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J Simmons


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An ER (client) is being pitched a plan that specifies age-weighted HRA accruals into a retiree VEBA. The ER would establish and then fund into a VEBA pursuant to HRA accruals, as permitted by a couple of IRS pronouncements from the 2005-2006 era. These ER contributions (i.e., the HRA accruals) would be separately credited under the VEBA to the benefit of EEs individually. The age-weighting gives each employee an 'equivalent' amount of retiree health benefits for each month of covered service. Of course, the small ER's motivation here is to skew tax-free benefits in favor of the owner/employee and spouse/employee, as they are the two oldest EEs (ER is a C corporation).

To the extent that the EE and spouse do not use up the credits under the VEBA by the time both have died, the remainder would be re-allocated to the credit of other VEBA members.

The ER is not satisfied with what authority I've found suggesting that HRA accruals may not be age-weighted.

IRC § 105(h)(4) provides that--

A self-insured medical reimbursement plan does not meet the requirements of subparagraph (B) of paragraph (2) unless all benefits provided for participants who are highly compensated individuals are provided for all other participants.

Treas Reg § 1.105-11©(3)(i) seems to prevent age from being taken into account in a defined benefit HRA, at least for DB health reimbursements:

any maximum limit attributable to employer contributions must be uniform for all participants and for all dependents of employees who are participants and may not be modified by reason of a participant's age or years of service.

As an aside, the next sentence of Treas Reg § 1.105-11©(3)(i) prevents benefits being made in proportion to employee compensation if the plan covers highly compensated individuals:

In addition, if a plan covers employees who are highly compensated individuals, and the type or the amount of benefits subject to reimbursement under the plan are in proportion to employee compensation, the plan discriminates as to benefits.

Treas Reg § 1.105-11©(3)(iii) is as close as I've come in my research to specifically prohibiting age-weighting of the defined contribution HRA accruals into a retiree VEBA. The benefits for retirees are only excludable from taxable income if

the type, and the dollar limitations, of benefits provided retired employees who were highly compensated individuals are the same for all other retired participants.

I've opined that the owner would be better off avoiding this plan, or to redesign it as a defined benefit or if to be a defined contribution, without the age-weighting of HRA accruals into the retiree VEBA fund. The ER is not satisfied, certain that it can be done unless the IRS has specifically ruled that HRA accruals cannot be age weighted. Does anyone know of other authority bearing on the issue of whether HRA accruals into the retiree VEBA could be age-weighted?

I've suggested a PLR application might be useful, but is hesitant because of the cost.

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I think your counsel is right on.

I have found a few items that may be of interest.

In Treasury Decision 7750, it states under (b) Disproportionate benefits - The payment to any member of disproportionate benefits, where such payment is not pursuant to objective and nondiscriminatory standards, will not be considered a benefit within the meaning of 1.501©(9)-3 even though the benefit otherwise is one of the types permitted by that section. The payment to similarly situated employees of benefits that differ in kind or amount will constitute prohibited inurement unless the difference can be justified on the basis of objective and reasonable standards.

When you wrote an euivalent amount of retiree health benefits for each month of covered service, are they considering past service?

If so, This would not seem to be an objective standard.

And, though not directly, PLR 200638027 may be helpful. "The post retirement medical benefit is being funded proportionate to salary. Because medical expenses potentially effect all persons equally, there is no objective or nondiscriminatory basis for providing a larger medical benefit to highly compensated persons. Thus, this arrangement would be in violation of section 1.501©(9)-4(b), because medical benefits that are provided unequally in favor of highly compensated personnel are disproportionate per se."

However, if employees are contributing to the costs, the discrimination issue is viewed a bit differently.

Back to Treasury Decision 7750: "Generally permissible restrictions or conditions. In general the following restrictions will not be considered to be inconsistent with 1.501©(9)-2(a)(i) or 1.501©(9)-4(b)

(D) The allowance of benefits only on condition that a member or recipient contribute to the cost of such benefits, or the allowance of different benefits based solely on differences in contributions, provided that those making equal contributions are entitled to comparable benefits."

Don Levit

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I don't believe that the Reg section you cited is a problem. Maximum contribution limits are always uniform and individual, and this is required under IRC section 419A. It doesn't stipulate that the contribution may not be greater for participants closer to retirement, only that the same limits apply.

As for your "aside", the plan is considered discriminatory if benefits are proportionate to compensation. However, the penalty provided is that the percentage of benefits / compensation for HCIs that exceeds the percentage of benefits / compensation for non-HCIs is imputed to the HCIs as current income on form W-2. Apparently, it is per se discrimination without a penalty.

I know of no reason why a cross-tested allocation would not work for a welfare benefit plan (or post-retirement HRA plan). Of course it has to pass nondiscrimination tests, but that is true anyway. Therefore, I not only don't know of additional materials to buttress your arguments, I disagree with your understanding and interpretation of the rules.

Please note, however, that the fact that this is offered in connection with a "VEBA" doesn't make sense to me. A VEBA would be subject to UBIT on all income in any event. A simple welfare benefit trust would make more sense for the structure and would avoid the unnecessary additional rules under 501©(9), such as those referred to by Don.

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I agree with you that the VEBA has certain disadvantages.

One of the advantages a 501©(9) has over a taxable trust (insurer) is that to fully earn a tax-exempt status, an insurer needs to:

1. Offer unique operations from for-profit insurers.

2. Offer unique products from for-profit insurers.

A taxable trust (insurer) does not have such advantages from the IRS.

Don Levit

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