Don Levit

Are the claims paid out of the trust separated by employer; in other words, are the premiums paid by the employers, experience rated? Are the benefits self insured or fully insured? Don Levit

Joel: Thanks for your reply. We apparently posted our responses about the same time. I wonder if Pax would agree with your figures. By the way, are cash balance plans a way to help correct the apparent disparities between DB plans and DC plans? Don Levit

Gompers: Thanks for providing those advisory opinions. You certainly understand a lot of the nuances involved. In both those opinions, the employers "endorsed" the coverage by providing inducements, in addition to paying the premiums, such as providing the employer's logos on the marketing brochures. Merely paying the premiums does not make the coverage an ERISA plan. Don Levit

Pax: You are correct that the employee changing jobs every 5 years could be a myth. But, even if the employee changes jobs every 10 years, how would the DB plan balance stack up against the DC plan balance, making this assumption, and assuming the same returns? Don Levit

Joel: I understand that the typical employee works for each employer about 5 years before moving on. If that is true, the "typical" employee would seem to benefit much more from a defined contribution plan, than a defined benefit plan. The defined benefit plan seems to be front-end loaded. With only 5 years at each employer, the employee has little or no chance of accessing the perceived benefits. It is similar to retiree health benefits that usually do not vest; the benefits are more perceived, rather than real. Don Levit

Gompers: Thanks for providing that very interesting link. One of the questions I will pose to the texas DOI is the purpose of this bulletin. Are they concerned about "crowd-out" for the group market, if too many of the good risks opt out for individual policies? I believe I had read some of the court cases of those mentioned in the link you provided. The majority of cases had the employer involved to a greater extent than merely paying the premiums. The employer helped select the policies, assisted in applying for claims, etc. If the only stipulation was whether the employer subsidized the premium, I would think there would be no question that every individual policy would be considered a group policy, which, of course, is not the case. Merely paying the premiums, particularly of a policy chosen and owned by the employee before ever coming to that particular employer, does not make the policy a group plan, in my opinion. Don Levit

Folks: This is related to your question, but not directly. The TX Department of Insurance recently published a bulletin stating that if employers pay individual premiums from an HRA, the insurer of that individual policy must make it avilable to every employee in the group. Any comments? Don Levit

Ira: I agree with you that the 100% employee pay merely entices those who anticipate claims to buy the insurance. One way to address this issue would be for the employer, or employers in the same line of business, to offer an employee-pay-all VEBA. Not only can this address adverse selection, but also discrimination as well. Benefits can vary in direct proportion to premiums paid. Don Levit

Janet: I don't think it is the method of funding, as it is the method of payout. Vacation and sick policies are subject to ERISA. However, if the payout is considered a payroll practice, raher than a plan, then the "plan" is not subject to ERISA, for it does not meet the definition of an administrative scheme, or "plan," I provided earlier. A payroll practice, is more along the lines of a one-time payment, or even a series of payments in which the duties are more clerical as opposed to fiduciary in nature. Don Levit

Janet: You are correct that paying out of general assets is one indicator, although an employer who has a self-funded arrangement for health benefits, in which expenses are paid out of general assets does have an ERISA plan. A good description of how the courts see this can be found in the Supreme Court decision, Fort Halifax v. Coyne, 482 U.S. 1 (1987). In this case, a Maine statute required employers, in the event of a plant closing, to provide a one-time severance payment to employees not covered by a contract providing for severance pay. Congress was concerned with "respect to benefits whose provision by nature requires an ongoing administrative program to meet the employer's obligation. It is for this reason that Congress preempted state laws relating to plans, rather than simply to benefits. The Maine statute neither establishes, nor requires an employer to maintain, an employee benefit plan. The requirement of a one-time, lump-sum payment triggered by a single event requires no administrative scheme to meet the employer's obligation. The obligation imposed by the Maine statute thus differs radically in impact from a requirement that an employer pay ongoing benefits on a continuous basis." Don Levit

You may want to consider an employee-pay-all VEBA. Don Levit

Steelerfan: I agree with you completely. But, isn't that how businesses are encouraged to operate in order to reduce expenses? When labor becomes similar to a commodity, and the supply increases, the price for that labor goes down, right? Don Levit

I occasionally gamble in Nassau. Don Levit

I agree with Offshore Option. There is even a fiduciary responsibility to keep costs reasonable, and still maintain the quality of service. It's a big world out there; why not use it? Or, is capitalism confined to the U.S.? Don Levit

Folks: This is a dangerous game, when the services start to look like a commodity, and, therefore, the cheapest price wins. Fools know the cost of everything, and the value of nothing. However, when value and cost are synonomous, watch out! Don Levit

If the FSA funds are employee-pay-all, there are no discrimination requirements to be concerned about. Don Levit

Jeff (and others); Thanks for your reply. Are you aware of any health plans, in which the benefits are standardized, but the deductibles vary in $5,000 increments, up to $50,000? Would this be discriminatory, in that those with lower claims would tend to select higher deductibles? Assume that an individual could change his deductible yearly. Assume also that he can increase the deductible each year by $5,000, but not reduce it.

Jeff: What you are describing would be examples which may not prove to be discriminatory, when the benefits are defined for the group, and are the same for all the participants. Would it be possible, and legal, for a firm to offer a "defined contribution" plan, in which benefits vary in direct proportion to the premiums paid? Also, the following year, a portion of the unused benefits would roll over to the lower claims users. In your opinion, would this be discriminatory? Don Levit

Tommy: Could you tell us a little more about what the employer is trying to accomplish? Is his main concern abiding with the federal "discrimination" provisions? In general, insurers cannot charge different premiums based on health status. However, plans may establish parameters for similarly situated individuals. Plans may not require an individual to pay a premium greater than that for similarly situated individuals. One way to comply with these provisions, in my opinion, is to offer varying deductibles, as well as varying annual benefits. While each employee pays the same premium per dollar of coverage, the premiums do not "discriminate" against the lower claim users, which is important to keeping the mix of healthy and sick employees a "healthy" one. Don Levit

Folks: What about a possible violation of the employer blocking his COBRA rights? Don Levit

If the VEBA is an employee-pay-all arrangement (after-tax) with at least 50 employees, there are no limits to the amounts that employees can contribute. Don Levit

ipod: What about discrimination issues for pre-tax employee contributions? Don Levit

Is there any way you can cite any IRS provisions for a VEBA? My understanding is that employee contributions are not tax deductible. Don Levit

Jeanine: I agree with you there is not too much of an incentive for the provider to negotiate discounts. But, if the administrator pays "excessive" reimbursements out of plan assets, might he be personally liable to the plan, as a fiduciary? Don Levit

Larry: Thanks for providing your posting. I agree with you that an important part of claims administration is keeping costs reasonable when using plan assets. If discounts are not negotiated prior to utililzation, doesn't the plan sponsor have a fiduciary responsibility to negotiate discounts after the fact? Don Levit