Don Levit

mal: A few questions. What retiree benefits are available, in addition to medical? Are there any employee contributions? Does the HRA have a rollover feature? Don Levit

Folks: A participant is defined as an employee or former employee. It sounds like this person has a colorable claim to benefits, in that he, apparently, was not paid the $5,000 due to the contract's terms. I'd say this colorable claim is pretty black and white. Don Levit

mal: This is one reserve fund used to pay benefits for the collective participants, right? It is not separate savings accounts, with separate participants and their respective dependents? VEBAs can offer benefits both ways: collectively and individually. Don Levit

mal: Reading over RR 2006-36, here is the gist, as I understand it. HRAs can provide medical benefits only to employees, their spouses, and their dependents. Any unused amounts remaining in the HRA at the deaths of the employee, his spouse, and his dependents must return to the employer; they cannot be paid out as death benefits. The same rationale applies to an individual savings account of the VEBA which is dedicated to medical expenses. Once the employee, his spouse, and his dependents die, any unused balance is forfeited to the VEBA; it cannot be paid as a death benefit. I don't see why the HRA cannot simply be added to the individual's savings account, if it is dedicated to paying only medical expenses. Don Levit

mjb: I agree with you. The benefits are tax free. It must be a taxable distribution, because the funds are no longer employer's funds once used for medical benefits, whether for premiums or actual reimbursements from the funds themselves. If reimbursements from the funds themselves, they are taxable. If proceeds from a medical plan, they are non taxable. Don Levit

mjb: Can you provide the reg. for us, or give us the link? This RR merely stated that the funds used to buy the medical insurance were considered a distribution, and thus, taxable. It clearly allows for doing so, because, if the funds purchase a medical policy, there is no residual value to leave upon death or under circumstances. A savings account under my scenario would be different, for it does have residual value. In a VEBA, if one does have a savings account dedicated to medical expenses, it can be used only for those expenses. Thus, the distributions for medical expenses are not taxable. However, upon the deaths of the employee and his dependents, any remaining savings not used for medical expenses must be forfeited over to the VEBA. Don Levit

mjb: It seems we are miscommunicating on what the profit sharing plan is comprised of. I am assuming that there is $100,000 in the employee's account, of which $25,000 is the maximum that can be spent for medical expenses. I also assume that the $25,000 is in the same form as the other $75,000 (the $25,000 is not premiums paid for a health insurance policy). Are you saying that, in this scenario, if the employee pays for medical expenses out of the $25,000, there are no taxes paid? I am assuming that your answer for the other $75,000 would be that it is fully taxable. Publication 575 states that pension or annuity payments are fully taxable if you have no cost in the contract. Don Levit

mjb: The profit sharing plan does have tax-advantages for the contributions. However, the benefits are taxable. Are you suggesting that all the benefits would be taxable, except the incidental medical benefits? Don Levit

mjb: Correct, as long as the benefits are not used to pay medical expenses. Once used to pay medical expenses, the amounts distributed are taxable. As it states in RR 2005-55, paraphrasing RR 61-164, "although the purchase of hospitalization insurance does not prevent the qualification of the plan if the insurance is incidental, the use of the funds to pay for medical insurance is a distribution within the meaning of Sec. 402." Doing so within a VEBA, the use of funds to pay medical expenses would not be taxable. Don Levit

mjb: I like your options, in particular, option 2. Regarding option 3, Rev. Rul. 2005-55 may be pertinent. It states that under Rev. Rul. 61-164, using profit-sharing funds to pay for medical insurance is a distribution within the meaning of Sec. 402. Also, according to Rev. Rul. 2005-55, restricting the funds to be used only for medical expenses means the funds are forfeitable. However, if the amounts payable from the medical reimbursement account were available from distribution under the same terms as the other amounts of the profit-sharing account, the plan satisfies section 411. However, in that case, no amounts payable under the profit-sharing would be excluded under 105(b). In other words, tp pay for medical expenses under a profit-sharing plan, the distribution will be taxable. I am wondering if the employees could have a tax-advantaged arrangement to pay for medical expenses under a VEBA through a 501©(9) trust? Don Levit

Janet: Profit sharing plans are allowed to have part of their funds used for health expenses. They could be used for current or future expenses. Why not take advantage of the tax laws, instead of using the same funds as wages? Austin: Could you explain how this could be discriminatory, if the participants have individual accounts, with the discretion to use a minority portion of their contributions for medical expenses? Don Levit

What are you trying to accomplish, in regards to the health plan? For example, are you looking to fill in the deductible gap? Are you looking to fill in the co-insurance gap? Don Levit

krijowri: I agree with everything you said. In addition, the plan sponsor needs to monitor the fiduciaries he appoints to ensure they are performing as intended. Don Levit

Steelerfan: Excellent point. The trustee responsibility is a matter of degree, not whether a plan sponsor has any explicit trustee duties. In matter of ambiguity, one can generally look to form over substance. Don Levit

John: Yes, the tax issue is significant, for if the plan is discriminatory, and it is fully insured, the executives will be taxed on all of their reimbursed medical expenses. It was stated previously that the Execucare plan was a supplemental policy. I assume there is a valid group policy available, and the 2 executives are participating in the supplemental plan. Here is how Reg. 1.105-11©(2)(ii)(2) reads. "Other Rules. The rules of this section apply to a self-insured portion of an employer's medical plan or arrangement even if the plan is in part underwritten by insurance. For example, if an employer's medical plan reimburses employees for benefits not covered under the insured portion of an overall plan, or for deductible amounts under the insured portions, such reimbursement is subject to the rules of this section." Is this regulation pertinent to our discussion? Don Levit

Dolores: I think you are asking the proper question. If the plan is an insured plan, it will be regulated by the insurance department of Misouri. Why not ask the broker which licensed insurers in Missouri are offering the plan? What hoops did they have to go through to be able to offer the plan? Don Levit

Folks: This has been a fascinating discussion on the differences between self insured and fully insured plans. Ostensibly, the rationale is that fully insured plans are not subject to discrimination issues, while self insured plans are. While literally factual, the practicality is that both arrangements are subject to discrimination issues. Self insured plans are not subject to state regulation. Therefore, the federal government needed to pass discrimination provisions. Fully insured plans are subject to state regulation, including discrimination issues. Therefore, federal laws, supposedly, are not necessary. Don Levit

vebaguru: Are you saying that the beneficiaries of the life insurance proceeds can also use the cash values to pay for medical expenses, as long as they don;t actually submit claims to the VEBA? If that is the case, the beneficiaries are using the life insurance for 2 benefits, death benefits and medical benefits. Isn't this in violation of the VEBA rules (similar to my prior question about receiving unused medical benefits as death benefits)? Don Levit

If the salary reductions for a government entity were to pay for retiree health benefits, would there be any ramifications? Apparently, in this scenario, the health benefits were "current" benefits. Also, would there be any difference in the "strength" of the state's obligation, if the salary reduction was actually made, as opposed to an "oral agreement?" Don Levit

Are there non discrimination rules for a section 125 plan, if there is only a fully insured health insurance policy in the arrangement? Don Levit

vebaguru: Thanks for your reply. Let us assume a VEBA participant is accumulating in his individual account a fund to pay medical expenses. Assume the account still has $100,000 in it, and the participant dies with no dependents. Can the $100,000 go to the participant's beneficiary or estate, with no consequences? Don Levit

vebaguru: If the cash values of the policy are used to pay medical benefits, is it legal for the death benefit to be paid to the employee's beneficiary, instead of to the VEBA? If the policy is used to benefit participants for life and medical benefits, wouldn't this violate the VEBA provisions? Don Levit

GBurns: It does sound contradictory, so let me explain. There are 2 distinct contributions to the VEBA. One contribution is a premium payment, which provides for claims paid by the VEBA as an insurer for all the participants. The second, distinct contribution goes to the individual participant's savings account to be used for medical expenses just for that individual. As I mentioned earlier, the VEBA can be used in 2 ways. First, as a non commercial insurer, paying qualified claims for all the participants. Second, as an accumulation vehicle for individual participants to pay current and future medical expenses. Don Levit

Steelerfan: The states are not preempted by ERISA from passing laws that regulate insurance, as long as the laws are not inconsistent with ERISA. For example, MA law, under the MA Health Care Reform Act, states that insurers are prohibited from issuing most types of group health insurance policies, unless the employer mets certain non-discrimination requirements. In particular, the employer must make the coverage available to all full time employees and may not contribute more toward the cost of coverage for more highly paid employees. Is this law preempted by ERISA? Don't you think, most, if not all states, have similar legislation? By the way, what states allow for insurers to discriminate for highly compensated employees for health benefits in qualified plans? How about this, as a shocker: A plan which reimburses employees for premiums paid under an insured plan does not have to satisfy nondiscrimination requirements. Does this mean that if the employee in this post secures a plan for $1,000 a month, the employer would only need to pay what he pays for the highest premium policy? Don Levit

vebaguru: If the employer decides to provide a death benefit, in addition to a post-retirement medical benefit, can the death benefit be paid to the insured's beneficiary, or must the beneficiary be the VEBA? Don Levit