Don Levit

vebaguru: Since you are unable to state where specifically overfunding is allowed, I assume you think it is okay by the code's silence. If that is the case, then why does the code specifically state that for collective bargaining agreements and for certain employee-pay-all VEBAs, that no account limits apply? Don Levit

vebaguru: I did not say that 501(m) applied to VEBAs. What information that I have provided is outdated, specifically. I am looking for some specific citations from you, not your opinions. Don Levit

vebaguru: When you say excess additions are not precluded, can you cite any text to that effect? Or, are you saying they are not precluded due to silence? How do you explain the limit on set-asides for 10-or-more employer plans, even though the deductions are unlimited? Don Levit

TCP: Thanks for the update. In your opinion, if the deduction is unavailable, does that mean that no funding is allowed, even after-tax employer contributions? Don Levit

George: We are dealing with the issue of the distinction between commercial insurers and non commercial insurers, of which the VEBA represents. My last sentence of the prior post dealt with circumventing income tax provisions by an insurance business (commercial insurers). In 1986, IRS code section 501(m) was passed, primarily because Blue Cross and Blue Shield was circumventing these provisions. They had evolved over the years from an organization distinct from commercial insurers to an organization which looked more and more like other insurers. Thus, 501(m) was passed to deal with insurers, who heretofore, had an unfair competitive advantage over other insurers, through the 501©(3) and 501©(4) tax exempt designations. If you look at a paper published by the IRS, this becomes more clear. Go to: http://www.irs.gov/pub/irs-tege/eotopicc88.pdf. On pages 5-6, it states, "Each case must be analyzed in light of the existing precedent of the definition of insurance in other areas of the code and in light of the legislative intent behind IRC 501(m). These include to what extent the entity is operating in a manner similar to for-profit insurers or Blue Cross and Blue Shield; and whether and to what extent the entity is marketing a product similar to for-profit insurers or the Blues." Don Levit

George: I agree with you regarding the state income tax issue. Whether or not a group plan is an ERISA plan is a federal issue, is it not? Don Levit

Folks: While the typical UL policy may be ripe for replacement due to the increasing cost per thousand charge (similar to a yearly renewable term policy), whole life policies are intended to remain in force. While the premium cannot rise, dividends are variable. I bought many policies over 20-25 years ago. Virtually every one of these policies has not had an increase in dividends over the last 10 years. They have no loans againsdt the cash value. If you add up the total cash value (dividends buy paid-up additions), the dividends range from 1-2% of the total cash available. Back when I bought these plans, the dividends were estimated to exceed the dividends in about 20 years. After 20-25 years, the dividends are about 20-30% of the premiums. Is this scenario typical for others on this board? Don Levit

Lori: I can't comment on the tax issues, but I feel competent to discuss the insurance cost issue. Since this policy is 23 years old, the cost per thousand should be very high. Typically, UL's insurance costs per thousand are similar to a yearly renewable term policy. Even though there is "only" $50,000 at risk, the cost per thousand is probably 7 times what it was at policy issue, depending on his issue age. If that is true, and he is in good health, it may be time to make a switch. Don Levit

Lori: I assume this is a UL policy. If so, what are the insurance charges for the $50,000 of net coverage? Don Levit

David: Thanks a lot. Do you have any idea, once I get to the IRM, how to find the specific citation? By the way, for the TAM, I contacted the legal bit stream web site, and the fellow, Trey, was very helpful. Go to: http://www.legalbitstream.com/default.asp. For the TAM, do not click on the TAM link. Instead, click on the private letter ruling database. Don Levit

Folks: I tried accessing on legalbitstream.com, but was unable to locate several TAMs. If someone could let me know how to access TAM 9541003, I could then access others. In addition, if anyone knows how to access a specific text of the Internal Revenue Manual, I would appreciate it. I am looking for a few texts, one of which is IRM 7751, Text 935. Thank you. Don Levit

lmccormick: I, too, would be interested in the wording of the state regulation. Texas went so far as to say that merely having a premium paid through a section 125 plan made the policy a group policy, regardless of the employer involvement. As John so wisely pointed out, ERISA considers this type of an arrangement as employee money, not employer money. If the employee pays the premium on a policy in which the employer had no involvement whatsoever (other than providing the payroll deduction), how in the name of common sense does that policy become a group plan? Don Levit

George: Thanks for your question. I am thinking of a VEBA, in which 2 health benefits are available. First, from an individual savings account, and second, from a pooled account, which the VEBA insurer would pay from. For example, let's assume that a person has $5,000 in his individual savings account. He is paying premiums to the pooled account, which will match his dollars in his savings acvount, for qualified claims. If the match from the VEBA's pooled account is $4 that year, the individual has $25,000 of total coverage ($5,000 from his individual account and $20,000 from his pooled account). If he uses $15,000, he still has $10,000 remaining. I am thinking there would be no discrimination here, for there is an objective standard for calculating benefits. Don Levit

George: Thanks for your questions. The first item we need to look at, in my opinion, is what distinguishes commercial from non commercial insurance, according to the IRS? One document (of several) which helps to provide the distinction, is found in General Counsel Memorandum 39817. "We identify other attributes relating to the commercial nature of an insurance operation which an employee beneficiary plan would not possess." "There are several attributes which distinguish an employee benefit program from an insurance program. First, an employee benefit plan identifies an employer-employee relationship while an insurance program identifies an insurance company-customer relationship." "Second, unlike an insurance program, an employee benefit plan is non-commercial in nature and lacks a profit motive." "Third, an employee benefit plan does not involve public solicitation while insurance programs are prominently marketed in this manner." "Thus, to give effect to the policy against circumvention of income tax provisions by an insurance business, the 'geographic locale' restriction limits the recognition of exempt status to organizations generally lacking the attributes of insurance as discussed." Don Levit

Are you looking for specific back up material? I have plenty of material from the IRS. If so, please provide specific questions. Don Levit

While we're on the subject, if the employer has a section 125 plan, with all contributions made by the employees, are there any discrimination requirements for a medical benefits plan if: 1. Participation is voluntary, and 2. Benefits vary in direct proportion to contributions made, less claims incurred. Don Levit

George: The issue is that a VEBA is more than merely a funding mechanism. It is an insurer, albeit a small one. The closest I can think of regarding an insurer of similar size would be a 501©(15). When you realize that the VEBA is an insurer, and it has specia taxl exempt status, you then realize it has opportunities to establish and maintain its tax exempt status. One of those opportunities is developing plans which are not sold by commercial insurers. This is because, according to the IRS, if a VEBA provides similar policies to those of commercial insurers, it would be unfair competition. The VEBA would have an unfair competitive advantage, due to its tax-exempt status. This unfair tax advantage is lessened substantially, if the VEBA offers plans that commercial insurers are unwilling or unable to offer (and that satisfies a community need). This provides many opportunities for innovative plan designs. Don Levit

George: In the self-funded arrangement, if the VEBA is unable to pay its bills, can the participants look to the employer(s)? I say no, because the VEBA is a distinct entity, a non commercial insurer controlled by its membership, not the employers. Don Levit

Don: Thanks for your question. I think I found the answer. On page 10 of a 1985 CPE Text, it states, "The limit on set asides applies to more-than-10-employer VEBAs even though these plans are excepted from the IRC 419A deduction limitations." In other words, even though an employer has unlimited deductions in these plans, there are limits on the amount it can set aside. See http://www.irs.gov/pub/irs-tege/eotopico85.pdf. Don Levit

Folks: In a 1992 paper published by the IRS, it states on pages 9-10: "The qualified cost of a fund not only includes the qualified direct cost, but also additions to a qualified asset account described in IRC 419A. A qualified asset account may be established only for the specific purposes described in IRC 419A, and no addition is allowed if an accounbt is overfunded." This seems to suggest that no addition is allowed, even if non deductible. Yet, I have read in other places that deductions may be taken in the following year. Does that mean that the funding cannot occur until the following year? To read pages 9-10, go to: http://www.irs.gov/pub/irs-tege/eotopicj92.pdf. Don Levit

John: Would there be discrimination if coverage varies in direct proportion to premiums made, less claims incurred? Don Levit

John: Are there any section 125 discrimination issues if the plan is an employee-play-all welfare plan? I am thinking of a VEBA, in particular. Don Levit

Steelerfan: I can't comment on NJ specifically, but I am intrigued about NQDC as it relates to retiree health benefits for private and public employers. I consider retiree health benefits very similarly to NQDC, in that neither benefit vests. It is interesting that NJ wants to tax the deferrals before distributions, which is similar to the GASB and FASB declaring that retiree health benefits are actual liabilities, even if they are unfunded (and even if the benefits can be reduced or eliminated). Don Levit

Lori: Do the retirees pay premiums to the "commercial" insurer or to the employer? If they pay to the employer, I would say that it is funded, for employee contributions are plan assets. Don Levit

TCP: I went to the Grist Mill web site, but had to be a registered member. Can you provide any other information regarding your concerns? I noticed their plans are not ERISA plans. Does that mean their expertise can be used for non employees? Don Levit