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Guest BL333

Use of VEBA retiree medical reseve to buy permanent life insurance for retirees

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Guest BL333

A client has a VEBA with a reseve for retiree medical. When the employer money was contributed to the VEBA, it was taken as a deduction under 419A's provision for funding post-retirement medical or life insurance. When the money was contributed to the VEBA, the purpose was to fund retiree medical only. Now, the employer wants to use part of the money in the VEBA (only money currently in the VEBA is the retiree medical reserve) to buy up permanent life insurance for the retirees. Would using the money to buy permanent life insurance "inure to the benefit" of the employer b/c otherwise, the employer would use its own funds to buy the life insurance?? Obviously, the employer could have prefunded the VEBA to create a reseve to pay for retiree life insurance, but since the reseve was actually created to fund only retiree medical, is it a problem to now use it to pay for retiree life insurance?

Many thanks!

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Let me see if I understand the facts correctly.

Up until this point, all contributions have been made and deducted by the employer.

The VEBA has been used as a savings vehicle to pay for retiree medical expenses. of which the proper qualifying amount has been paid.

No life insurance has been bought up to this point for post-retiree purposes.

Now, the employer wants to use part of the retiree medical reserves to buy permanent life insurance, and part of the retiree medical reserves to continue paying medical expenses.

Is that correct?

If so, is the employer wanting to make the change, because there is an excess in reserve for medical expenses.

If so, does each employee receive the same permanent life insurance benefit?

Don Levit

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Guest BL333

Don,

Up until now, the employer has been paying term life insurance premiums out of an separte RLR fund. The employer is not making any further contributions to the VEBA for retiree medical and will likely use the money in the VEBA now to pay premiums on an insured health insured product for retirees for as long as the money lasts (retirees are receiving notice that the employer will be terminating retiree health coverage once the money runs out - which it always had the right to do).

The company is being sold. The current management feels that the expectation of the retirees is that their life insurance will never be taken away, so they are looking for a way to buy up paid-up life insurance (there is not enough money to cover that in the RLR fund).

I think one big problem here is that 1.501©(9)-3(b) defines "life benefits" (as are allowed to be paid with VEBA money) as generally consisting of current benefits. There are three exceptions - 1) right to convert to individual coverage upon termination of coverage; 2) VEBA funded with employee contributions (not the case here); 3) permanent benefits satisfying the requirements of section 79.

Using VEBA funds to buy paid up life insurance for the retirees seems to be permanent life insurance that does not meet any of the three exceptions, and therefore, it seems that VEBA funds can't be used for this purpose.

Does this analysis make sense to you?

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Yes, it makes a lot of sense.

The employees seem to want paid-up life insurance, without their having to pay for it.

I am not real familiar with the options of Section 79 when the employer sells out.

Is there any way the employees could pay the premiums?

Don Levit

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As you correctly anticipated, the problem is not prohibited inurement.

Since you state that the tax deduction was claimed under IRC section 419A, I presume that the amount of paid-up insurance will not exceed $50,000 per participant, as required under 419A. Otherwise they have a problem also under section 4976.

IRS has provided rulings under section 125 that premiums for group-term life insurance under section 79 qualifies as a medical expense under 213(d). In fact, most health insurance policies provide either mandatory or optional amounts of group-term life insurance.

You state that the employer is "looking for a way to buy up paid-up life insurance" even though "there is not enough money to cover that in the RLR fund". Will the employer contribute the shortfall?

The "problem" you identified under the VEBA Regs. is not so great as you imagine. The Regs under section 79 are not onerous. The problem is with your understanding of permanent insurance.

When a defined benefit pension plan terminates, one option it has is to purchase a single-premium paid-up group retirement annuity contract. The contract is individually drafted to provide the benefits promised under the DB plan, and once the contract is purchased, the plan and trust can go out of existence.

Similarly, a group-term life insurance contract can be purchased on a single-premium, paid-up basis. Many life companies that sell group term life insurance can do this. although it is not common. This is "permanent" in the sense that it will continue until the deaths of the participants. However, it is still term insurance, in fact, group-term life insurance, and would fit under the VEBA Regs. The VEBA funds can be used for this purpose.

An alternative (and this can be an option) is to include a convertibility feature that permits individual participants to elect to convert to a cash-value life insurance contract with the payment of an additional premium. This is also permitted under section 79, but is not the treatment referred to in the VEBA Regs.

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BL 333:

I found one other possible exception to providing whole life policies, in GCM 39440. In this situation, the whole life policies were ruled favorably if (!. The policies were owned by the VEBA; (2) purchased through level premiums over the expected lives or working lives of the individual members; and (3) the cash reserves accrue to the VEBA.

The whole life policies are funding a current (as opposed to permanent) life benefit in that the member receives pure death protection only.

Don Levit

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