Don Levit

vebaguru: The premiums paid to the VEBA cannot be used by the participant. However, the dollars in his individual account can be used by the participant for qualified medical expenses. However, any dollars unused in his account at the death of the employee and any dependents must be returned to the VEBA. The fact that dollars can revert to the VEBA, does this make the individual account "deferred compensation" for dollars not used in the current year for medical expenses? Don Levit

mjb: Thanks for providing those 2 cases. Can you tell me which circuit they are in, and the year of the decision? Thanks, Don Levit

John: Assuming the plan is a group plan, which the TX DOI would say it is, according to its interpretation of federal law, could the employer provide an "average amount" of dollars, either for a medical plan, or for medical expenses to the OPoster? Under this scenario, would it be discriminatory? Also, your point about insurers accepting the group is well taken. Steelerfan: The reason there are no federal requirements for discrimination in fully insured plans, is because the federal government assumes the states will take care of this issue. Apparently, the issue is important enough for the federal government to pass discrimination for self insured plans, because without these laws, the plans could discriminate as much as they want. These laws would seem to serve as guidelines for federal laws, in that federal laws do not typically regulate insurers. Don Levit

Steelerfan: According to which federal law could an employer restrict qualified group health coverage to executives only? Don Levit

Steelerfan: I am glad that you continually are looking for better jobs! Fully insured plans do not have separate state discrimination requirements, because the federal government assumes the states are providing the legislation needed to ensure justice. Of course, both fully insured and self insured plans must adhere to federal insurance laws. According to the IRS in a paper entitled VEBA Update and Safe Harbor Rules, "All such benefits (medical and dental benefits, child care facilities, educational expenses, and vacation facilities) must be offered in equal amounts, under equal terms, eligibility requirements, and conditions, without regard to salary level, position, or ownership interest in the employer." Don Levit

Lee: If the state was Texas, it would. Again, I disagree with the TX DOI. But, what can you do with regulators who refuse to look at federal case law, in their own state, which seems to suggest otherwise. Don Levit

mjb: You are correct. Would including self-funded plans in the mandate, which is done, by the way, preempt the legislation? Don Levit

Lee: The answer, at least according to the TX DOI, is in the bulletin. Being part of a cafeteria plan makes the benefits a group plan, if 2 or more employees participate. I happen to disagree with the Texas bulletin, and sent one of several cases to refute it. One case took place in the fifth circuit (Texas). After submitting the case to the TX DOI, the person mentioned in the bulletin said he did not have time to read it. What is their rationale in providing the bulletin? According to this particular person, it is to protect the group market, regardless. For example, if an insurer makes an individual policy available, even if underwriting is required, and at least 2 employees accept the plan, all employees must be offered the policy at rates which don't discriminate according to health status. Don Levit

Folks: According to the TX DOI, having premiums paid on an individual policy through a cafeteria plan, "creates a small or large employer health benefit plan. See http://www.tdi.state.tx.us/bulletins/2006/cc9.html. Don Levit

John: Thanks for your reply. Let's revise my idea, based on the taxable implications. Everything remains the same, except for the employer reimbursements between $5,000 and $15,000 of medical expenses. Assume the employer adds to each employees' salary 20 cents for every dollar of benefits not used. Each employee, then, has the opportunity of making an extra $2,000 if they use no benefits between $5,000 and $15,000. The employer does have exposure for each employee of $10,000, before the insurance kicks in. However, if only 10% of the employees reach the $15,000 level, the employer may still come out ahead for enlarging the deductible, and saving premiums (even after reimbursing those employees who do not use the full benefits, before the insurance kicks in). Don Levit

John: Thanks for providing those 2 documents. Reading through them gave me an idea I want to bounce off of you, and others. Let's say, that the employer has a $5,000 deductible plan, and is considering raising the deductible to $15,000. He guarantees that the employees who incur expenses between $5,000 and $15,000 will be paid. However, their salaries will be adjusted to account for any medical expenditures the employer pays between $5,000 and $15,000 of expenses. Is this discriminatory? Don Levit

Benefitsrock: The arrangement is not subject to income tax. See Private Letter Ruling 199921036. Here, the benefits are entirely self-funded. "Federal tax cases have held life insurance contracts to exist in situations where there is not a standard commercial life insurance contract between the insured and the insurer." "Taxpayer's death benefits are paid from Taxpayer's general account, rather than from a particular fund. Under Taxpayer's representation that it has ample funds to pay Plan benefits, this difference with Odom should not affect the result." Conclusion: "Amounts received as death benefit payments from Taxpayer are amounts received under a life insurance contract that are excludable from gross income under 101(a)." Don Levit

QDROphile: It sounds like you are trying to do 2 things: 1. Use the cash values to help pay for medical benefits. 2. Use the remaining values of the life policies as death benefits. According to the 1999 EO CPE Text, the IRS states: "We are seeing an increasing number of employers look for ways to fund post-retirement medical benefits by encouraging employees to pick up part of the cost. Many such plans qualify for exemption, but if amounts are vested in employees as described below, so that there is little or no possibility of an employee forfeiting the amounts attributabe to that employee, the plan will not qualify. Individual policies are maintained and are credited with a proportionate share of the earnings. Upon retirement, funds in the employee's account must be used for certain purposes, usually medical insurance premiums and medical expenses not covered by insurance. If the employee dies before his or her account is depleted, remaining funds are paid to a designated beneficiary. Such a payment upon death is not a permissible VEBA benefit." Don Levit

QDROphile: You certainly have the option of funding medical benefits with life insurance. Before doing so, however, consider that a VEBA can pay for medical benefits in 2 ways: (1) through tax-deferred accumulations of individual contributions and (2) through insurance claims. Why would life insurance, which combines these 2 benefits, be more advantageous than the VEBA serving as a tax-deferred accumulation trust, individually, and a unique medical insurer, collectively? Don Levit

Mel: Thanks for clarifying the situation. Yes, I believe you would be okay, in that the employer does not have a group plan. If he had a group plan, you may have problems taking some of those off the group, and putting them on less expensive individual policies. I assume there is no carryover provision for the HRAs? If there was, those who didn't use the expenses could carry them over to the following year (cumulatively, if more than one year was involved, with no concerns about discrimination, if the amounts yearly were equal). Don Levit

Appleby: Go to http://www.legalbitstream.com/default.asp. Click on Private Letter Rulings, and put the number in the box. Don Levit

Folks: I am curious if contributions made to a VEBA would qualify under a cafeteria plan? The IRS Publication 15-B states, "Generally, a cafeteria plan does not include any plan that offers a benefit that defers pay. However, a cafeteria plan can include a qualified 401(k) plan as a benefit." The VEBA can serve 2 purposes; (1) an insurer; (2) a way to accumulate savings in individual accounts for medical expenses. Premiums paid to the VEBA as an insurer would qualify unbder a cafeteria plan, for pay is not deferred (it is "absorbed" by the VEBA, as would premiums to a commercial insurer). However, could an employee accumulate dollars in his individual account, only to pay for qualified medical expenses? Is it deferred pay, if any unused balance is forfeited back to the VEBA? Don Levit

mel: I have accumulated a few pertinent cases over the years. Try Hansen v. Continental Insurance Company, the fifth circuit, 1991. The citation is 940F.2d 971. Don Levit

oriecat: You may be right about the spam. I am curious how you, and others, may answer my question. Should I post to the VEBA board? Don Levit

devilliers: Can you be a bit more specific what you are looking for? What are you trying to accomplish via health insurance for your employees? MaryMM and J Simmons: Thanks for providing the link to Publication 15-B. On p. 3, it states " Generally, a cafeteria plan does not include any plan that offers a benefit that defers pay. However, a cafeteria plan can include a qualified 401(k) plan as a benefit." I am curious if contributions made to a VEBA would qualify under a cafeteria plan? The VEBA can serve 2 purposes: (1) an insurer; (2) a way to accumulate savings for medical expenses. I can see how premiums paid to the VEBA as an insurer would qualify under a cafeteria plan. How would contributions to an individual's account for medical expenses fare under a cafeteria plan? Is it deferred pay, if the expenses can be used only for medical care, and any unused balance is forfeited back to the VEBA? Don Levit

ipod: Section 101(a). Also see Private Letter Ruling 199921036. Don Levit

John: Bingo, you got it! Don Levit

Folks: The Employee Plans CPE Technical Topics for 1998 provides an interesting perspective from the IRS. On p. 6, it states, "The term 'employee' includes both present and former employees. In addition, the plan may not be established primarily for former employees." Don Levit

PBJ: Why not consider an employee-pay-all plan? That way, it doesn't lock itself into providing benefits, and has no FASB liabilities. Don Levit

erinf: Why not consider setting up two group plans. The first would be an employee-pay-all plan, with similar contributions to what they are presently making. The second group plan wouyld be an employer-pay-all plan. The first (primary) group plan would be a limited benefits plan, in which participants would have the ability to build benefits each year, if not all the benefits are used. In this way, employees truly share the risk with the employer, possibly providing the employer with no risk for the vast majority of employees over a few years. Don Levit