Don Levit

Brett: The non discrimination rules for self insured plans under Sec. 105(h) apply to eligibility to participate and to benefits. Under the scenario introduced by waid 10, there did not appear to be discrimination in these 2 areas. For example, the medical benefits available appear to be the same for all employees, as well as the premiums. What is not the same, however, is the employer-paid portion of the premium. I do not read anywhere in section 105(h) where this is relevant. However, that does not mean that unequal employer reimbursements for premiums is not discriminatory. Why do you think there are comparability rules for employer-paid HSA contributions? Don Levit

Brett: Is discrimination not an issue, due to the plan not being an ERISA plan? Can you cite any regulation in support of your opinion? Thanks. Don Levit

Brett: In this situation, the employer is offering to tie the employer contribution to the premium, based on a percentage of salary. While the gross premium should be the same (non discriminatory), the net premium would be lower for higher paid employees. Are you saying this is not discriminatory, merely because the net premiums are based on compensation, rather than health? Don Levit

Folks: I am talking with the senator's office in Michigan, which is attempting to pass this legislation. I posted the guidelines a few months ago. Does anyone know how I can access those to send to the senator's office? Thanks for any help you guys can provide. Don Levit

George: Thanks for your reply. I have some issues with your opinions regarding the first thing and the third thing. To simplify the discussion, I would like to concentrate on the fourth thing, in that the federal law is a minimum standard. On this, I am in agreement with you. Let's say that the federal law regarding health and wellness incentives is the minimum standard. What would be the result if a state, like Michigan, passed health and wellness incentives which were not more favorable for the employees? Don Levit

Folks: In today's Benefits Link, I noticed this story. I was under the impression that the federal government passed legislation detailing how health and wellness incentives could be incorporated into plans, without being discriminatory. Why couldn't insurers in MI be offering plans duplicating these federal incentives now, without legislation needing to be passed in MI? As I understand federal law, the states can pass legislation, which would be more favorable to the employees. Don Levit

Larry: Thanks for your reply. You are correct about trying to cut out the intermediary, at least to keep the "commercial" insurer more on the periphery for more catastrophic claims. The idea is for employees to self insure, over a 2-5 year period between $25,000 and $50,000 of potential medical expenses. This need not be done without an insurer, in which the person would need to accumulate $25,000-$50,000 in savings. Rather, the person can do so through a combination of personal savings and communal matching through the VEBA. If the VEBA match in a particular year is 4, the person needs to accumulate $10,000 in cash in order to qualify for up to $40,000 through the VEBA. I am suggesting the individual make monthly payments, according to his ability, not according to his expected medical costs. This program will address the adverse selection we are all concerned about, for the low claimants have an incentive to continue contributing to the savings/VEBA program. Even those with high claims who use up all their savings and corresponding VEBA matching dollars, have the ability to replenish their coverage. And, they can do so, without proving health. Don Levit

Larry M: You are correct about the blending of the rates making the employer liable for the difference. I think that is the situation, regardless if the retirees pay the entire premium. The key point is that the retirees are getting a discount, they could not have had, were it not for the employer. I do not have any documentation to support my premise, other than what I have read. I hope I am still making sense. Regarding the premium being too high for the retirees, this is the problem with a defined benefit plan. If you had a defined contribution arrangement, the benefits would be lower, but, at least, the plan could be in force. By being able to adjust benefits for the high claims users, adverse selection can be more effectively addressed. Of course, to continue the discussion of how to address adverse selection, I run the risk of being nonsensical. However, if the demand is there, I will go out on a limb, for that is where the fruit is. Don Levit

AMP: Thanks for your reply. You bring up several valid concerns and questions. I am not aware of a plan as I have described being available, although I would be quite surprised if some plan similar to it is not being provided for employees. This plan could apply either to single employers, or to employers in the same line of business, across 3 contiguous states. I envision the plan being available initially only for active employees. As you have expressed, time will be needed in order to accumulate savings to provide more meaningful benefits. My plan design allows only for voluntary employee contributions, at this point. The savings account is held outside the VEBA, because, as I understand the VEBA laws, individual accounts that grow strictly due to the passage of time are viewed as deferred cpmpensation, and are disallowed. If there is a way to provide for these savings accounts within the VEBA, that would certainly simplify the administration. Whether the savings accounts accumulate inside or outside the VEBA, the savings balances would be determined simply by the contributions made, their accumulations, less the withdrawals. The premiums paid are amounts chosen by the employees, up to a certain maximum. I am thinking of somewhere between $4,000 and $6,000 per year would be the cap, with half of the contributions going to the individual's savings account, and one-half of the contributions would be premiums paid to the VEBA. The matching contributions are not made by individuals. Rather, the matching dollars for qualified medical claims are made by the VEBA. For example, if an individual has $5,000 in his savings account after 2 years, and the VEBA match, for that year, is 4, then the VEBA can provide up to $20,000 in benefits. The individual has total "coverage" of $25,000, which can increase his deductible under the secondary group plan to $25,000. This higher deductible can reduce the total premium by up to 60%. I do not envision the employer making contributions, so there would be little or no FAS 106 liability. The VEBA match can change once a year, so the liability can be adjusted depending on claims, etc.

AMP: You are correct about employees being able to start early in order to accumulate funds to help pay medical expenses. While the fund could be used for retiree medical only, I envision the fund being used for current and qualified former employees. The objective is to have the VEBA serve as the primary plan to pay medical expenses. The individual balances would serve as the deductibles for each participant, thus potentially reducing the medical premiums currently being paid by the employer (and employee). When I say balances, I do not mean individual accounts in the VEBA. Rather, each VEBA participant would contribute a "premium" to the VEBA, and a similar "contribution" to a savings account. The VEBA serves strictly as an insurer, providing matching dollars each year for the savings account balance. Thus, each participant has a cash value (savings account balance) and a VEBA medical benefit (the matching dollars), for an even higher total medical benefit value. The VEBA and savings account payments would be based on some affordability measure, such as percentage of income, up to a maximum. The amount could increase or decrease each year, by 10%, up to the cap. You are correct that there are no specific plan benefits provided. Rather, there are dollars available to pay medical expenses. The total dollars each year are determined by the savings account balance as of Jan. 1, plus the matching dollars available from the VEBA. So, there is insurance here, in the form of VEBA premiums, and VEBA matching dollars. Don Levit

George: You are getting quite adept at stating what can't be done. I guess since you apparently really believe we are as limited as you think we are, that cuts off any discussion. If you want to take up any specifics of what I wrote, I will be happy to do so. Don Levit

AMP: Thanks for your reply. I can see where you would have concerns about discrimination based on health status. If one were to use a VEBA trust to fund these benefits, then the initial benefits could vary proportionately to the premiums made. Deducting claims from future benefits, while indirectly related to health status, is not discriminatory, in my opinion, for the continuing benefits would be in proportion to contributions, and claims, made. This calculation would be assessed similarly, for all the participants, regardless of health status. George: You raise some excellent questions, of which I will attempt to address. The employer could have such a plan, if he decides he wishes to have a group-type arrangement. One of the primary advantages of a group-type plan is that its purpose is to provide plans that are not available to the public. The plan can be kept, as long as the plan sponsor wishes to continue the coverage. It would not address retiree coverage per se, unless a retiree is defined as an individual who is an ex-employee, who has been covered for at least 2 years. The employee who is able to think ahead, who realizes his greater risk is as he ages, would be a good candidate for this plan. It is not that his contributions are being "wasted." Rather, they merely are being deferred in order to build up reserves. Adverse selection is minimized, because if a person uses all his benefits in one year, it will take 12-24 months to build up significant coverage. The objective is to build $10,000-$20,000 of benefits per year, on monthly accruals. There is no discrimination in this plan, in my opinion, for this is a defined contribution plan, not a defined benefits plan. Just as in a retirement defined contribution plan, the more benefits you use, the lower is your total benefits. Don Levit

Sheila and George: Exactly correct. Adverse selection is probably concern number one. That is why I would suggest considering one of several options: a limited benefits plan, in which the coverage varies in direct proportion to premiums paid and claims made. The more claims one incurs, the lower his benefits. The plan is designed to build up $10,000-$20,000 of benefits per year, depending on contributions and claims. Coverage starts after 2 years of contributions. Don Levit

Sheila: I am curious about a couple of the provisions. While the employer is looking at 20 years in order to qualify, he also is considering a permanent COBRA extension. On the one hand, the employer seems to be providing long-term coverage, yet it takes 20 years in order to take advantage of this opportunity. I can see where you would be concerned about the premium increases for the active employees with a permanent COBRA extension, and not even coordinating with Medicare. Has your employer considered offering 2 group plans, with only the primary plan offering a permanent COBRA extension. This plan would be employee-pay-all, in which coverage varies proportionately with premiums paid. Don Levit

jmor: Interesting thought. I was under the impression that the federal tax breaks still apply. Isn't Section 125 a federal provision, which would not be under the authority of state regulation? While states do have regulatory authority over state income taxation, they do not have authority over federal income taxation. Regarding the offering of HSA/HDHPs in non conforming ststes, if insurers in these states could not offer these plans, what would be the point of the federal legislation? Don Levit

jsb: Are you saying that, at the beginning of the next plan year, the deductions can be returned to the employee? Don Levit

jmor: If the deductions have to continue, how could the insurer cancel the coverage? Don Levit

George: Good response. There IS a difference between a plan and the coverage it provides. Don Levit

jmor: If this is an employee-pay-all arrangement, then the employer is making zero contributions. The "match" comes from the VEBA, which is also the result of employee contributions. The match is the same "multiplier" for each participant. The higher the participant's savings balance, the higher the total absolute dollars that are matched. With the 2-year waiting period, the VEBA is able to accumulate dollars in order to provide the match. As new entrants come onboard, a "reserve" can build due to their similar waiting period. Don Levit

jmor: You bring up a valid point about the lack of tax savings initially. With an employee-pay-all VEBA, the contributions are after-tax. I envision this arrangement being attractive mostly to the rank-and-file, if initial tax savings are that important. With an employee-pay-all VEBA, you have 2 attractive benefits. First, there are no discrimination issues, if the contributions are voluntary. Second, coverage can vary directly with the contributions made: a big advantage for an innovative "defined contribution" health plan. Don Levit

jmor: Right, there are some drawbacks to the HSA/HDHP arrangement. One, is that the deductible rises with inflation, regardless of what the HSA balance may be. Second, with a few exceptions, one can have only the HDHP in force. One other option would be to provide a savings account with separate balances for each employee, for example, through a Roth IRA. Similar contributions would be made to a VEBA (Voluntary Employees' Beneficiary Association) trust. Starting in year 3, the VEBA would provide matching dollars for the balance in the savings accounts, similar to an employer match through a 401(k). This feature would accelerate the coverage for the VEBA/savings combination plan. This plan would be primary; the deductible under the group plan would vary each year, depending on the savings balance, and the amount of the match through the VEBA insurance trust. Don Levit

jmor: The varying deductibles could be possible under my first post in this thread. Don Levit

mal: Thanks for providing more details. I am not sure if this helps, but there is a special rule which provides that welfare benefit funds under CBAs have no account limits. IRC Sec. 419A(f)(5)(A); Temp. Treas. Reg. 1.419A-2T, A-2. Don Levit

jmor99: Thanks for your reply. When you wrote that the underwriting department should be able to provide a suggested rate, could this be done with varying deductibles? For example, if one has an HSA, could the deductible be determined by the balance in the HSA, as of January 1 (subject to the maximum deductible, according to federal law)? In this way, lower claimants will have higher deductibles, and lower premiums. How difficult would this be for an insurer to calculate once a year, per participant, rounded to the nearest $1,000? Don Levit

Mal: You posted this under two or more VEBAs, so are you asking if a plan can have more than one VEBA associated with it? In regards to this dollar bank, VEBAs cannot have individual accounts for participants to access. Were you suggesting this be done? Don Levit