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457(f) Taxation of Retiree Medical Reimbursement Plan


Guest rjohnson

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Guest rjohnson

I've faced an issue several times and have not come across clear IRS guidance on its resolution. What are the 457(f) taxation rules for an employer's payment of a retired executive's taxable of out-of-pocket medical expenses incurred in years after retirement (vesting)?

The plan would vest in the retired executive the right to have the employer provide the executive an individual health insurance plan (non-taxable under 106) and would further reimburse any and all out-of-pocket uninsured medical expenses the retired executive incurs every year for the remainder of his life. It will comply with 409A, so I'm not worried about that aspect. Under my reading of 105 and 106, these payments would constitute taxable income to the retired executive, but would be the only feasible method of providing complete coverage after PPACA applied the nondiscrimination rules to insured plans.

As the executive will have the vested right to future medical expense reimbursements in the year in which he retires, how would that benefit be immediately taxed under 457(f) without having any idea what the eventual amount of payments would total? The present value of a best estimate? If so, how do you recoup any differences in later years? Section 72 rules?

I appreciate any input.

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  • 2 months later...
Guest rjohnson
I've faced an issue several times and have not come across clear IRS guidance on its resolution. What are the 457(f) taxation rules for an employer's payment of a retired executive's taxable of out-of-pocket medical expenses incurred in years after retirement (vesting)?

The plan would vest in the retired executive the right to have the employer provide the executive an individual health insurance plan (non-taxable under 106) and would further reimburse any and all out-of-pocket uninsured medical expenses the retired executive incurs every year for the remainder of his life. It will comply with 409A, so I'm not worried about that aspect. Under my reading of 105 and 106, these payments would constitute taxable income to the retired executive, but would be the only feasible method of providing complete coverage after PPACA applied the nondiscrimination rules to insured plans.

As the executive will have the vested right to future medical expense reimbursements in the year in which he retires, how would that benefit be immediately taxed under 457(f) without having any idea what the eventual amount of payments would total? The present value of a best estimate? If so, how do you recoup any differences in later years? Section 72 rules?

I appreciate any input.

In the event anyone's interested, the IRS tells me *informally* that we would have to assign an estimate of the future benefits and pay taxes on that amount immediately upon vesting. Any difference in future years would be adjusted based on section 72, with the basis being the amount already taxed.

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  • 1 year later...

RJohnson, I am currently looking at the same situation you had in March 2011. Have you learned/heard anything more on this? Like, for instance, the possibility that the IRS in the 457(f) regs may carve out a medical benefit-type reimbursement arrangement like you described,just because of the difficulty of assigning a "current value" to the future reimbursements? How the heck would you do that anyway? Wouldn't you have to factor in life expectancy plus some kind of estimate of the growth in health care/premiums costs?

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