued, all liabilities have been paid, then any residual could be used for a different benefit.

As far as sub trusts go, I got that idea from PLR 200119064, which states "sub-trusts CU are maintained pursuant to a collective bargaining agreement within the meaning of section 419A(f)(5), and no account limits will apply as long as the assets of each sub-trust are not available to pay any benefits provided by the other sub-trusts."

Don Levit

But the issue there had nothing to do with VEBAs, only with 419A asset account limits. While use of sub-trusts is acceptable, I don't believe it is required. Reasonable accounting should be adequate.

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But the issue there had nothing to do with VEBAs, only with 419A asset account limits. While use of sub-trusts is acceptable, I don't believe it is required. Reasonable accounting should be adequate.

That is the same position (that a sub-trust is not required and reasonable accounting will suffice) I am taking on it in regards to a VEBA and an HRA. I think the guidance that governs reimbursement under an HRA is seperate than reimbursement under a VEBA. I can not seem to find anything definitive that states that reimbursing medical expenses through a VEBA must be done with a seperate HRA sub-trust to be non-taxable to the individual.

Thank you all for your responses and information.

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benpat3:

Must the portion of the VEBA that is paying medical expenses be used only for medical expenses?

If there are any monies left at the death of the last participant, then the balance can be rolled over into another VEBA benefit?

If you agree with this, then the VEBA medical expenses function like an HRA, except with an HRA, any residual benefits go back to the employer.

Agree?

Don Levit

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I always thought that the VEBA was a funding medium only and that the benefits available are provided not by the VEBA but by the underlying plans that are funded through the VEBA.

Yet I keep seeing people like Don treating VEBAS as if they were benefits plans (medical plans, DB plans etc).

Can someone please opine?

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George:

It depends if the VEBA is fully insured or self insured.

A self insured VEBA is a non commercial insurer.

Part of the reason it can receive its tax exempt status as a 501©(9) trust is its ability to offer plans not commercially available.

Thus, its product design is virtually unlimited.

Don Levit

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How does a VEBA get "fully insured"?

As far as I know, a VEBA cannot be fully insured nor can it be self insured, It is the underlying benefits plans that can be either fully insured or otherwise.

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Guest mjb

GB: I have seen vebas that provide benefits under an insurance policy issued to the veba where the insurance co pays all benefits which means its fully insured. Alternatively the benefits can be paid direclty from the VEBA to participants without an ins policy, i.e., there is no risk shifting to pay benefits which makes the VEBA self insured.

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I would interpret what you described as being that the benefits were fully insured not the VEBA. In fact the program of benefits/benefits plan is what is fully insured not the VEBA.

Additinally, is it not that the VEBA provides the funds that the benefits plan uses under the terms of coverage of that benefits plan rather than the VEBA paying the benefits?

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Guest mjb
I would interpret what you described as being that the benefits were fully insured not the VEBA. In fact the program of benefits/benefits plan is what is fully insured not the VEBA.

Additinally, is it not that the VEBA provides the funds that the benefits plan uses under the terms of coverage of that benefits plan rather than the VEBA paying the benefits?

It is a distinction without a difference.

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mjb:

Well, there could be a big distinction, depending if the plan is self-funded.

Let's first look at what a VEBA is, according to the IRS.

"The regulations under 501©(9) provide that for an organization to be a VEBA:

A. the organization must be an association of employees;

B. membership in the organization must be voluntary;

C. the organization's purpose is to provide for the payment of life, sick, accident, or other benefits to its members or their dependents or designated beneficiaries;

D. no part of the net earnings of the organization inures to the benefit of any private shareholder or individual."

Found in Chapter 9, VEBAs, Handbook 7.8.2.

Notice it is the organization that provides the benefits, a tax-exempt non commercial insurer.

And, I haven't even discussed the distinctions between an employee benefit program, such as offered through the VEBA, and an insurance program, according to the IRS.

Don Levit

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mjb

Are you seriously saying that there is no difference caused by or between the benefits provided?

If the benefits provided under a VEBA are a SUB, a 401(k) and a medical expense reimbursement plan and the MERP provides the benefits through a BCBS insurance policy, are you saying that it means that the VEBA is fully insured rather than that it is the MERP that is fully insured?

Are you also saying that because the MERP is fully insured, so is the 401(k)? You said there is no difference.

Since SUBs are usually self funded (self insured) does it now become regarded as being fully insured since the larger benefit the MERP has caused (in your interpretation) the VEBA to be fully insured, which would be the case since you see "a distinction without a difference"?

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Guest mjb

Don: What is the distinction that you are referring to in your post?. Reg 1.501©(9)-3© states that VEBAs can provide benefits by purching a health ins policy. As I understand it, a fully insured VEBA will purchase an insurance policy to pay benefits and self insured vebas reimburse participant's expenses. Are you saying a VEBA cannot own an insurance policy to pay benefits? Please enlighten me.

GB: your last two posts are unintelligible. I dont understand "Is it not that the VEBA provides the funds that the benefits plan uses under the terms of coverage of that benefits plan rather than the VEBA paying the benefits."

GB: what is the statuory provision that allows a VEBA to provide a 401k benefit? Last time I looked 401k plans are qualified trusts under IRC 401(a) not under 501©(9).

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As I understand it, a fully insured VEBA will purchase an insurance policy to pay benefits and self insured vebas reimburse participant's expenses. Are you saying a VEBA cannot own an insurance policy to pay benefits? Please enlighten me.

I guess I'm confused as to why an employer would by insurance for a VEBA. I thought the point of the VEBA was to fund it to pay welfare benefits and get the immediate deduction with no tax to the employee. You can get that treatment buying insurance outside a VEBA-what's the VEBA for then?

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mjb:

The distinction the VEBA provides is when an employer self-funds the benefits.

Of course, if only one employer is involved, the VEBA is not as attractive, for an employer has much flexibility without the protection of a VEBA.

Where a VEBA can really prove useful, is the self-funding of medical benefits for more than one employer, in the same line of business.

Steelerfan, here is a very important distinction.

The self-funded VEBA is especially useful for small employers in 3 contiguous states.

Thus, the plan can be a mini Association Health Plan, without an Act of Congress!

Congress already provided for VEBAs over 80 years ago!

As a non commercial insurer, the choice of benefit designs is virtually unlimited, for the VEBA insurer is intended to offer plans not available to the public.

Thus, out-of-the-box thinking is encouraged.

Don Levit

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Steelerfan, here is a very important distinction.

The self-funded VEBA is especially useful for small employers in 3 contiguous states.

Thus, the plan can be a mini Association Health Plan, without an Act of Congress!

Congress already provided for VEBAs over 80 years ago!

That's a good point, but my question was geared more toward what is the additional benefit of a VEBA where the employer "funds" the VEBA with insurance to pay the benefit? Self funded VEBAs are obviously very flexible, so why would you use insurance to pay benefits. Is it a cost/risk analysis?

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