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Guest YATPA

Post-Retirement Benefit Trust

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Guest YATPA

I’m really out of my element here, but am trying to help a client – would appreciate any help you can give! If I should post on another board, please let me know.

Several years ago, a fire fighter’s local union set up a post-retirement benefit trust under Section 105(e) for the purpose of helping to pay for health and life insurance benefits for retirees for the period between when they retire at age 55 and the time that Medicare starts at 65. After they attain age 65 they’re no longer eligible for the benefit.

The plan reimburses the retirees (annually) for a portion of the out-of-pocket cost for health, dental and term life insurance premiums, up to an annual limit. The trustees determine the amount they will be reimbursed based on fund performance, health costs and the number of eligible retirees that year. The trust is funded by an annual payment made by the City. The firefighter’s union agreed to this payment in lieu of a 1% pay increase that would have started the year the plan was set up.

Questions –

1. How would you go about terminating this type of plan and have each employee who contributed to it (indirectly) be treated equitably? You have varying categories of employees based on their age, how long they’ve “contributed” to the plan, and whether they’ve retired or not and starting receiving benefits. The plan has also had significant investment losses in the last couple of years.

2. Could the assets be “split” and allocated to some type of account for each retiree and pre-retiree based on age and how much went into the plan for their benefit?

3. If so, could some type of individual account be set up for each employee to manage on their own?

4. Any way any of these assets could be transferred into a qualified plan for the employees?

5. What type of plan is this ?!?

Thanks in advance for any input on this!

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I have established several similar plans and will attempt to answer your questions:

Q1. How would you go about terminating this type of plan and have each employee who contributed to it (indirectly) be treated equitably? You have varying categories of employees based on their age, how long they’ve “contributed” to the plan, and whether they’ve retired or not and starting receiving benefits. The plan has also had significant investment losses in the last couple of years.

A1. Despite your question, the issue is not how to terminate the plan and treat employees equitably. The issue is whether the plan can be terminated and assets distributed at all (at least without incurring a huge tax penalty and liability). See IRS Notice 2007-84. To answer your question directly, the primary concern about treating employees "equitably" is that the amounts distributed not be discriminatory.

Q2. Could the assets be “split” and allocated to some type of account for each retiree and pre-retiree based on age and how much went into the plan for their benefit?

A2. Along with other methods this would appear not to be discriminatory.

Q3. If so, could some type of individual account be set up for each employee to manage on their own?

A3. The plan/trust could be amended to provide as described. The account should be labelled as an health reimbursement account and should comply with the HRA Regs. issued by IRS.

Q4. Any way any of these assets could be transferred into a qualified plan for the employees?

A4. No. However, they may be able to be transferred to health savings accounts (HSAs, a form of IRAs permitting payment of medical expenses tax-free) for each of the employees. This treatment is referred to in the 409A Regs. but it is not clear if the employees must be covered under a high-deductible health plan in order to obtain this treatment.

Q5. What type of plan is this ?!?

A5. This is a welfare benefit plan. See IRS Notices 95-34 and 2007-84 for information about their concerns with such plans. They have generally not had concerns when the plans are collectively bargained (since DOL has primary jurisdiction. However, since 409A was added to the Internal Revenue Code, IRS is in the position to call this a nonqualified deferred compensation plan which is not in compliance with 409A and assess a 20% excise tax on the distributions (in addition to FICA, Medicare and income taxes).

Hope this helps.

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Guest YATPA

Thank you, vebaguru! Your responses are VERY helpful.

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You're welcome. Also, J Simmons made a good point on the VEBA termination thread: Be sure to check the plan/trust document(s) to see what provisions they contain relative to termination. It may be advisable to follow those provisions. If not, the document(s) need(s) amended to reflect whatever treatment is decided upon.

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