VEBA funded with TOHI (TM)

[Steelerfan]

Anyone familiar with this insurance product? The intent is to use TOHI to get retiree medical liabilities off the books and the accelerated deduction.

Specifically, since you can accomplish the same business and tax goals with a self-funded VEBA, what would be the benefit of funding the VEBA with health insurance other than to make the insurance company richer?

[Don Levit]

Steelerfan:

I am not familiar with TOHI, although I have heard of it.

If the goal is to get retiree medical off the books, have you considered an employee-pay-all-VEBA?

Don Levit

[vebaguru]

The primary advantage is to eliminate all or part of the risk with respect to future cost of benefits by contracting those to a health insurance company. It may make the insurance company rich (or poor) depending upon the actual experience.

The other advantage is in how the accounting is reported under FAS 106. Insured benefits are excluded from the company's financial statements, while VEBAs and self-funded benefits are not.

[Steelerfan]

Thanks

Don: I don't know what an emloyee pay all VEBA is, but in this instance it doesn't sound like you can ge the preferable FAS 106 treatment, i.e., the VEBA assets would not qualify as FAS 106 assets (to offset the liability)

[Don Levit]

Steelerfan:

The employee-pay-all VEBA is a VEBA in which employees pay all the premiums.

In this situation, some unique plans can be designed, for discrimination is not an issue.

In addition, as I understand it, FAS 106 would not apply to the new liabilities, as the employees, not the employer, assumes the risk through the VEBA.

Don Levit

[Steelerfan]

Steelerfan:

The employee-pay-all VEBA is a VEBA in which employees pay all the premiums.

In this situation, some unique plans can be designed, for discrimination is not an issue.

In addition, as I understand it, FAS 106 would not apply to the new liabilities, as the employees, not the employer, assumes the risk through the VEBA.

Don Levit

That's interesting. There are no new liabilities here though, retiree health was cut off a while ago. Hard to find an employer today who continues retiree health programs.

[Guest veba_funding]

I am familiar with how TOHI works & would be happy to discuss.

[GBurns]

How are the insurance premiums going to be paid?

If the employer is still going to be liable for future insurance premiums What is the advantage?

If the employer is going to fund the trust with an amount which is calculated to be enough, Is the employer giving any sort of guarantee that the funding is adequate and will the employer be on the hook for shortfalls, if any?

Is there any difference in the FAS 106 treatment if the TOHI is used rather otherwise?

[Guest Exec_Ben_N_Ret_Med_Guru]

Anyone familiar with this insurance product? The intent is to use TOHI to get retiree medical liabilities off the books and the accelerated deduction.

Specifically, since you can accomplish the same business and tax goals with a self-funded VEBA, what would be the benefit of funding the VEBA with health insurance other than to make the insurance company richer?

I am very familar with TOHI and other VOHI (VEBA Owned Health Insurance) products - have been working with it for ten years.

You CANNOT accomplish the same business and tax goals with a self-funded VEBA. A VEBA on non-collectively bargained employees is subject to UBIT. VOHI shields earnings from UBIT.

Also, this product does not settle the benefit, as seems to be implied by some of the responses. It OFFSETS the benefit liability by funding it through tax advantaged growth of assets and tax-free reimbursement of claims.

This tax-advantaged build-up is valuable compared against the thin pricing on this product. We've seen costs reduced by as much as 25%.

The product also provides a guaranteed minimum reimbursement per insured per year, even if policy assets "tank". Funding without the insurance does not provide this.

Feel free to contact me with questions.

[Guest Exec_Ben_N_Ret_Med_Guru]

How are the insurance premiums going to be paid?

If the employer is still going to be liable for future insurance premiums What is the advantage?

If the employer is going to fund the trust with an amount which is calculated to be enough, Is the employer giving any sort of guarantee that the funding is adequate and will the employer be on the hook for shortfalls, if any?

Is there any difference in the FAS 106 treatment if the TOHI is used rather otherwise?

The product is designed as a single premium. The client determines the premium level.

The advantaged is that policy assets grow tax deferred and provide tax free reimbursements for VEBA (plan) claims.

The employer provides no guarantee as to funding. They are not required to fund retiree medical.

The difference in FAS 106 treatment is that FAS 106 requires recognition of tax costs on earnings. TOHI shields the tax costs so it increases the offset to the benefit expense and the liability that is provided by funding for the liability by the amount of the taxes saved.

That is, the product expenses are less (generally significantly less) than the tax cost; hence the company does better with TOHI.

The product also provides a guaranteed minimum reimbursement per insured per year, even if policy assets "tank". Funding without the insurance does not provide this.

[GBurns]

Isn't the requirement for continued employer funding a facts and circumstances issue?

What happens if retiree medical is either vested or provided under a non changeable contract etc?

[Guest Exec_Ben_N_Ret_Med_Guru]

Isn't the requirement for continued employer funding a facts and circumstances issue?

What happens if retiree medical is either vested or provided under a non changeable contract etc?

It can be facts and circumstances. My statement was meant to indicate that there is no general requirement to fund or implication of responsibility for continued funding ONLY BECAUSE the employer decided to fund.

[Steelerfan]

Thanks for your input.

The continued discussions in these threads always leads me back to the same question/conclusion. the underlying assumption always seems to me to be faulty--that assumption being that a VEBA is the only way to do this. If you need to use TOHI to shield from UBIT, then why use a VEBA in the first place, why not use a taxable trust? Contributions to a taxable trust are tax-deductible under 419/419A and there are less adminstrative burdens. There seems to be a misconception that VEBA trusts are like qualified plans in the sense that you have to have one to get the tax deduction.

Can you demonstrate how using a VEBA is necessary or provides any benefit over using a taxable trust if you are using a tax sheltered product like TOHI?

[Don Levit]

steelerfan:

As a 501©(9), and a non commercial insurer, the VEBA has the opportunity to provide unique products not available through commercial insurers.

So, creativity and innovation is encouraged.

Why would you want UBIT to be a consideration anyway?

Typically, UBIT means the trust is overfunded.

Don Levit

[Steelerfan]

steelerfan:

Typically, UBIT means the trust is overfunded.

Don Levit

Not with respect to funding for post-retirement medical. I'd think you could be creative with a taxable trust--still don't see what a VEBA gives you unless you like the snazzy acronym.

[Don Levit]

steelerfan:

you are correct about post-retirement medical benefits not taking into account inflation.

If this was a qualifying employee-pay-all VEBA, UBIT would not apply, for there are no limits on the set-asides.

In addition FAS 106 would be inapplicable.

Don Levit

[Steelerfan]

steelerfan:

you are correct about post-retirement medical benefits not taking into account inflation.

If this was a qualifying employee-pay-all VEBA, UBIT would not apply, for there are no limits on the set-asides.

In addition FAS 106 would be inapplicable.

Don Levit

The statute indicates that all funding for post retiree medical is subject to UBIT. Employee pay all is irrelevant--the idea is for the employer to prefund the benefit

FAS 106 seems to be the remaining thorn. Not sure yet about that.

[Don Levit]

steelerfan:

Can you cite the statute?

Being subject to UBIT, and actually having to pay the tax are 2 distinct issues.

If the amount set aside is within the guidelines, why would any of the interest need to have a tax?

Don Levit

[Steelerfan]

steelerfan:

Can you cite the statute?

Being subject to UBIT, and actually having to pay the tax are 2 distinct issues.

If the amount set aside is within the guidelines, why would any of the interest need to have a tax?

Don Levit

512(a)(3)(E)(ii)(I)

any income attributable to an existing reserve for post ret med is not exempt function income. that's why the insurance industry has bent over backwards to find tax exempt investment vehicles to place inside a VEBA (ironic isn't it since a VEBA is thought of as tax exempt).

As has been fleshed out here recently, one industry insider (?) on the board has verified that the use of VEBA is resting largely on it's perceived need for FAS 106 rather than any real tax purposes.

to your point, i'm not entirley sure what tax rate would apply for UBIT. But if you have TOHI who cares?

[Don Levit]

steelerfan:

512(a)(3)(E)(ii)(I) states Clause (i) shall not apply to any income attributable to an existing reserve for post-retirement medical or life insurance benefits.

This is because clause (i) deals with current medical benefits, not post-retirement medical benefits.

The set asides and, thus, the reserves are 2 distinct calculations for current medical benefits and post-retirement medical benefits.

The account limit for post-retirement medical benefits is calculated over the current employees' working lives.

Such a reserve may not be included in the account limit unless it is actually established and funded.

If the set-asides are within the limits, no UBTI occurs in either the current medical benefits reserve, or the post-retirement medical benefits reserve.

Don Levit

[J Simmons]

Don,

You have written, in this thread and others, that "the VEBA has the opportunity to provide unique products not available through commercial insurers". I've struggled to understand what you've meant by that, but think I may have figured it out.

Your state (Texas) regulates health insurance, which I presume requires certain provisions be in each coverage policy and prevents certain other types of provisions. However, if ERISA preempts Texas law in a particular situation, then the coverage provided might include otherwise Texas-prohibited provisions and/or exclude otherwise Texas-required provisions.

If that's what you are referring to as "the opportunity to provide unique products not available through commercial insurers", a VEBA would not necessarily do the trick. That is because you could have a VEBA that is a multiple employer welfare arrangement which is subject to both ERISA and state law.

If you have a single employer welfare arrangement by a private employer (not governmental, not church), then ERISA applies and certain state laws are preempted. The state laws preempted are those directed at ERISA plans. Saved from preemption are those that have a broader reach.

So what I'm wondering is if you mean that a single employer welfare arrangement 'has the opportunity to provide unique products not available through commercial insurers' because Texas does not try to regulate what is or might be preempted by ERISA. The single employer welfare arrangement could use a VEBA or might use a taxable trust with the products mentioned in this thread.

Am I understanding your comments about "the opportunity to provide unique products not available through commercial insurers"? Or can you explain more how a VEBA allows you to do in Texas what cannot be done there without a VEBA?

[Don Levit]

John:

Thanks for your reply.

I believe that VEBAs provide opportunities for unique products due to federal regulations.

I have cited those regulations in describing non commercial entities, including insurers.

In addition, the VEBA itself is a federal entity.

This does not mean that states are unable to regulate multiple employer VEBAs.

As you know, the 1983 MEWA Amendment provides for states to use any and all laws to regulate self-funded MEWAs.

Several states regulate self-funded MEWAs, as if they were full-blown commercial insurers.

While they have the right to do so, they also have the opportunity, in my opinion, to regulate self-funded multiple employer VEBAs in relation to the federal constraints imposed on VEBAs.

For example, we are discussing in this thread how UBIT applies to VEBAs.

We know if the set-aside is excessive, that UBIT results.

Well, if states which regulated a self-funded VEBA (multiple employer) as if it was a commercial insurer, the reserves set-aside would be excessive, according to federal law.

Thus, substantial UBIT could be the result, providing lower benefits to the VEBA's participants (in violation of the trustee's fiduciary responsibilities).

This is one example how regulating self-funded VEBAs, by the book, can prove to be detrimental to the participants.

I am not looking for preemption here; rather I am looking for state regulation in the context of federal VEBA regulations.

I also think the VEBA can fit in very well for small employers in the same line of business, across 3 contiguous states.

Don Levit

[vebaguru]

I believe that VEBAs provide opportunities for unique products due to federal regulations.

Federal laws provide opportunities that state laws don't? Such as what? The only "opportunities" are federal pre-emption of state mandated coverages or benefits. And those are not pre-empted for MEWAs, as previously noted.

I have cited those regulations in describing non commercial entities, including insurers.

You have cited them ad naseum and they still don't relate to VEBAs in any way.

In addition, the VEBA itself is a federal entity.

Wrong. A VEBA is a common-law trust created under state law (not Federal common law) that complies with 501©(9) and obtains a favorable ruling from IRS.

This does not mean that states are unable to regulate multiple employer VEBAs.

You finally got one right.

Well, if states which regulated a self-funded VEBA (multiple employer) as if it was a commercial insurer, the reserves set-aside would be excessive, according to federal law.

Huh? You seem to be saying that state regulation of MEWAs will cause them to become taxable. However, lots of insurance companies operate at no profit, and it is possible to have excess investment income (taxable) while needing to increase reserves for state law purposes (at risk capital).

Thus, substantial UBIT could be the result, providing lower benefits to the VEBA's participants (in violation of the trustee's fiduciary responsibilities).

This is one example how regulating self-funded VEBAs, by the book, can prove to be detrimental to the participants.

Your specious arguments have the mistaken premise that some state regulator is going to be swayed by your sophistry into failing to enforce state insurance laws. It's time to give it a rest; it's not going to happen.

[Don Levit]

vebaguru:

VEBAs are a creation of federal law, passed by Congress in 1928.

Yes, states have the right to regulate non-profits.

And, states do have full authority to regulate self-funded multiple-employer VEBAs.

I am saying that, in my opinion, it would be prudent to regulate them in relation to their federal characteristics, and in particular, because they are not in the "business of insurance," as are commercial insurers.

State regulation of VEBAs will not cause them to be taxable, but it may cause them to have excessive set-asides, which result in unnecessary UBIT.

You may be correct in your prediction about state regulators.

They certainly have the legal authority to regulate VEBAs as if they were United Health Care.

That reminds me of the difference between genius and stupidity: genius has its limits.

Don Levit

[GBurns]

Don

VEBAs are not created by or under Federal law. All that happened in 1928 was the granting of tax exempt status.

Corporations, LLC, Associations and Trusts (including VEBAs) are created under state law, but then they each get their tax status from the IRS under Federal law. None are created under Federal law.

How would you create a VEBA under Federal law? Where would you file the entity name? Articles? By-Laws? Occupational License etc and anything else needed to operate the entity?