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rocknrolls2

Non-Exempt Trust Funding Welfare Benefits

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Let's say employer X creates trust T to fund medical and disability benefits. If the benefits are partly insured, some of the assets of T may be used to pay for premiums under the medical and disability plans. The IRS instructions to Form 1041 say that a K-1 has to be issued to each beneficiary in the year in which a trust makes a potentially deductible distribution from its assets. In this scenario, assuming all of X's active employees (let's say, a nice round number, like 10,000) were covered by its medical and disability plans, would a Schedule K-1 have to be issued to each employee participating in X's medical and disability plans based on the payment of premiums by T, the payment of benefits by T, or at some other time? This reporting requirement appears to be sufficiently onerous as to make a non-exempt trust a definite non-starter for any employer who is considering one. If issued in connection with the payment of premiums, would a K-1 be issued to each employee for which T paid premiums showing a $0 taxable amount, based on excludable health and accident coverage? Thoughts, anyone?

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Your inquiry presupposes that it is a taxable trust, rather than a grantor trust. Are you sure about that?

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If it is set up as a taxable trust rather than a grantor trust, the grantor's intention should generally be controlling. I know that in 2013, the IRS concluded that a grantor trust did not constitute a welfare benefit fund and that there are certain retained powers, such as the power to amend or revoke the trust as well as the application of the corpus to satisfy a legal obligation of the grantor, which could be viewed as making the trust a grantor trust, which would negate the reason for having a taxablewelfare benefit trust in the first place. While one cannot be sure of what position the IRS will take in a private letter ruling, I think the trust would have to have the grantor retained less ambiguous powers for the taxable trust to become taxable to the grantor under the grantor trust rules.

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The K-1 is for distributed "income" or the beneficiary's share of trust income, deductions, credits etc.. "Distributed income" is defined as per governing state law and the documents. Payment of expenses from assets are not income distributions.

I do not see the applicability here even if for some reason a taxable trust is used.

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Your inquiry presupposes that it is a taxable trust, rather than a grantor trust. Are you sure about that?

Saw your response and thought you might have an answer for a similar question.

Employer group purchases a level-funded, self-insured plan. The premium equivalent consists of the fixed costs and money to fund a claims account. At the end of the contract the claims account has a surplus, which belongs to the employer. Assume that the employer has decided to take a refund of the amount. Assume the premium equivalent consists of both employer monies and employee contributions that were run through their 125 Premium Plan.

Since the refund includes both employer and employee monies; 1)does the employer need to allocate out to the employees their share, 2) is there a tax event for the employer, and 3) is there a tax event for the employees share?

Thanks.

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Please tell us what this means: Employer group purchases a level-funded, self-insured plan.

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Please tell us what this means: Employer group purchases a level-funded, self-insured plan.

Sorry.

It is a self-insured group medical plan. Some people refer to it as "partial self-funding", others refer to it as level-funded, self-insurance.

Employer is billed a "premium equivalent" rate, meaning it appears the same as a fully-insured. Within that premium equivalent rate is monies for fixed (administration) and variable (claims) expenses. By way of an example, fixed (admin) is $200,000 per year and variable (claims) is $400,000 per year, with a total cost of $600,000 per year. If no claims are submitted, the entire $400,000 is refunded. If $450,000 in claims are submitted, the employer owes nothing. If claims submitted are $350,000 the employer has $50,000 remaining in the claims account and is the property of the employer.

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So, if I am the employer, it's "heads I win, tails you lose"?

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So, if I am the employer, it's "heads I win, tails you lose"?

Yes, the employer has a maximum cost stated up-front and if the claims come in higher than predicted by the carrier, the carrier loses.

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This is completely off the cuff but it sounds like there are no "plan assets" within the meaning of ERISA and, therefore, participants' have no rights to any portion of the surplus or refund. As to the tax effects to the employer, I am not really sure although I would think that the employer can take a deduction only when the "all events" test is satisfied; therefore, can only deduct the net spend for the year, but by the same token the recovery of surplus is not a taxable event.

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Yes, the employer has a maximum cost stated up-front and if the claims come in higher than predicted by the carrier, the carrier loses.

By the way, this is called "insurance".

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