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Guest parrot87

Does the implementation of a 105 plan need to be a board action, or can it be re-worded to be an executive action? I haven't found any guideline on this in IRS regs. Help appreciated, thank you.

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What do the corporate documents (bylaws, for example) provide about who has that authority? The Board or the corporate president? Has the Board delegated authority to do so to the corporate president?

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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The decision to adopt/put into effect any new plan is not usually regarded as being within the day to day operation of a company and thus not an executive decision. This is why providers of plans require a Board Resolution adopting whatever plan it is.

It has nothing to do with the plan or the IRS. It has to do with the corporate by-laws.

The only way around the Board itself adopting is a resolution authorizing the executive to take the action. One resolution to avoid another resolution seems a waste.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest parrot87
What do the corporate documents (bylaws, for example) provide about who has that authority? The Board or the corporate president? Has the Board delegated authority to do so to the corporate president?

It is a small company and the board is fairly hands off. I'm not sure if the CEO has the authority to implement an HRA, but if the CEO did sign, we're all quite sure the board would be ok with it. I'm fairly sure the CEO has generic authority to make decisions such as "CEO has authority to perform actions without board consent that is in the best interests of Company ABC".

Here's the markup as I have it, thoughts, any loopholes or pitfalls I should be aware of?

ABC COMPANY

RESOLUTION

HEALTH REIMBURSEMENT ARRANGEMENT

WHEREAS, it has been determined that it would be in the best interests of ABC, a corporation duly formed pursuant to the laws of the Commonwealth of Pennsylvania, and its employees to adopt a "Health Reimbursement Arrangement" allowing ABC employees to receive reimbursement of medical care expenses,

RESOLVED, that ABC adopt a so-called "Health Reimbursement Arrangement" all in accordance with the specifications annexed hereto; and, be it known that the ABC "Health Reimbursement Arrangement" Plan Document was executed July 1, 2008.

RESOLVED FURTHER, that the CEO of ABC undertake all actions necessary to implement and administer said plan.

IN WITNESS WHEREOF, I have executed my name as ABC on July 1, 2008.

Attest

_______________________________

CEO

_______________________________

Witness

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Guest parrot87
The decision to adopt/put into effect any new plan is not usually regarded as being within the day to day operation of a company and thus not an executive decision. This is why providers of plans require a Board Resolution adopting whatever plan it is.

It has nothing to do with the plan or the IRS. It has to do with the corporate by-laws.

The only way around the Board itself adopting is a resolution authorizing the executive to take the action. One resolution to avoid another resolution seems a waste.

If the executive team is allowed to adopt new health plans without board consent, does this extend into the adoption of an official HRA? The company has been doing reimbursements and treating it as income for quite some time now.

P.S. If the corporate by-laws are written in a way that executives cannot adopt the plan, but they do as I have worded it, what are the consequences?

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Matthew,

What the IRA and DoL are interested in is the ER being legally bound, however within the ER's legal sphere that occurs. Those agencies would not want the Board to be able to deny benefits promised under signature of the corporate president.

Stepping back for a moment, since you have a "hands-off" Board, perhaps a general, comprehensive authorizing resolution ought to be considered for the Board to give the corporate president all sorts of authority above and beyond what would lie under the state's corporate statute, those things that the Board doesn't want to be "hands-on" concerning. That might include adopting employee benefit plans, amending them, etc.

In such an exercise, you might learn that the Board wants to be hands-on regarding employee benefit plans, like the HRA, that would otherwise commit the corporation to what could mount up to large sums of money depending on the HRA design.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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No.

And I am also fairly sure that your your bylaws do not allow the CEO "generic authority" especially for something like this.

Signing first then getting consent afterwards is dangerous. While you can back date some documents, you cannot do all. For example the date of the Board meeting might conflict with the other dates involved.

I saw 1 case where the date of the first plan contribution took place before the date of the Board meeting. I saw another where the date on an insurance application and first rate quote conflicted with every possible Board meeting. Then there is the question of not being listed in the Minutes. And Yes, all Boards including those of small companies must keep minutes of meetings. Don't keep minutes at your oown peril.

Having always done things that were/are not allowed does not mean that you will always get away with it. The consequences are not worth it.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest parrot87

Thanks for the clarification. Does it matter that reimbursement have been given for quite some time now? It seems the focal point here is discrimination or CEO negligence as a claim could be denied by the board.

It the board approved the reimbursements years ago, how does this affect it? The 105 plan is being adopted to make these reimbursements tax free. At what point is the legal obligation created, when the reimbursements are authorized, or when the 105 plan re-labels the reimbursements into a "plan"?

P.S. - what does re-labeling this arrangement into a "plan" entail in terms of further obligations on the part of the ER? Also, why would anyone have a problem with taking an existing situation (i.e. reimbursements) and making them tax free for the company and the employee alike? Also, how does a company adopt an HRA if it is a sole proprietorship that has no board?

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Matthew, this would make me nervous.

Call the company's attorney, who is familiar with the company's by-laws and the state's incorporation laws, and ask for her/his written opinion that this action by the CEO is A-OK.

And instead of being "quite sure" and "fairly sure" about the Board's approval of the new plan, ask them. Do not proceed without at least advising the Board of what is being done.

My choice would be to take the resolution to the Board for their approval.

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Based on your wording I have to wonder what you understand "arrangement" and "plan" to mean.

Reimbursements are either tax free at the time of reimbursement or they are not. You cannot, in general, go back and make it so unless you are willing to "cook" the books.

Reimbursements make before the effective date of the plan are not subject to the plan nor to any tax benefits derived from use of the plan.

Retroactive adoption is generally not adviseable, but let a legal advisor opine on whatever you decide to do.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest parrot87
Based on your wording I have to wonder what you understand "arrangement" and "plan" to mean.

Reimbursements are either tax free at the time of reimbursement or they are not. You cannot, in general, go back and make it so unless you are willing to "cook" the books.

Reimbursements make before the effective date of the plan are not subject to the plan nor to any tax benefits derived from use of the plan.

Retroactive adoption is generally not adviseable, but let a legal advisor opine on whatever you decide to do.

I understand this and we are not trying to retro reimbursements or "cook" the books. Reimbursements have been made for quite some time now and have been treated as income. What I was wondering about was when legal obligation (as JSimmons put it) is created, when the reimbursements are agreed to or when these reimbursements are made tax free. I would think that its when the reimbursements are agreed to. No?

My understanding of arrangement is the basic English one, whatever Webster's says. My understanding of "plan" is a legal "health plan" affording it all benefits and obligations that comes with it. No? For all practical purposes, the arrangement that the group previously had is exactly the same as it is as outlined in the proposed HRA plan document. Therefore, what does this really mean beyond tax free status? Based on what you said on adopting a "new plan", you didn't see this reimbursement arrangement as a "plan" before, therefore necessitating board action. So obviously there's a distinction there, I'm curious as to the details of that distinction because I'm not exactly sure what it is and what it means in terms of practical consequences.

P.S. Also, how would the consequences be severe in this particular scenario? The reimbursement limit is about $100 per year, per member.

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Let me try some simplistic explanations.

Employee benefits are provided under an employee benefit plan which is an arrangement or agreement by the employer to provide the agreed or promised benefits. These benefits may be insured or not insured (self-funded/self-insured). These benefits can be either pension benefits or welfare benefits. The welfare benefits can consist of health/medical coverage, vacation etc. These underlying benefits can be insured or not insured (such as an HRA).

In other words, the HRA is not the welfare benefit plan nor is it the employee benefit plan. It is just 1 of the underlying benefits which requires its own documentation and which must also be allowed and referenced in the governing plan.

Treas Regs 1.105-5 Accident and health plans states in 1.105-5(a): "In general, an accident or health plan is an arrangement for ......".

So as far as tax issues go an arrangement and a plan are the same.

Treas Regs 1.105-11(b)(i) states that a self-insured medical reimbursement plan is a separate written plan.

ERISA requires that every employee benefit plan shall be established and maintained pursuant to a written arrangement.

The start of the legal obligation has nothing to do with the taxation issue..

Medical expenses incurred or reimbursed before the date of the plan do not fall under the plan. In other words you cannot buy house insurance after the fire has started.

The consequences could include disallowance of the tax deduction of not only the reimbursement but also of other arrangements that might be linked. There also is the danger that ther would be automatic examination to see if non-compliance was systemic, which in cases like this is quite possbile. Bu that is not the only problem, examinations for systemic issues tend to expand exponentially into many other areas,, leaving you very very exposed.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest parrot87
Let me try some simplistic explanations.

Employee benefits are provided under an employee benefit plan which is an arrangement or agreement by the employer to provide the agreed or promised benefits. These benefits may be insured or not insured (self-funded/self-insured). These benefits can be either pension benefits or welfare benefits. The welfare benefits can consist of health/medical coverage, vacation etc. These underlying benefits can be insured or not insured (such as an HRA).

In other words, the HRA is not the welfare benefit plan nor is it the employee benefit plan. It is just 1 of the underlying benefits which requires its own documentation and which must also be allowed and referenced in the governing plan.

Treas Regs 1.105-5 Accident and health plans states in 1.105-5(a): "In general, an accident or health plan is an arrangement for ......".

So as far as tax issues go an arrangement and a plan are the same.

Treas Regs 1.105-11(b)(i) states that a self-insured medical reimbursement plan is a separate written plan.

ERISA requires that every employee benefit plan shall be established and maintained pursuant to a written arrangement.

The start of the legal obligation has nothing to do with the taxation issue..

Medical expenses incurred or reimbursed before the date of the plan do not fall under the plan. In other words you cannot buy house insurance after the fire has started.

The consequences could include disallowance of the tax deduction of not only the reimbursement but also of other arrangements that might be linked. There also is the danger that ther would be automatic examination to see if non-compliance was systemic, which in cases like this is quite possbile. Bu that is not the only problem, examinations for systemic issues tend to expand exponentially into many other areas,, leaving you very very exposed.

OK, so according to your definitions, the "plan" was adopted years ago, when reimbursements began. The 105 document acknowledges the "plan" and allows tax advantages. That said, how does this point back to who signs the 105 document since the main objection to the CEO signing was that adoption of a new "plan" requires board approval? The signing of the 105 document isn't adopting a new plan, correct?

P.S. - my mistake, i thought an arrangement became a welfare plan once the plan document is written, which is not the case...but still doesn't explain why the CEO can't sign.

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Adopted but nothing in writing means nothing was adopted.

Which 105 document ackowledges the "plan" ?

Implementing a "new" 105 plan would not require Board approval if such a plan was covered in the governing employee benefit plan or if the initial Board Resolution was broad enough to cover additional items or changes.

If the CEO says that signing is not within his powers, How can you question his executive decision unless you can show where he is wrong according to the by-laws? The by-laws dictate his authority subject to his decision as to what to defer to the Board.

By the way, the sample document that you posted does not make it as anything. The title says "Resolution" which suggests a Board Resolution, but a CEO cannot sign a Board Resolution. Your title is also questionable. Is there a Plan Document etc for this 'Health Reimbursement Arrangement"?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest parrot87
Adopted but nothing in writing means nothing was adopted.

Which 105 document ackowledges the "plan" ?

Implementing a "new" 105 plan would not require Board approval if such a plan was covered in the governing employee benefit plan or if the initial Board Resolution was broad enough to cover additional items or changes.

If the CEO says that signing is not within his powers, How can you question his executive decision unless you can show where he is wrong according to the by-laws? The by-laws dictate his authority subject to his decision as to what to defer to the Board.

By the way, the sample document that you posted does not make it as anything. The title says "Resolution" which suggests a Board Resolution, but a CEO cannot sign a Board Resolution. Your title is also questionable. Is there a Plan Document etc for this 'Health Reimbursement Arrangement"?

I would think that implementing a 105 document cannot be done without a plan, therefore acknowledges existence of a plan. The 105 document allows plan distributions to be tax free by re-categorizing (aka re-labeling) the plan activites as insurance functions, no?

I'm not sure if the initial board resolution grants authority to the CEO for such activities. The CEO never said signing was not within his powers, I never said that either. Although it seems like he has the authority to do just about anything.

I'm not sure if there is a plan document, probably not, then again, there doesn't need to be a formal plan document ("An accident or health plan may be either insured or noninsured, and it is not necessary that the plan be in writing or that the employee's rights to benefits under the plan be enforceable" 1.105a). We need the 105 document to make the plan legally tax deductible (in case of IRS audit), hence, what we are doing now. What other title would you put instead of "resolution"? Is a board resolution required? What does a sole proprietorship which does not have a board do if they want to implement a 105 HRA plan?

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You do not implement a 105 document, you implement a 105 plan as per its documents.

You cannot recharacterize anything, it either is or is not. Insurance functions are irrelevant.

See 1.105-11(b)(i) regarding the necessity for a written plan in regard to a medical reimbursement plan.

What purpose could it possibly serve in a sole proprietorship ?

It seems pointless to have this discussion if you are not sure what the by-laws say, what the initial resolution covers or what the plan document for the benefit plan says. These are things that have to be known first.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest parrot87
You do not implement a 105 document, you implement a 105 plan as per its documents.

You cannot recharacterize anything, it either is or is not. Insurance functions are irrelevant.

See 1.105-11(b)(i) regarding the necessity for a written plan in regard to a medical reimbursement plan.

What purpose could it possibly serve in a sole proprietorship ?

It seems pointless to have this discussion if you are not sure what the by-laws say, what the initial resolution covers or what the plan document for the benefit plan says. These are things that have to be known first.

please explain further, i do not understand. What was the reimbursement arrangement classified as before? If the activities continue exactly how they have been, but with a 105 document to allow tax deduction, what is that? To me, "that which we call a rose by any other name, would it not smell as sweet?", but that's not the question that I need answered.

According to 1.105(a), reimbursements for medical expenses are re categorized as insurance distributions making them tax deductible. Could you address that?

http://www.tasconline.com/businessresource...section105.html - this and many other sites claim a benefit to a sole proprietorship, could you comment please. How would an organization without a board implement a section 105 plan?

Why is it important what the by-laws say? Why would the IRS void the 105 plan if the CEO signed the plan document?

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There was no arrangement before. It was just an improper practice. It is not a matter of continuing, it is a matter of starting an actual plan. It does not matter what you call something as much as it matters what that thing is. You cannot call a payment an expense reimbursement just because you feel like, it has to be eligible etc.

I do not know how you came to your conclusion regarding 1.105(a). In any case it is 1.105-11 that is fully applicable. It is in fact titled "Self-Insured medical reimbursement plan" which is what we are discussing here.

Regarding tasconline.com : Read the documents cited in paragraph 2 and read paragraph 3 regarding the spousal and spouse/employee requirements. There also requirements for adequate compensation etc. In other words, not every sole prop will qualify and not everyone will be able to meet the various requirements. Even then because of limitations etc it might not be worthwhile.

The by-laws are what the company has to operate under. If the signer of a document is not authorized to sign that document, it is either a failure to operate, null and void, or in some cases involving business transactions it could be fraud.

It is not the plan document signing that is the issue. It is the Board Resolution.

***********************

Will someone else chip in, Please.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Why is it important what the by-laws say? Why would the IRS void the 105 plan if the CEO signed the plan document?

The CEO's authority to act on behalf of the corporation is as delegated by state law or the shareholders, acting through the Board. The By-laws are a key document that delegates what actions for the corporation require Board action and which actions for the corporation the CEO might take without the necessity of Board approval.

I certainly don't have authority to act on behalf of and bind the corporation if I were to sign the 105 plan for the corporation. The CEO only has the authority to do so for the corporation that is set forth in the state's corporate law and as may be delegated to the CEO from the shareholders, via the Board. Merely by the title CEO he is not imbued with anything more than what powers he is given by corporate law and delegation.

The IRS might "void" the 105 plan if the CEO signed it but did not have authority to make it binding, legally, on the corporation because then the 105 plan is elusive, giving the corporation the opportunity if it ever wanted (e.g., the Board perhaps later wanted) to wriggle out of the benefits promised by the 105 plan. What the IRS would be doing is denying the tax free aspect of 105 plan benefits, and taxing those as additional income to the employees. That is what the IRS does, collect taxes.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Also, how does a company adopt an HRA if it is a sole proprietorship that has no board?

A sole proprietor does not have a board. A sole proprietorship is an individual that can act for himself or herself. So he or she signs for himself or herself.

A corporation is a fictitious legal "person" that needs live bodies to act for the collection of shareholders. So the shareholders elect a Board that then has most--but not all powers that the shareholders have as the owners of the corporation. The delineation of powers retained by the shareholders and those that the Board has are primarily set forth in the state's corporate law and perhaps somewhat in the Articles of Incorporation. The Board in turn may delegate to officers certain authority. One way is through adopting By-laws, but other resolutions and written delegations are frequently given as well.

Matthew, I wonder why you seem so averse to getting the Board's approval for the 105 plan? Has the CEO already exceeded his/her authority and attempted to adopt such for the corporation?

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Guest parrot87

No, this is for my understanding moreso than anything, no one is averse to getting the board's approval. Nothing has been signed or made official yet for technical purposes. Ok, so it seems like a stretch that a signature could void a plan document. Are there any cases or specific rules that address this, or are we speculating?

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It does not merit cites or cases, all you need is some simple logic.

What happens if an employee who is not authorized to sign a check, draws and signs a check to a vendor, and that vendor then deposits that check ?

What happens if the CEO tells the accounts payable clerk to pay his house mortgage every month and record it as being rental of office space by the company ?

What happens if the CEO signs an agreement to sell the company without the Board knowing ?

What happens if the CEO decides to not bother to have Board meetings or a Board because he is the major shareholder?

Persons can only enter into agreements/contracts that they are entitled or authorized to. Without such entitlement or authorization the agreement/contract is null and void, except where there is fraud or intent to defraud etc, then you have additional issues.

A CEO or any other executive and the Board can only act as the by-laws and state corporation laws etc authorize them to do. That is the basic reason behind articles of incorporation and the company by-laws. Why do you think that they exist ? Why do you think that Minutes etc have to be kept for Board meetings ?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest parrot87

Thanks, it still seems far-fetched that the IRS would go after non HCE's in a 105 plan for small reimbursements that follow the rules in good faith. I don't follow your logic Gburns, the premises in your examples and in this specific situation are different. First, your situations have intent to defraud, possibly with a collusion piece since there are other parties involved. Also, in your examples, the CEO is tapping into company funds...in my example the funds have already been released. This would just re-classify the funds to take advantage of tax deductions.

Edit: also, I'd like to re-iterate that the previous activities with reimbursements were being done as INCOME, therefore isn't an improper practice as you stated before.

As for situations in the past where a single employee over-extended his/her authority, well we can look at the rogue banker stories. In those events, the activities of that individual were not null and void, in fact, it collapsed those banks.

I've read some IRS releases, especially the last one concerning cafeteria plans...that's not simple logic, if logic at all. I'd like some specifics from cases or IRS regs that state 105 plans are only valid as board resolutions.

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I cannot think of any other poster in over 5 years who so consistently misreads, misquotes and misunderstands responses and even their own posited scenarios.

It is pointless responding to you, maybe someone else will spend the time.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest parrot87
There was no arrangement before. It was just an improper practice. It is not a matter of continuing, it is a matter of starting an actual plan. It does not matter what you call something as much as it matters what that thing is. You cannot call a payment an expense reimbursement just because you feel like, it has to be eligible etc.

The by-laws are what the company has to operate under. If the signer of a document is not authorized to sign that document, it is either a failure to operate, null and void, or in some cases involving business transactions it could be fraud.

It is not the plan document signing that is the issue. It is the Board Resolution.

No reason to get uppity George, no one's calling you an idiot. If reimbursements are being made and being reported as income, it is not an improper practice. Inefficient yes, not improper/illegal. I just find what you say a bit hard to believe, especially since you can't or won't support your statements. I haven't misquoted, misread, or misunderstood ANY of my own statements. With all due respect George, your input hasn't been helpful or on point.

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