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Guest bobolink

VEBAs in M&As

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Guest bobolink

I am trying to get my head around VEBA nondiscrimination testing.

BigCompany has a retiree medical VEBA and excludes key/highlycompensated employees. BigCompany acquires littlecompany and its retiree mendical VEBA.

What happens to the participants who were highly compensated/key in littlecompany but no longer are?

When do we run the test?

What do we do with the separate accounts under 419A maintained for the old key ees in littlecompany?

Since this is retiree medical, what relevance has reg. sec. 1.416-1 which says a former employee is a key employee if he was a key employee when he retired or separated from service.

Remember, the nondiscrimination rules are under 505 which involves highly compensated employees as defined in 414(q), not keys under 416.

Help.

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The vebaguy was busy with year-end business.

Your facts didn't disclose whether the plans were to be merged, or consolidated for testing purposes, or tested separately. More importantly, you didn't stipulate whether littlecompany's plan met the nondiscrimination requirements prior to the acquisition. If it did, it is now impossible for the consolidated or merged plans to be out of compliance. (Prove this by running the tests yourself before and after.)

Remember that VEBAs are subject to IRC Section 505(b)(1) nondiscrimination rules unless they are subject to nondiscrimination requirements applicable to benefits plan provided under another section of the Code. Here you are describing a medical benefit plan, which is covered under IRC Section 105(h) (for uninsured benefits) and makes plans which favor HCEs over non-HCEs taxable to the HCEs to the extent that the plan is discriminatory.

What happens to the participants who were highly compensated/key in littlecompany but no longer are?

They become ineligible to continue to participate if the plans are merged into the bigcompany plan. Their account balances/earned benefits could continue to be paid. They are treated as HCEs and HCIs before the acquisition, and non-HCEs (HCIs) afterwards.

When do we run the test?

Each quarter; however, IRS will only look at it annually.

What do we do with the separate accounts under 419A maintained for the old key ees in littlecompany?

Maintain them if required. See note above about disposition of littlecompany plan.

Since this is retiree medical, what relevance has reg. sec. 1.416-1 which says a former employee is a key employee if he was a key employee when he retired or separated from service.

Top-heavy rules under Regs. 1.416 apply to retirement plans, not medical plans. Medical plans are subject to nondiscrimination testing, but not to top-heavy testing. The only mention of medical benefits under those Regs. has to do with medical benefits provided under a 401(a) plan as an incidental benefit.

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