Don Levit

John: I am not disputing whether state departments of insurance can or cannot impose the same surplus levels on all health insurers. I believe they can do so. The question I have is why do so? Why not decide appropriate surplus on a case-by-case basis? In the event of a not-for-profit insurer, the possibility of excessive surplus may be damaging to its tax-exempt status. As I understand, Blue Cross has a standard of maintaining a surplus between three and six months of the expected year's claims in reserves. So, in the event a one-size fits all would apply to a VEBA that has stop-loss insurance, the surplus required to ensure claims are paid in a timely manner may be, for example, 12-18 months of the current year's expected claims. Don Levit

John: I agree with you that when 2 or more employers are involved that state regulation is needed (and is mandated). Why do you think that, say, a 10-employer MEWA of 500 participants, should require the same surplus as a United Health Group that has, say, 1 million participants in a particular state? In addition, if the multiple employer VEBA has stop-loss insurance, the surplus required would be even lower to ensure that benefits are paid in a timely fashion. When I mentioned that the self-funded VEBA has fiduciary obligations as an insurer that a fully insured plan does not have, I am referring to the inefficiencies that would result that vebaguru referred to. For example, by requiring surplus that simply is unnecessary to pay claims, participants are paying more in premiums than is necessary. In addition, having unnecessary surplus reduces the benefits available to the participants. Wouldn't this scenario violate fiduciary responsibilities of maintaining reasonable expenses and maximizing benefits, while ensuring the safety of those benefits? Don Levit

vebaguru: Thanks for your reply. It would be great for others to share their thoughts as well. You are correct that a self-funded VEBA of 2 or more employers must be licensed as an insurer. However, it is my contention that the spirit of the law is to license self-funded VEBAs, of 2 or more employers, as an insurer that is not "in the business of insurance." That is to say, an insurer that is not-for-profit that provides products that are not available to the public. The IRS explains the distinctions between commercial and non commercial insurers very well in General Counsel Memorandum 39817. Of course, the way the law is actually written which allows states to regulate MEWAs, is that states can apply any and all laws to do so. There is a distinction, however, between power and wisdom. While states have the authority to regulate a VEBA, as if it was United Health Group, where is the logic in doing so? The purpose for having the same standards for different entities, is when standardization among the entities is desired, such as with McDonald's. The public desires each McDonald's to be very similar; thus, the similar standards. VEBAs are intended to be unique from commercial insurers. Why regulate them similarly? It is ironic, in my opinion, that states want freedom from the federal government and ERISA preemption to try innovative approaches. They were given such freedom back in 1983, when they were provided the authority to regulate self-funded MEWAs. In regards to the fiduciary duties of trustees, they would be similar regardless of how the plan is funded. I am stating that if the plan is self-funded, then the insurer and the plan are more intimately related, than if the insurer was, say, United Health Group. This increased intimacy is heightened even more, when you consider that the self-funded plan is in the "business of insurance" for one client, the VEBA itself. Don Levit

vebaguru: Thanks for your reply. One of the advantages you cited in using a taxable over a non taxable trust was that the taxable trust could cover an entire industry and all states within one trust. As you know, a VEBA cannot have the attributes of a commercial insurer. A major way to avoid being in the commercial insurance business is to operate in all 50 states. Thus, the IRS regulations provide that the VEBA cannot operate in more than three contiguous states. By limiting the VEBA to this "geographic locale," the VEBA sustains the employer-employee relationship, and avoids the insurance company-customer relationship. Nationwide participation would violate the intimacy required to qualify as a VEBA, for the arrangement is more akin to a commercial insurer than a not-for-profit VEBA. You wrote that there is no advantage to the VEBA, other than the exclusion of current investment income from income taxation. You seem to be focusing on the tax benefits, and exclude the VEBA as a non commercial insurer. Why would you limit the advantages of a VEBA to merely tax advantages, and exclude the unique products it can offer, to help maintain those tax advantages? You say the duties of an ERISA trustee are the same for a taxable trust as they are for a VEBA. That is correct, if the VEBA is fully insured. In that case, the insurer and the trust are 2 distinct parties. However, if the VEBA is self-funded, it is not an entity independent of the employment relationship, as a commercial insurer is. A self-funded VEBA still maintains the employer-employee relationship, so that the insurer and the participants are seen more like one unit. Thus, the fiduciary responsibilities of the insurer are very similar to the fiduciary responsibilities of ERISA trustees. A commercial insurer, on the other hand, has no fiduciary responsibilities to the plan participants, simply for issuing the policy. Don Levit

mjb: Thanks for providing the additional information on UBIT. Don't you think that repeated, excess UBIT could be a potential threat to a VEBA's tax status? You don't think "too much" excess reserves would violate the fiduciary responsibilitry of the trustees to keep costs reasonable to the participants? I trust you are aware of this type of problem in the insurance industry. Don Levit

vebaguru: Thanks for your thoughtful reply. Is there any way you could E-mail to me the pertinant parts of the statutes and committee reports you mentioned? Is the only penalty for "abusive" funding of a VEBA the loss of the tax deduction for excessive contributions? I have not seen in the regulations any excise taxes for excessive contributions, as you mentioned. I do believe there will be UBIT on excessive contributions, but this involves taxing excessive income at the trust tax rates, with no additional penalty taxes. In addition, it would seem that the benefits would still be tax-free, even for "abusive" contributions. In short, the only drawbacks for abusive contributions, seems to be what would normally occur in a taxable trust, other than the non-deductibility of contributions. If correct, that raises the issue of what are the advantages of a taxable welfare benefit trust over a tax-exempt trust? I believe a VEBA offers unique advantages as a tax-exempt 501©(9) trust, in addition to the tax advantages. That is because a VEBA can be more than just a tax-advantaged way to contribute, accumulate, and distribute benefits. It also is a non commercial insurer, which, according to the VEBA regs, is intended to provide products that are not available to the public. This provides a wonderful opportunity for creative plan design, similar to what Blue Cross and Blue Shield used to accomplish. In addition, as an insurer, the VEBA has strict fiduciary responsibilities to the participants. One of those responsibilities is to maximize the benefits and maintain reasonable costs. Excessive UBIT could violate this particular fiduciary responsibility. In addition, excessive reserves means higher premiums would be required, which would also violate the fiduciary responsibilities of a VEBA to maintain reasonable costs to the participants. Thus, I believe the tax-exempt status could be threatened. If correct, the advantages of the VEBA as a unique insurer could be terminated as well. Don Levit

vebaguru: Thanks for your reply. Are you saying that the maximum that can be set aside is strictly for tax purposes? Can you cite any rulings or regulations which state that explicitly? Are you suggesting that a VEBA can have an unlimited amount of UBIT, without losing its tax exempt status? Don Levit

Go to: http://www.medicare.gov/Publications/Pubs/pdf/02179.pdf. Don Levit

QDROphile: Thanks for providing those 2 PlRs. In PLR 9522017, it states "Sec. 419A(b) provides no addition to any qualified asset account may be taken into account under Sec. 419©(1) to the extent such addition results in the amount of such account exceeding the account limit." Do you read that to mean that if the amount is not deductible, it cannot be added to the account limit? Or, that there is no account limit for non deductible contributions? Don Levit

Oh so Simple: I agree with your assessment. However, I wonder why the employer not bearing part of the premium was not mentioned as one of the criteria for the safe harbor? Don Levit

Folks: Today's Benefits Link provided Field Assistance Bulletin 2007-04. This answers a lot of concerns we had several months ago regarding whether certain individual policies would be considered group health plans. Policies that are "excepted benefits" are not group health plans. Go to: http://www.dol.gov/ebsa/pdf/fab2007-4.pdf. Don Levit

vebaguru: You mentioned that the law implies the need for level funding for post-retirement benefits. You are correct. Section 419A©(2) provides that the account limit for any taxable year may include a reserve funded over the working lives of the covered employees and actuarially determined on a level basis for post-retirement medical and life insuranc e benefits. The level funding is calculated over the working lives of the covered employees. The policy doesn't terminate at the employee's retirement, but the employer funding for that policy does. Where in 419A does it allow for contributions for permanent life benefits subsequent to the participant's retirement? Don Levit

401 chaos: I think your concerns are legitimate. Private Letter Ruling 9834037 states, "The Committee report for the Deficit Reduction Act of 1984 states, No deduction for advance funding is to be allowed with regard to a plan which provides medical or life insurance benefits exclusively for retirees, because such a plan would be considered a plan of deferred compensation rather than a welfare benefit plan. Of course, if a plan maintained for retirees is merely a continuation of a plan maintained currently or in the past for active employees, then the retiree plan would not be considered a plan of deferred compensation because medical benefits would have been provided without the necessity of a retirement or other separation from service." Don Levit

mjb: In the ninth circuit case earlier this year, was the plan a defined contribution plan or a defined benefits plan. One of the arguments in LaRue is that a defined contribution plan must effect the plan as a whole, whether it affects one person, a class of persons, or every participant. I do not know how this argument can be made for health benefit claims, however. Those claims seem to be a lot more individual and personal, rather than effecting the plan itself. Don Levit

vebaguru: Can you support your theory that a lifetime term policy premium would be deductible? It seems to me that the higher premium required would provide a benefit exceeding the current year. We know that there are 2 separate reserve accounts in the VEBA: a reserve for current benefits and a reserve for post-retirement benefits. Even the post-retirement benefits can provide deductions actuarially calculated on a level basis only over the working lives of the covered employees. You seem to be suggesting that the current life insurance deductions can be extended even farther actuarially, over the entire lifetime of the active employee. When you wrote that the IRS did not object to using the cash values for other than death benefits, I disagree. The recent Revenue Ruling 2007-83 stated that "any deduction with respect to uninsured benefits (for example, uninsured medical benefits) is not based on the premiums of the life insurance policies." In other words, premiums for life insurance policies used to pay for medical benefits will not be deductible. This also means that life policy cash values cannot be set aside to pay for medical benefits. Only the actual expenses for medical benefits will be deductible. However, if the medical benefits were insured, then a medical policy (not a life policy) would be the funding vehicle. Here, the premiums would be deductible, because the benefits are insured, not uninsured. Whether or not premiums are deductible also enters into whether or not the expenses are able to be set aside in a reserve. We know that some employee-pay-all VEBAs have no account limits. This is because employee-pay-all VEBAs incur after-tax, not before tax, expenditures. In addition, the income in excess of the amount properly set aside, is taxable as unrelated business income, at the trust rates. You wrote that the excess over $50,000 of post-retirement life insurance may be deducted. This seems to contradict Revenue Ruling 2007-83 which state that "account limits for reserves for post-retirement may not take into account life insurance benefits in excess of $50,000." Are you suggesting that premiums are still deductible, if they exceed the account limits? Don Levit

vebaguru: When the IRS opined to disallow deductions for cash value life insurance, I assume they were referring to non current benefits. If that is the case, then the cost of the current benefits (yearly renewable term life premiums) should be deductible. In the case of non current benefits (post-retirement life and health benefits), if the premiums were within the bounds of the reserves allowed for such benefits, then deductions would seem to be in order. I think the problems the IRS cite revolve around 2 areas, both of which entail non permissible benefits: 1. Benefits which discriminate in favor of HCEs. 2. Life insurance proceeds used for benefits other than death benefits. If these 2 issues are not satisfied, then deductions are not available, in my opinion. Don Levit

Jay: Glad I could help. David: Wow, you are amazing! Don Levit

Folks: While we're at it, does anyone have a link to Technical Advice Memorandum number 200511015? Thanks, Don Levit

http://www.legalbitstream.com/default.asp. Don Levit

Stuartt: Looking over page 21, I read that the states can regulate self-funded MEWAs. I have no problem with that. And, the states can regulate MEWAs to a great extent - as long as the regulation is not inconsistent with ERISA. Courts have ruled, including the Supreme Court, that multi-state regulation of ERISA plans is different than single state regulation of ERISA plans. This holds true whether or not the entity is a MEWA. Can you cite where the AOs would state a different position? Don Levit

401 chaos: Assuming this is a MEWA, I agree with you that the law since 1983 is for states to regulate insurance products which are self-funded MEWAs. However, it is my opinion, based on Supreme Court decisions, that the regulation must be uniform and consistent, if more than one state is involved. I assume the states involved wish to regulate the arrangement, as if it existed in only one state, correct? Don Levit

Andy: You seem to have a lot of gripes with the FASB. I wonder if you are familiar with the FASAB? If so, are you familiar with the report on accounting for social insurance that came out last year? I spoke to Stephen Goss, the chief actuary of Medicare, recently. The fact that there is no trust fund reserved for Social Security and Medicare liabilities seemed to be of little concern to him. And, the fact that FASAB considers these obligations as liabilities extending over only the next 2 years, seems to be quite comforting to Mr. Goss. Should I take him at his word? Don Levit

vebaguru: I agree that a cafeteria plan can include a section 79 life insurance policy that is paid to the beneficiary upon the participant's death. However, this policy does not include a cash value that can pay medical expenses during the participant's life, correct? Don Levit

Leevena: I am very impressed with your knowledge of the goings-on in Missouri. To access the bill, go to: http://www.house.mo.gov/bills071/bilsum/truly/sHB818T.htm. This bill was signed by the governor in June. A few interesting items are: 1. The Health Care Sharing Ministry. The new code section was not available online, so I called the sponsor of the bill to review it. It looks like religious organizations can get involved to some extent, with financing health care. 2. If the employer contributes to a health plan for an employee, the employer must provide a premium-only cafeteria plan. 3. Employers can pursue a defined-contribution model without a group plan operated through a carrier. 4. If an eligible employee chooses to retain his individually underwritten health benefit plan when he gains employment with a small employer that offers small group coverage, the individually underwritten plan is not subject to the small group provisions. Don Levit

Folks: I know in Texas, a law was passed a few years ago, allowing coalitions. These entities are considered as a single employer, and must be fully insured. Is this law in Texas similar to your experiences with coalitions in other states? Don Levit