Don Levit

Andy: Thanks for posting this. The Social securiity taxes do not go into the trust funds. They go into the general fund of the Treasury. What goes into the trust funds are credits, bookkeeping entries, which are secured by newly issued Treasury securities, debt. "The money will go into the Treasury - the General Fund. The tax money does not go into the Social Security account, but goes into the Treasury. The collection of the tax is one operation. Spending regular appropriations for benefits under Title 2 is another operation - under other powers." Comgressional Record - House http://www.ssa.gov/history/pdf/h417.pdf. Don Levit

John: Thanks for providing your comment. It does seem to put a lid on my theory. Do you or anyone else have any theories as to why the HSA was exempt from deferred compensation? Don Levit

George: I agree that the VEBA is not listed as one of the section 125 benefits. However, it is a possibility, as far as the IRS is concerned. Why would it list section 125 as a way to pay for benefits, if the employee wasn't paying at least part of the costs? In addition, there are employee-pay-all VEBAs. I will admit, those I have read about are all after-tax. I'm just throwing this out for discussion's sake. I am taking no particular position. Why do you say that 419 plans are deferred compensation, when the 404 regulations say differently? Don Levit

George: No, it is not. I find it interesting that HSAs are acceptable for section 125. My point here is that if the 419(e) plan is not deferred compensation, it could be acceptable under section 125. If it is not deferred compensation, then it could be, what, current compensation? Also, the IRS considers that section 125 for VEBAs is a possibility. Go to: http://www.irs.gov/irm/part7/ch10s12.html. Look at 7.25.9.14. Don Levit

vebaguru: If it is not deferred compensation according to 419(e), why couldn't the employees make the contributions, before tax, through a section 125 plan? Don Levit

In section 404(b)(2)(A) it states, For purposes of this section, any plan providing for deferred benefits (other than compensation) shall be treated as a plan deferring the receipt of compensation. In the case of such a plan, the determination of when an amount is includible in gross income shall be made without regard to any provisions of this chapter excluding such benefits from gross income. In section 404(b)(2)(B) it states, Subparagraph (A) shall not apply to any benefit provided through a welfare benefit fund (as defined in section 419(e)). Don Levit

Jeff: Thanks for your reply. Are you aware of the reason insurers use to not count individual coverage? Does this not qualify as "creditable coverage," particularly if the individual policy is fairly comprehensive? Or, is this restriction part of the state insurance codes? Don Levit

dsw713: Your case is an interesting one. I assume the employee must pay part of the premium. If it was 100% paid by the employer, would his refusal be valid? On another note, I have been told by many agents that several insurers will not count individual policies as valid coverage for participation requirements. In effect, they are considered uninsured. Any one have a similar experience? Don Levit

VEBAPLAN: Could you be more specific about still being true? The idea of coops being presented for potential health insurance reform is very intriguing. While coops can be large regional entities, they can be much smaller local organizations, such as a 501©(12) Local Benevolent Life Insurer. This insurer can offer health insurance, in addition to life insurance. Its very reason for existence could be consumer controlled, consumer operated (the definition of a coop). Now, that can be a great way to initiate consumer-directed care, and retain most of the earnings with the participants. Don Levit

Folks: We had a discussion a while back regarding UBIT and tax-exempt income. I did discover a Revenue Ruling, 76-337, in which a social club did not have to include in gross income interest on obligations of a State. I have not found a revenue ruling regarding like insurance income as not being included in gross income. Could this revenue ruling be used as a precedent? Don Levit

John: It is section 415. See Secs. 419A(d)(2), 419A(h)(1)(A). Don Levit

Thanks for posting this. As we know, highly compensated employees must have individual accounts, and all employees can do so as well. I see 2 problems with this scenario. First, the IRS is concerned about the benefits primarily going to highly compensated employees. If this turns out to be that type of arrangement, there could be discrimination problems lurking in the future. Second, monies contributed to retiree medical count againt the maximum that can be contributed for "regular" retirement plans. Don Levit

BL 333: I found one other possible exception to providing whole life policies, in GCM 39440. In this situation, the whole life policies were ruled favorably if (!. The policies were owned by the VEBA; (2) purchased through level premiums over the expected lives or working lives of the individual members; and (3) the cash reserves accrue to the VEBA. The whole life policies are funding a current (as opposed to permanent) life benefit in that the member receives pure death protection only. Don Levit

John is absolutely correct. We know that salary reduction contributions have to be forwarded within a certain time for welfare benefits. I think it is 90 days. In one case decided in the 10th circuit, this year, almost all of the medical funding was done (or to be done) by the employer. With bankruptcy looming, the court found that the employer never wore his fiduciary hat; that other expenses took precedence. The case is Holdeman v. Devine. Go to: http://caselaw.lp.findlaw.com/data2/circs/10th/074235p.pdf. Don Levit

Yes, it makes a lot of sense. The employees seem to want paid-up life insurance, without their having to pay for it. I am not real familiar with the options of Section 79 when the employer sells out. Is there any way the employees could pay the premiums? Don Levit

Let me see if I understand the facts correctly. Up until this point, all contributions have been made and deducted by the employer. The VEBA has been used as a savings vehicle to pay for retiree medical expenses. of which the proper qualifying amount has been paid. No life insurance has been bought up to this point for post-retiree purposes. Now, the employer wants to use part of the retiree medical reserves to buy permanent life insurance, and part of the retiree medical reserves to continue paying medical expenses. Is that correct? If so, is the employer wanting to make the change, because there is an excess in reserve for medical expenses. If so, does each employee receive the same permanent life insurance benefit? Don Levit

Is this new VEBA available only for retirees? Is there an existing VEBA for current employees? If the employer is discontinuing the VEBA for current employees, there could be a problem. See Health Insurance Coverage for Retirees from the Congressional Research Service. http://www.opencrs.com/rpts/RL32944_20060328.pdf Look on page CRS-14 An employee is a person who first becomes entitled to participate in the association by reason of being an employee. So, former employees are employees. Reg. 1.501©(9)-2(b). The Association must be an entity having an existence independent of the member employees or their employers, and it is controlled either by its membership or by independent trustees Reg. 1.501©(9)-2©. My initial thought about this spin-off VEBA is that depending if there is any employer involvement or not, would answer your question about the possible ERISA plan. Assuming this is a self-funded VEBA, and it is an ERISA plan, I would think it is not subject to state regulation. If it is a self-funded non ERISA plan, that would be an excellent question on whether or not it is subject to state regulation. My guess is that this would still be an ERISA plan, for the retirees were employees initially, and former employees are still considered employees. Don Levit

I understand the reason that FICA must be paid is that the government does not want 401(k) dollars to reduce Social Security benefits. Don Levit

mjb: John Simmons very adequately described this as primarily a way to comply with the money not being constructively received, and still be, ultimately, employee dollars. Sort of having the best of both worlds; the tax advantage of (ultimately) employee money. Don Levit

George: Are you looking at section 7.25.9.14? It is entitled VEBA Funded Cafeteria Plan Benefits. Don Levit

George: That is why I posed the question of whether the money in a cafeteria plan is considered "employee" contributions. If a cafeteria plan is used to fund the VEBA, how could the contributions be employer contributions? And, if they are employee contributions, how can they be after-tax contributions? Don Levit

John: Possibly I should post my reply on another board. Many experts believe that employee VEBA contributions can be only after-tax contributions. However, according to the IRS, a VEBA can be funded through a cafeteria plan. Go to: http://www.irs.gov/irm/part7/ch10s12.html. Don Levit

John and others: This may sound like a dumb question, but can a section 125 plan ever be considered employer money? Don Levit

George: Excellent! What else can we add? Don Levit

vebaguru: I agree with you that the VEBA has certain disadvantages. One of the advantages a 501©(9) has over a taxable trust (insurer) is that to fully earn a tax-exempt status, an insurer needs to: 1. Offer unique operations from for-profit insurers. 2. Offer unique products from for-profit insurers. A taxable trust (insurer) does not have such advantages from the IRS. Don Levit