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VEBA Health Ins.

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Guest SRC58

When a health insurance company contracts to provide health benefits to employees through an employer's VEBA is the insurance company contracting with the VEBA or the employer?

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Guest L337pwner5

The VEBA is an independent legal entity under 501©(9) and it is the VEBA that provides benefits to the employees, so I believe that the insurance company would be contracting with the VEBA.

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The VEBA is an independent legal entity under 501©(9) and it is the VEBA that provides benefits to the employees

I would say that the VEBA and the plan are two separate "animals" that exist in connection with each other. The VEBA is a distinct tax-exempt organization that funds the plan; the plan is a program to provide welfare benefits. It seems to me that the insurance company contracts with the plan, not with the VEBA. But, I'm very interested in other people's comments.

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Lori:

I agree with you, if the plan is fully insured.

If it is a self-insured VEBA, the VEBA and the insurer are one and the same.

Don Levit

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Whether in a fully insured or in a self-funded there are 2 different entities, a VEBA funding arrangement and a health /medical plan.

In a fully insured arrangement, the health plan contracts with an insurance company for the providng of claims payment and administrative services etc. The VEBA funds the premiums.

In a self-funded arrangement, the health plan contracts with a third party for claims payment and administrative services etc. The VEBA funds the expenses.

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George:

In the self-funded arrangement, if the VEBA is unable to pay its bills, can the participants look to the employer(s)?

I say no, because the VEBA is a distinct entity, a non commercial insurer controlled by its membership, not the employers.

Don Levit

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A basic reason for VEBAs is to try and assure that funds are available. What recourse is available in the event of funds not being available depends on the facts and circumstances of each case.

In any case, What does this have to do with the issue?

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George:

The issue is that a VEBA is more than merely a funding mechanism.

It is an insurer, albeit a small one.

The closest I can think of regarding an insurer of similar size would be a 501©(15).

When you realize that the VEBA is an insurer, and it has specia taxl exempt status, you then realize it has opportunities to establish and maintain its tax exempt status.

One of those opportunities is developing plans which are not sold by commercial insurers.

This is because, according to the IRS, if a VEBA provides similar policies to those of commercial insurers, it would be unfair competition. The VEBA would have an unfair competitive advantage, due to its tax-exempt status.

This unfair tax advantage is lessened substantially, if the VEBA offers plans that commercial insurers are unwilling or unable to offer (and that satisfies a community need).

This provides many opportunities for innovative plan designs.

Don Levit

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George:

The issue is that a VEBA is more than merely a funding mechanism.

It is an insurer, albeit a small one.

The closest I can think of regarding an insurer of similar size would be a 501©(15).

When you realize that the VEBA is an insurer, and it has specia taxl exempt status, you then realize it has opportunities to establish and maintain its tax exempt status.

One of those opportunities is developing plans which are not sold by commercial insurers.

This is because, according to the IRS, if a VEBA provides similar policies to those of commercial insurers, it would be unfair competition. The VEBA would have an unfair competitive advantage, due to its tax-exempt status.

This unfair tax advantage is lessened substantially, if the VEBA offers plans that commercial insurers are unwilling or unable to offer (and that satisfies a community need).

This provides many opportunities for innovative plan designs.

Don Levit

Huh????

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Are you looking for specific back up material?

I have plenty of material from the IRS.

If so, please provide specific questions.

Don Levit

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Don

The first obvious question pertains to:

"This is because, according to the IRS, if a VEBA provides similar policies to those of commercial insurers, it would be unfair competition."

Where did the IRS say this?

A second question is Which community and what "community need" would a VEBA satisfy?

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George:

Thanks for your questions.

The first item we need to look at, in my opinion, is what distinguishes commercial from non commercial insurance, according to the IRS?

One document (of several) which helps to provide the distinction, is found in General Counsel Memorandum 39817.

"We identify other attributes relating to the commercial nature of an insurance operation which an employee beneficiary plan would not possess."

"There are several attributes which distinguish an employee benefit program from an insurance program.

First, an employee benefit plan identifies an employer-employee relationship while an insurance program identifies an insurance company-customer relationship."

"Second, unlike an insurance program, an employee benefit plan is non-commercial in nature and lacks a profit motive."

"Third, an employee benefit plan does not involve public solicitation while insurance programs are prominently marketed in this manner."

"Thus, to give effect to the policy against circumvention of income tax provisions by an insurance business, the 'geographic locale' restriction limits the recognition of exempt status to organizations generally lacking the attributes of insurance as discussed."

Don Levit

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You have not answered the questions.

In my opinion you have misinterpreted the relevance of GCM 39817 to the issues at hand.

But worst of all, you excerpt bits and pieces then paste them together in a misleading manner, apparently trying to create some sort of authority or credible statement to support your interpretation.

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George:

We are dealing with the issue of the distinction between commercial insurers and non commercial insurers, of which the VEBA represents.

My last sentence of the prior post dealt with circumventing income tax provisions by an insurance business (commercial insurers).

In 1986, IRS code section 501(m) was passed, primarily because Blue Cross and Blue Shield was circumventing these provisions.

They had evolved over the years from an organization distinct from commercial insurers to an organization which looked more and more like other insurers.

Thus, 501(m) was passed to deal with insurers, who heretofore, had an unfair competitive advantage over other insurers, through the 501©(3) and 501©(4) tax exempt designations.

If you look at a paper published by the IRS, this becomes more clear.

Go to:

http://www.irs.gov/pub/irs-tege/eotopicc88.pdf.

On pages 5-6, it states, "Each case must be analyzed in light of the existing precedent of the definition of insurance in other areas of the code and in light of the legislative intent behind IRC 501(m). These include to what extent the entity is operating in a manner similar to for-profit insurers or Blue Cross and Blue Shield; and whether and to what extent the entity is marketing a product similar to for-profit insurers or the Blues."

Don Levit

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The issue is, as per the OP:

"When a health insurance company contracts to provide health benefits to employees through an employer's VEBA is the insurance company contracting with the VEBA or the employer?"

That is the issue. The contracting parties.

The side issue is where did the IRS say what you claim?

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Guest VEBAPLAN

I bet that VEBAGURU knows.

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Again I agree with GBurns.

The plan and VEBA trust may not be legally distinguishable, but the VEBA and the employer clearly are. In general, it is better for the VEBA plan/trust to contract with the insurance co. Unfortunately, however, many health insurance companies will only contract with employers and require proof of employment, etc., so the ideal may become unworkable.

Note: 501(m) applies to 501©(3) and 501©(4) entities, not VEBAs. Don Levit's aside was unrelated to VEBAs and to the question at hand. Don seems to enjoy quoting from outdated and nonbinding rulings issued by IRS or Treasury in a different era of plan regulation. He should spend as much time reading court decisions, the Code, Regs, Temporary Regs and Proposed Regs for current, governing law.

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vebaguru:

I did not say that 501(m) applied to VEBAs.

What information that I have provided is outdated, specifically.

I am looking for some specific citations from you, not your opinions.

Don Levit

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vebaguru:

If you wish not to respond more constructively, that is your choice..

Of course, we fail to learn, together, that way.

Don Levit

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Don

Why then do you reference 501(m) etc in discussions about VEBAs and now try to claim that you never said that it applies to VEBAs?

Outdated etc material includes, and definitely not limited to, 1985 and 1988 CPE texts etc.

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George:

The reason I mentioned 501(m) is to illuminate the difference between a commercial and a non commercial insurer.

This is to also highlight that a VEBA is to remain a non commercial insurer in order to continue its tax exempt status.

Two of the distinctions of a non commercial insurer are:

1. Conducting its operations differently from commercial insurers.

2. Offering products which are different from commercial insurers.

Because Blue Cross was unable to do these 2 things, they lost their tax exempt status through 501©(3) and 501©(4) in lieu of 501(m) or 833.

Of the 1985 and 1988 texts, which items are outdated that are relevant to our discussion?

Don Levit

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VEBAPLAN:

Could you be more specific about still being true?

The idea of coops being presented for potential health insurance reform is very intriguing.

While coops can be large regional entities, they can be much smaller local organizations, such as a 501©(12) Local Benevolent Life Insurer.

This insurer can offer health insurance, in addition to life insurance.

Its very reason for existence could be consumer controlled, consumer operated (the definition of a coop).

Now, that can be a great way to initiate consumer-directed care, and retain most of the earnings with the participants.

Don Levit

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Guest VEBAPLAN

Ron is cheap but he is not free. I agree with Ron

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