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Guest rgorman

Overfunding for LTD

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Guest rgorman

I have limited experience with VEBAs but a client under IRS audit has come to us for guidance. The IRS is stating that based on the assets in the LTD plan, the plan is over funded. I know in the past they were concerned that these vehicles did not become a way for companies to hide money away in a tax deferred vehicle.

Does anyone have references to regs that address the overfunding issue?

Thank you

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In determining the proper reserves for long-term disability benefits, the allowable reserve includes amounts for claims estimated to have been incurred but which have not yet been reported, and those claims that have been reported but have not been paid. Incurred but unpaid claims include the present value of a future stream of payments under a claim, using reasonable actuarial assumptions.

H.R. Conf. Rep.861, reprinted in 1984-3 CB (vol.2) 410.

Yes, overfunding is a huge, legitimate concern.

Thus, we have the unrelated business income tax.

To dramatize its concern, the IRS has several papers dedicated to this tax.

Can you be more specific about the allegations of overfunding?

Don Levit

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Is your LTD insured or self-funded ?

I usually see LTD as fully insured and so there is no issue of over funding.

What rationale etc has the IRS given ?

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IRS has only had 25 years to issue Regs. under section 419A, so they have not gotten around to it yet. The American Bar Endowment case, although decided under prior law, may be useful. Review IRC section 419A©(4) and (5). If your plan is self-funded or partially self-funded, one way to avoid this issue is to establish a captive insurance company who would write the LTD coverage for the plan.

Read Regs. 1.419-1T, though they are of little help. The articles referred to by Don Levit can be helpful, but carry no legal weight.

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Guest rgorman
IRS has only had 25 years to issue Regs. under section 419A, so they have not gotten around to it yet. The American Bar Endowment case, although decided under prior law, may be useful. Review IRC section 419A©(4) and (5). If your plan is self-funded or partially self-funded, one way to avoid this issue is to establish a captive insurance company who would write the LTD coverage for the plan.

Read Regs. 1.419-1T, though they are of little help. The articles referred to by Don Levit can be helpful, but carry no legal weight.

Thanks for all the responses -

The plan is self funded. They have not considered the earnings that have accumulated in the account of the years. It seems this means they could disallow tax deductions on the company side but could it have a excise tax issue for the plan or affect the plan in any other way? This is the main concern of the plan sponsor. They are correcting funding ongoing.

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