Don Levit

Jacmo: Thanks for your reply. You are correct that other elements go into whether or not an employer endorses a plan, in addition to paying premiums. I assume you are referring to the 4 safe harbor factors, in which an employer must meet in order to not establish an ERISA plan. Are you aware that just because the employer does not meet the safe harbor guidelines, does not mean that an ERISA plan has been conclusively established. Federal courts have ruled on this issue, which means that even if the employer pays the premium on 2 or more individual policies, an ERISA plan has not necessarily been established or maintained by an employer. Further investigation would need to be pursued to determine whether or not an ERISA plan exists. Do you have any federal citations to back your opinion? Don Levit

Jacmo: Yes, I am assuming that if the employer paying the individual premium for the employee establishes an ERISA plan, then it would be subject to the small group laws. Why do you think paying the premiums (and, that is all the employer does), establishes an ERISA plan? Could the employer establish an ERISA plan by not paying the premium on an individual policy? Don Levit

Folks: Can you explain the 6-month delay rule? Also, I was under the impfession that welfare benefits are not considered deferred compensation. Don Levit

Steelerfan: The employee-pay-all VEBA is a VEBA in which employees pay all the premiums. In this situation, some unique plans can be designed, for discrimination is not an issue. In addition, as I understand it, FAS 106 would not apply to the new liabilities, as the employees, not the employer, assumes the risk through the VEBA. Don Levit

vebaguru: I looked over the regulation before I responded. Can you cite the particular words in the regulation which says that a trust dedicated to paying medical benefits can pay death benefits if a participant has a balance in his account when he, his spouse, and his dependents have died. Don Levit

vebaguru: We know from the information you cited that HRAs can only be used to pay for medical expenses. If used for any other expense, the tax benefits would be eliminated. I find this rationale works very similarly to a VEBA which has a sub account for medical expenses. You say that some of the 1999 EO CPE Text from the IRS is out of date. Is this portion out of date: "Upon retirementy funds in the employee's account must be used for certain specified purposes, usually medical insurance premiums and medical expenses not covered by insurance. If the employee dies before his account is depleted, remaining funds are paid to a designated beneficiary. Although viewed in isolation the benefits provided by such a trust may appear to be permissible VEBA benefits (a permissible medical benefit plus a death benefit), the combination of funds to pay current health insurance premiums and the residual payment uppon death suggests that the trust is operating as a permanent wealth-building vehicle. Any amounts not used to pay health insurance premiums during the lifetimes of the participant and his spouse would eventually be paid to beneficiaries. Such a payment upon death is not a permissible VEBA benefit. There is no current protection, no insurance-type protection, and no set death benefit." To view, go to: http://www.irs.gov/pub/irs-tege/eotopicf99.pdf. See p. 109. Don Levit

Just one other item about CO, and my opinion about federal law. I don't mean to say that federal law trumps state law in every situation. It should be decided on a case-by-case basis, according to federal law. What CO has done is to say, categorically, that any time an employer pays for an individual policy, it is an ERISA plan, and, thus, subjects that individual policy to the small group regulations. Don Levit

In my opinion, this can be done with an individual policy, but not an HSA/HDHP, as stated already. I believe it is okay from a federal standpoint, which would trump any state insurance law that says otherwise. I am having this discussion presently with the CO Department of Insurance, which specifically prohibits this option. I have sent them my "evidence." They basically came back with, "This is what it says in our state law, and the legislators had legal advice before they passed it." They basically don't care how it may conflict with federal law. What state are you in, and how does their department of insurance deal with the issue? Don Levit

PBJ: Why don't you read an excellent primer from the IRS? Go to: http://www.irs.gov/irm/part7/ch10s12.html. Don Levit

Steelerfan: I am not familiar with TOHI, although I have heard of it. If the goal is to get retiree medical off the books, have you considered an employee-pay-all-VEBA? Don Levit

Jacmo: You are correct about the DOL safe harbor. However, just because an arrangement does not meet the safe harbor, does not make it automatically an ERISA plan. Don Levit

Vebaguru: I looked over both of those citations. While the ruling and the notice emphasize the HRA can be used only to reimburse medical expenses, I did find a section that was somewhat interesting in Notice 2002-45. "An HRA does not qualify for the exclusion under 105(b) if one has the right to receive cash or any other benefit other than the reimbursement of medical care expenses. If any one has such a right currently or for any future year, all distributions made are included in gross income, even amounts paid to reimburse medical care expenses. For example if it pays a death benefit without regard to medical care expenses, no amounts paid are reimbursements paid for medical care expenses excluded under 105(b)." So, are you saying that if the HRA pays a death benefit with regard to medical care expenses, then this would be kosher? An interesting take on this portion. Why do you mention this in regard to VEBAs? If the VEBA, for example, paid the hospital after the participant's death, this would not be a death benefit. Rather, it would be a medical benefit paid after one dies. Don Levit

vebaguru: Are you saying that a life insurance policy could utilize the cash values to help pay meducal benefits for a participant, and, in addition, be used to pay death benefits to his beneficiary? If that is so, then please cite a specific federal code section in which this is allowed, to contrast that with the "outdated" article. Don Levit

Susan: It certainly sounds like this would be kosher. My initial thought is it seems like the proposed regulations are very clear. However, how would the regulations deal with individual life policies? Would their treatment from the IRS be different from how state departments of insurance may react (using individual health policies as an example)? Don Levit

mjb: The distinction the VEBA provides is when an employer self-funds the benefits. Of course, if only one employer is involved, the VEBA is not as attractive, for an employer has much flexibility without the protection of a VEBA. Where a VEBA can really prove useful, is the self-funding of medical benefits for more than one employer, in the same line of business. Steelerfan, here is a very important distinction. The self-funded VEBA is especially useful for small employers in 3 contiguous states. Thus, the plan can be a mini Association Health Plan, without an Act of Congress! Congress already provided for VEBAs over 80 years ago! As a non commercial insurer, the choice of benefit designs is virtually unlimited, for the VEBA insurer is intended to offer plans not available to the public. Thus, out-of-the-box thinking is encouraged. Don Levit

George: How can an individual policy be part of a small employer health benefit plan that is not subject to ERISA? Don Levit

401 Chaos: I have not read the 409A regs. I am curious, though, if it says anything about medical benefits that extend past COBRA? For example, if you look at PLR9834037, it states, ""The Committee report for DEFRA allows a plan to be considered a welfare benefit plan if it is a continuation of a plan maintained currently or in the past for active employees. The benefits provided by the 501©(9) Trust are a continuation of the medical plan for active employees. The fact that the 501©(9) Trust only provides benefits to retirees, does not cause the deduction limits of section 404 to apply rather than the deduction limits of sections 419 and 419A. In other words, wouldn't the medical plan for retirees not be considered deferred comp? Don Levit

mjb: Well, there could be a big distinction, depending if the plan is self-funded. Let's first look at what a VEBA is, according to the IRS. "The regulations under 501©(9) provide that for an organization to be a VEBA: A. the organization must be an association of employees; B. membership in the organization must be voluntary; C. the organization's purpose is to provide for the payment of life, sick, accident, or other benefits to its members or their dependents or designated beneficiaries; D. no part of the net earnings of the organization inures to the benefit of any private shareholder or individual." Found in Chapter 9, VEBAs, Handbook 7.8.2. Notice it is the organization that provides the benefits, a tax-exempt non commercial insurer. And, I haven't even discussed the distinctions between an employee benefit program, such as offered through the VEBA, and an insurance program, according to the IRS. Don Levit

John: I am not sure if I can help, but I have come across recently cases (including a Supreme Court case), in which a fiduciary relationship was not established when the employer chose not to contribute to a trust, and used its funds for other business purposes. The relationship was one of debtor-creditor, rather than fiduciary. Would that be helpful? Don Levit

George: I agree with you that the states do not have to agree with the IRS proposed cafeteria plan regulations. States do have the right to regulate insurance, as long as their interpretations do not conflict with ERISA. The key issue here is whether or not an ERISA plan has been established and maintained by the employer, when individual policies are invloved. Court cases have gone in several directions on this issue. I am not aware of any cases, in which employer payment of premiums for an individual policy, in and of itself, established an ERISA plan. Rather, the courts believe that in grey areas, that the facts and circumstances will establish whether or not an ERISA plan has been established. It seems to me that the TX DOI is suggesting that any subsidizing of premiums for 2 or more individual policies establishes an ERISA plan. This, to me, has no rational basis to be applied across the board. To access the bulletin, go to: http://www.tdi.state.tx.us/bulletins/2006/cc9.html. Don Levit

George: The proposed regulations are an important step to easing the transition from group insurance to individually-owned portable policies. If the IRS says it is kosher for employees to pay for individual policies in a tax-advantaged manner, then the state departments of insurance will probably have to allow this practice in certain situations. States like Texas forbid this practice from being used. Don Levit

George: It depends if the VEBA is fully insured or self insured. A self insured VEBA is a non commercial insurer. Part of the reason it can receive its tax exempt status as a 501©(9) trust is its ability to offer plans not commercially available. Thus, its product design is virtually unlimited. Don Levit

George: Proposed Regulation 1.125-1(m), in which a cafeteria plan can pay or reimburse individual policy insurance premiums. An employee may purchase an individual insurance policy, and elect to have the employer reduce his salary on a pre-tax basis, and be reimbursed for insurance premiums, after proper substantiation of the expenses. This resembles somewhat the legislation In MA in which employees can buy individual policies and pay the premiums pre-tax via salary reduction. Don Levit

Yes, that is very sad news. I found Brett's questions and comments to be very helpful. He always would reply to my questions, and I learned a lot from him. We even corresponded offline, as he was willing to continue our discussions through that format as well. I feel like a part of our team is missing. Does anyone know of any ERISA-type matters which were on his plate, in which Brett had a particular mission to carry on? Don Levit

benpat3: Must the portion of the VEBA that is paying medical expenses be used only for medical expenses? If there are any monies left at the death of the last participant, then the balance can be rolled over into another VEBA benefit? If you agree with this, then the VEBA medical expenses function like an HRA, except with an HRA, any residual benefits go back to the employer. Agree? Don Levit