Don Levit

Gary: Are you saying that the death benefits are providing the medical benefits, and that you are not using the cash available before death for medical benefits? Don Levit

Gary: I don't think this will agree with the IRS's viewpoint. The combination of the availability of trust funds to pay medical expenses, and the resudual payment upon death suggest that the trust is in effect operating as a permanent wealth-building vehicle. Such a payment upon death is not a permissible VEBA benefit. Go to: http://www.irs.gov/pub/irs-tege/eotopicf99.pdf. Don Levit

Gary: Are you saying that the life insurance policy will be used either to pay a death benefit before retirement, or to pay medical benefits after retirement, but not used for both benefits for the participants? Don Levit

Linda: You are asking some very good questions. The proposed rules for cafeteria plans, if adopted, will help clarify your tax concerns. As reported in Benefits Link on 8-3-07, go to: http://benefitslink.com/taxregs/reg142695-05.pdf. Part of the material does address cafeteria plans, such as the Connector in MA. Don Levit

WelfareBoy: Thanks for the insight into how MA regulates employers and insurers. I agree that MA should regulate employers located only in MA. However, for multi-state employers, how could each state regulate the employer, as if it was located only in their particular state? For example, with mandated benefits being different in each state, how would the structure and administration be uniform, if each state wished to impose its mandated benefits on the multi-state employer? The degree of the burden on employers is certainly relevant to ERISA preemption. This has legal precedence to a Supreme Court case in New York involving a hospital tax assessed on insurers, but not assessed on Blue Cross. However, the tax indirectly affected employers. Here, the assessment directly affects employers. Don Levit

mjb: MA can regulate MEWAs. Do you think the regulation would be any different, considering ERISA, from a self-funded MEWA only in MA, and a self-funded MEWA in MA, and, say 2 contiguous states? Don Levit

mjb: The states have the primary responsibility to regulate MEWAs, due to the MEWA Amendment passed in 1983. Don Levit

mjb: Would your comment be any different if the plan was a self-insured multi-state MEWA? Don Levit

mjb: If that is the case, then where does uniform administration of a plan come into play, when an employer is in MA, and at least one other state? Don Levit

mjb: That case dealt basically with the state's ability to regulate insurers, as opposed to the ERISA plans themselves. It did not deal with insurers who provided plans to an employer who was in more than one state. Don Levit

mjb: I couldn't have said it any better myself! Do you think that uniform administration applies to fully insured plans as well as self-insured plans (single and multiple employer plans)? Don Levit

WelfareBoy: Thanks for providing a heads-up on what is happening in MA. What I meant to say about employers in other states was pertaining to employers that had employees in 2 or more states, one of which is in MA. How would the structure and administration of plans be uniform in that situation? Don Levit

That was an excellent explanation, John. Also, I would add that the only time commingling of these benefits would be permissible is when, say, medical benefits are discontinued, all liabilities have been paid, then any residual could be used for a different benefit. As far as sub trusts go, I got that idea from PLR 200119064, which states "sub-trusts CU are maintained pursuant to a collective bargaining agreement within the meaning of section 419A(f)(5), and no account limits will apply as long as the assets of each sub-trust are not available to pay any benefits provided by the other sub-trusts." Don Levit

WelfareBoy: An additional factor to consider is whether a plan needs to be established, whether ERISA or not. A plan is a systematic way to pay for expenses, which the MA plan is. Also, bear in mind that employers in states other than MA will have to comply with the MA law, so the uniform administration is violated. As far as the law attempting to not endorse plans or require employer contributions, the question will come to what is the form and what is the substance? Individual policies can be group plans, if 2 or more individuals are covered. Paying premiums on a policy is a significant factor in whether the employer endorses the plan. By the way, I just saw that Suffolk Co NY law was preempted. One thing concerns me about MA, though. Has there been any court filings to preempt the law? If not, why not? Don Levit

The VEBA should set up sub trusts in which each of the benefits will be paid from. There should be no commingling of these sub trusts. If a particular benefit has been doscontinued, once all the participants have been paid, the remainder of the discontinued sub trust can be rolled over to another sub trust. Don Levit

Steelerfan: What about discrimination issues? Are the rank-and-file involved? Don Levit

Folks: Excellent points by mjb and Locust. To add my 2 cents (there is no "cents" sign on the keyboard, right), in Grant-Jacoby v. Commissioner, the court stated that "it is more significant to look to whether the plan is for the benefit of the owners; when the benefits are restricted to the owners, there is reason for requiring that the deduction be deferred until the distributions are made from the plan." Provision of benefits only for key employees is a strong indicator that deferred compensation is involved. In other words, context is key. There is a big difference between finding a bee in the garden and finding a bee in your bedroom. Don Levit

Steelerfan: You bring up some excellent, conflicting points. Can someone take a gander at explaining the difference between deferred compensation and severance benefits? Severance benefits are allowed in VEBAs. Don Levit

If this plan is voluntary and separate, this seems to be a group-type program that is not an ERISA plan. In addition, this plan is available to the public, which is another indication it is not an ERISA plan. I think, then, this is perfectly legitimate. Yeah, what are the rates? Don Levit

Seq: I have not read the 409A regulations, so take this with a grain of salt. If the employer was required to keep the life insurance in force, would this violate 409A? Does 409A apply to defined benefit plans, as well as defined contribution plans? If so, might this arrangenment be considered a defined contribution plan? Don Levit

I am curious if the amount of benefits could fluctuate over time, if set in advance by a formula which leaves no discretion to the empoloyer? Don Levit

Would this be considered a "wellness program?" If so, would the 20% maximum discount apply? If it is employee-pay-all, then I would think the discrimination rules would not apply. Don Levit

GBurns: Thanks for providing this PLR. The benefits, according to this ruling, need to be in separate accounts to be used only for those particular benefits. Any benefits that remain at the deaths of the employee and his dependents must be returned to the trust. For example, on page 3, it states, ""Amounts directed to the 'Premium Account' may be used to pay premiums for health plan coverage. Amounts remaining in a participant's 'Premium Account' upon the participant's death may only be used for health plan premium continuation or redirected to the healthcare reimbursement account by the participant's survivbing spouse or qualifying dependents. In the event there is no surviving spouse or qualifying dependents, any remaining amounts in the 'Premium Account' are forfeited. Any forfeited amounts are used foist to pay administrative expenses and then reallocated on a prorata basis to the accounts of other participants.' Taking the remainder as a death benefit or to pay medical premiums is prohibited from the same account. Actually, sub trusts should be set up for each benefit.

Randy: I am really not sure of the facts of the situation as you presented it. However, see PLR 9834037. "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

mal: If I understand you correctly, then, the employees are not contributing to this account. The IRS has noted concern of an arrangement in which medical and death benefits were available from the same account. See http://www.irs.gov/pub/irs-tege/eotopicf99.pdf. Look under B. Savings Plans. Don Levit