Don Levit

John: I think your counsel is right on. I have found a few items that may be of interest. In Treasury Decision 7750, it states under (b) Disproportionate benefits - The payment to any member of disproportionate benefits, where such payment is not pursuant to objective and nondiscriminatory standards, will not be considered a benefit within the meaning of 1.501©(9)-3 even though the benefit otherwise is one of the types permitted by that section. The payment to similarly situated employees of benefits that differ in kind or amount will constitute prohibited inurement unless the difference can be justified on the basis of objective and reasonable standards. When you wrote an euivalent amount of retiree health benefits for each month of covered service, are they considering past service? If so, This would not seem to be an objective standard. And, though not directly, PLR 200638027 may be helpful. "The post retirement medical benefit is being funded proportionate to salary. Because medical expenses potentially effect all persons equally, there is no objective or nondiscriminatory basis for providing a larger medical benefit to highly compensated persons. Thus, this arrangement would be in violation of section 1.501©(9)-4(b), because medical benefits that are provided unequally in favor of highly compensated personnel are disproportionate per se." However, if employees are contributing to the costs, the discrimination issue is viewed a bit differently. Back to Treasury Decision 7750: "Generally permissible restrictions or conditions. In general the following restrictions will not be considered to be inconsistent with 1.501©(9)-2(a)(i) or 1.501©(9)-4(b) (D) The allowance of benefits only on condition that a member or recipient contribute to the cost of such benefits, or the allowance of different benefits based solely on differences in contributions, provided that those making equal contributions are entitled to comparable benefits." Don Levit

SoCalActuary: Where in the Medicare law is lifetime benefits promised? Benefits are promised for the next year. That is why benefits extending beyond a year are not considered liabilities. Don Levit

SoCalActuary: In Medicare, what is the wealth that is being transferred comprised of? I say it is an intangible asset, which is the goodwill of the U.S. Do you agree? Is that type of wealth really secure? You are correct that SS is window dressing so that it seems like you have earned benefits, due to your payment of payroll taxes. Legally, we know that SS is a system in which citizen payments are mandatory, yet the benefits from the "trust fund" are optional. In fact, according to the GASAB, the accounting counsel for the federal government, benefits paid from the trust fund can be viewed as the federal government actually providing a windfall to the taxpayers - paying us a benefit we don't deserve. mjb: You ask an excellent question about expanding Medicare. I would say that social insurance is even more risky than the standard ponzi scheme, in that the wealth that is accruing is government debt, which is an intangible asset, the goodwill of the U.S. Other than God, the U.S. government can also create something out of nothing, wealth from debt. Don Levit

mjb: So you do agree that there are no assets in the Social Security trust funds, for the dollars are strictly in a notional account-like fund? And, do you agree that the federal government has spent the payroll taxes on non Social Security (and Medicare) expenses? And, do you agree that this combination of issuing government debt and spending the payroll taxes on other general expenses merely doubles the debt that is actually owed to the taxpayers? And, do you agree that by borrowing from the Treasury to pay Medicare benefits that an additional debt has been created? If so, do you agree with the government's accounting that when Medicare borrows from the Treasury (the government borrows from itself), that a corresponding asset is created, thus providing a wash, for accounting purposes? Don Levit

George: Thanks for the tip. This is a very interesting case. It went into great detail, including whether this particular law was one regulating insurance, and, thus, preempt from ERISA. The court decided this was not a law regulating insurance, even though it was part of the insurance code of New York. On a different topic of ERISA preemption, I found these excerpts interesting: "New York life insurance law 4216(d) is preempted when applied to employers who provide group insurance with a conversion privilege as part of an ERISA benefit plan. (it seems to suggest that insurers may have to do this). Notice must be given by either the insurer or the policyholder - here the employer." "But ERISA also contains elaborate provisions setting forth the contents and timing of notice of such information to be given to plan participants. 29USC Sections 1022, 1024(b)." Don Levit

George: You are correct, except that vebaguru made the statement I am posing as a question to him, in an earlier post. When I asked this same question at that time, i did not get a satisfactory answer. I thought this was a good opportunity to pose the question once again. Don Levit

vebaguru: I understood your analysis of number 4, if the employer takes deductions higher than 419 and 419A, that the reserve would still be tax-free. If so, aree you changing your stance now? Don Levit

David: Thanks for providing the particular section of ERISA. mjb: Can you provide us your understanding of the Social Surplus surplus, other than as an accounting entry? Do you believe there is any substance behind the notional surplus account? Don Levit

George: Can you provide a few of the facts and circumstances, and how a bit of a difference could have swung the decision the other way? Or, better yet, can you or tauriffic provide us the link for the case? Don Levit

In regards to whether or not Obama can make this promise, I found an interesting statement in a recent paper from the PBGC. On Page 32, it states, "ERISA provides the U.S. government is not liable for any obligation or liability incurred by PBGC. Go to: http://www.pbgc.gov/docs/2008_annual_report.pdf. Don Levit

Leevena: If the employee drops the health insurance, yet continues to make deductions: 1. Who do the deductions go to? 2. Can the employee get his deductions back at the beginning of next year? Don Levit

Matthew: I just came across information that may be helpful. In 29CFR 2590.732©(5) it states under Supplemental Benefits, (i) The following benefits are excepted only if they are provided under a separate policy, certificate, or contract of insurance -- (A) Medicare supplemental health insurance (as defined under section 1882 (g)(1) of the Social Security Act; also known as Medigap or Medsup insurance; © Similar supplemental coverage provided to coverage under a group health plan. To be similar supplemental coverage, the coverage must be specifically designed to fill gaps in primary coverage, such as coinsurance or deductibles. Similar supplemental coverage does not include coverage that becomes secondary or supplemental under only a coordination of benefits provision. (ii) The rules of this paragraph are illustrated by the following example: Example. (i) An employer sponsors a group health plan that provides coverage for both active employees and retirees. The coverage for retirees supplements benefits provided by Medicare, but does not meet the requirements for a supplemental policy under section 1882 (g)(1) of the Social Security Act. (ii) Conclusion. The coverage provided to retirees does not meet the definition of supplemental excepted benefits under this paragraph because the coverage is not Medicare supplemental insurance as defined under section 1882(g)(1) of the Social Security Act, is not a TRICARE supplemental program, and is not supplemental to coverage provided under a group health plan. Don Levit

In determining the proper reserves for long-term disability benefits, the allowable reserve includes amounts for claims estimated to have been incurred but which have not yet been reported, and those claims that have been reported but have not been paid. Incurred but unpaid claims include the present value of a future stream of payments under a claim, using reasonable actuarial assumptions. H.R. Conf. Rep.861, reprinted in 1984-3 CB (vol.2) 410. Yes, overfunding is a huge, legitimate concern. Thus, we have the unrelated business income tax. To dramatize its concern, the IRS has several papers dedicated to this tax. Can you be more specific about the allegations of overfunding? Don Levit

This case may be of some help. The converted policy was medical insurance, but still applicable, imo. Go to: http://caselaw.lp.findlaw.com/data2/circs/9th/9917437p.pdf. Don Levit

Folks: This is an interesting discussion. While not dealing with conversion rights of a life policy, The Self-Compliance Tool for Part 7 of ERISA HIPAA and Other Health Care-Related Provisions speaks about various notice requirements, such as for preexisting condition exclusions and certificates of creditable coverage. In general, these requirements are up to the plan to follow through on. However, there is a Special Accountability Rule for Insured Plans. "Under a special accountability rule in ERISA section 701(e)(1)© and 29 CFR 2590.701-5(a)(1)(iii), a health insurance issuer, rather than the plan, may be responsible for providing certificates of creditable coverage by virtue of an agreement between the two that makes the issuer responsible. In this case, the issuer, but not the plan, violates the certificate requirements of section 701 (e) if a certificate is not provided (An agreement with a TPA that is not insuring benefits will not transfer responsibility from the plan). Despite this special accountability rule other responsibilities, such as a plan administrator's duty to monitor compliance with a contract, remain unaffected." "Under 29CFR2590.701-5(a)(2)(ii), plans and issuers must furnish an automatic certificate of creditable coverage" in various COBRA situations. So, as my rabbi says, "You're both right!" Shalom, Don Levit

John: When you say that FICA taxes apply to the shareholder-employee, is that because of Sec. 3121(a)(2), which states wages shall not include "the amount of any payment made to or on behalf of any employee or any of his dependents under a plan or system established by an employer which makes provisions for his employees generally and their dependents, or for a class or classes of his employees and their dependents, for medical or hospitalization expenses in connection with sickness or accident disability?" Is this due to only the particular shareholder-employee being covered, rather than a bona fide class of employees? Also, is the same FICA tax exclusion not available for the self-employed sole proprietor? Don Levit

Folks: I just read an interesting case from the U.S. Court of Federal Claims, CNG Transmission Management VEBA v. the United States. It provides a good explanation of UBIT, and contrasts its decision with the Sherwin-Williams case discussed in this thread. Go to: http://www.uscfc.uscourts.gov/sites/defaul...H.CNG102108.pdf. Don Levit

John: Don't be such a scrooge. Why provide positive reinforcement? Don Levit

Matthew: Thanks for providing the link to the IRS paper on VEBAs. On the page discussing Multiple Employer Trusts, it states "Employees of one or more employers engaged in the same line of business in the same geographic locale share an employment related common bond. However, the geographic locale limitation effectively denies exemption to national or statewide multiple employer trusts, unless they are established pursuant to a collective bargaining agrteement. This provision is intended to prevent IRC 501©(9) from being used as a tax exempt vehicle for offering insurance products to unrelated individuals scattered throughout the country that would then undermine those provisions of the IRC concerning insurance companies. In addition, where an organization such as a national trade association or business league exempt under 501©(6) operates a group insurance program for its members, the organization is engaged in unrelated trade or business. To allow trade organizations to provide insurance benefits through an IRC 501©(9) organization would facilitate circumvention of the unrelated trade or business income tax otherwise applicable in this situation." Can we infer from this excerpt that "to undermine those provisions of the IRC concerning insurance companies," that the multiple employer VEBA is not intended to act as a commercial insurance company? And, that "circumvention of the unrelated trade or business income tax otherwise applicable in this situation," means that by acting like a commercial insurer, you will incur UBIT, because you are a non commercial insurer? Don Levit

mjb: We are talking about 2 distinct issues. I was referring to kosher food, which transforms an ordinary meal into a spiritual experience. It is behavior therapy for the spiritually enlightened. What you are referring to is thinking therapy, which, apparently occurs first before the act. Judaism is more akin to behavior therapy, while Christianity is more like psychotherapy. Seems like Madoff could use a dose of both. I doubt he is an observant Jew; probably eats sharks for dinner. Shalom, Don Levit

In regards to fish who are predators and bottom feeders, isn't it comforting to know that they are not kosher? Shalom, Don Levit

mjb: Your concerns are certainly appropriate. Yes, Social Security and Medicare are accounted for on a cash basis, similar to the PBGC. "According to the FASAB, the accounting advisor for the federal government, in a paper entitled Accounting For Social Insurance, Revised," written 2 years ago, the present view of those 2 benefits is that "expenses and liabilities are incurred for social insurance when the amount of benefit is due and payable. Hence, benefits beyond the due and payable amount are not present obligations of the Government and should not be expenses or liabilities in the current period." It further states "The liability for all social benefits should be recognized only when all eligibility criteria have been satisfied, which means that the liability generally equals the next payment." And, "The U.S. Supreme Court has affirmed Congress' right to modify future federal benefits in any manner at any time. So, because these future benefits can be modified or eliminated unilaterally by the entity which would pay them, there is no legal obligation for future social insurance benefits beyond amounts that are due and payable." Don Levit

Andy: AS you probably know, most of the balance sheet items for the federal government are due to cash-based accounting. Therefore, as a recent GAO report stated, "Insurance programs with long-term commitments, such as the PBGC, may distort the budget's fiscal balance by looking like revenue generators when premiums exceed benefits and administrative expenses, because the program's long-term expected costs are not reported. Generally, cost is only recognized in the budget when claims are paid rather than when the commitment is made. PBGC's current cash collections can exceed current cash payments, regardless of the expected long-term cost to the government." For the full report, go to: http://www.gao.gov/new.items/d081162t.pdf. Don Levit

Are you asking why they are considered employer contributions? If so, this is done to provide the maximum tax advantage. Don Levit

Thanks a lot, Janet. Don Levit