Don Levit

GBurns: Vesting is definitely an issue, as regards to the carryovers. I see the carryovers as very similar to deferred compensation. Deferred compensation, generally, is deductible only when the benefits are paid, not when they are funded. Without vesting, I do not see the benefits as irrevocably available to the employee; therefore, it is not deductible. Don Levit

GBurns make an interesting case here for deduction as a business expense versus a medical expense. I can see how the IRS could view this either way. If the IRS considered this a medical expense, how would they view the deductibility of the carryovers? Would this deductibility depend on whether the employee is vested or not? Don Levit

GBurns: I agree with everything you said. However, the general rule for deductibility is that the medical expense must be incurred. With the HRA, we have a unique situation with the carryover provision. The original question, way back at the top, had to do with deducting the HRA contributions at the beginning of the year (even if not all of that year's contribution was used for medical expenses). Where in the HRA regulation, or in the Internal Revenue Code, is a current deduction allowed for future medical expenses (as it applies to this situation, not retiree health plans, etc.). Don Levit

This discussion has nothing to do with HRAs. Assuming a trust is set up for a funded HRA, the deductions are limited to current year's expenses. You cannot prefund future years' medical expenses with an HRA. You can do so with a VEBA, as I am sure both GBurns and VEBAGURU are aware. When VEBAGURU wrote that current contributions for future medical benefits are deductible under 419A, he was correct for certain situations, such as a 10 or more employer trust. This cannot be done with an HRA trust, however. Don Levit

McGann v H&H Music c. (5th Circuit, 1991). The plan sponsor placed a cap on the lifetime benefits under its health plan to reduce costs associated with AIDS treatment. I believe the cap was $10,000, while other benefits had a much higher annual and lifetime maximums. This retroactive modification was deemed legal, for it affected all participants in the plan, and not just those under treatment for AIDS. If you need help finding the case, let me know. Miscommunication of benefits would fall under a different set of rules. Don Levit

You are asking a lot of questions. I will tackle the first one. I understand that employers can provide inside limits for various illnesses, as long as the limits apply to all employees. The change can be made once a year, when the employer does his typical plan review. Don Levit

The active employer-employee relationship need not exist for VEBA payments. Former employees (retired, disabled, left, or terminated) are eligible for benefits. Don Levit

I am involved on another chat group sponsored by the Galen Institute. All the HRA "experts" spoke of the HRA being a notional account, of which no specific funds are set aside. Today, I read a paper on the CCH web site which stated, "Unless the HRA is unfunded, that is, the benefits are paid out of the general assets of the employer, the funds become plan assets subject to ERISA and must be held in trust, pursuant to a written trust instrument, with an annual independent audit requirement." If accurate, this statement leads me to beloeve that HRAs can be funded, or unfunded. If funded, the deduction is available. If paid out of general assets, no dduction is available until the expense is actually paid. VEBAGURU, I read over sections 419 and 419A, and saw nothing about a 3-month reserve. Can you point out where that may be in those sections? Don Levit

I understand an HRA to be considered unfunded, even if specific funds are set aside. Deductions are not available until medical expenses are actually incurred. Why are you mentioning section 419, VEBAGURU? That section refers to multiple employer plans with trusts set up for current year's and future years' funding. Why would an employer prefund an HRA into a trust, if the deduction was not available, until the expense was incurred? Don Levit

Thanks for all your responses. I have been out of town since my posting, so I finally get a chance to respond. Let me amend my question a bit. Can the employer set up a group HRA that funds the first $25,000 of expenses for all employees and their spouses and dependents, per year. Reinsurance is then purchased which pays benefits beyond the $25,000 of family benefits, per year. I have designed a plan which enables the employees to accrue $10,000-$15,000 of benefits per year. So, those with few or no claims could be able to accrue the $25,000 in year 2, leaving no exposure for the employer beginning in year 3. (This is an employee-pay-all plan). The goal is to have only those employees with large family expenses in the first 2 years as a liability for the employer's HRA in year 3. If we assume that 7% of the employee census will not be able to accrue the full $25,000 over 2 years, the employer will have a relatively low liability for his employees. The employees with low claims benefit their employer by being able to cover the first $25,000 of expenses. By having a much higher deductible under their group plan, the employees are able to recoup a good percentage of the group premium. What do you think? Don Levit

Would it be possible for an employer to use an HRA to fund the gap between the HSA balance and the catastrophic deductible? Assume an employer believes that 7% of his employees will exceed their deductibles. A group HRA is set up to fund this gap, which could be easily determined once a year. Reinsurance is bought to fund the gaps in years which exceed this 7% estimate. Also, for COBRA purposes, could the former employee continue to self fund his HRA? If so, how would that amount be determined? Don Levit

Your question brought up a sales idea. While not addressing your question specifically, I started thinking of using an HRA as a way to fund the gap between an HSA balance and the deductible. Assume an employer believes that 7% of his employees will exceed the deductible on his catastrophic policy. The HRA is set up to fund this difference. Reinsurance is bought for those years, in which the 7% is exceeded. And, with longer-term employees , most or all of this gap could be filled. Any discrimination issues here? Don Levit

GBurns: With an employee pay all VEBA, benefits can vary in proportion to contributions paid. You are correct about the availability and eligibility of benefits - they must be equal (assuming all employees madethe same contributions). All employees are eligible for group plans 1 and 2. However, only group plan 1 is funded through the VEBA. And, recall, that the "V" in VEBA stands for voluntary. While all are eligible, only those who volunteer would qualify for group plan 1. Don Levit

I was not thinking of having a 125 plan. What about an employee-pay-all VEBA, in which premiums are paid after tax for group plan 1, which is primary? Group plan number 2 is your "traditional" group plan, which would be secondary. Plan 2's benefits would start where plan 1's benefits expire, for the year. For example, one family may have $10,000 of benefits undrer plan 1; its deductible is $10,000 for plan 2. A second family may have $25,000 of benefits under plan 1; the deductible for plan 2 is $25,000. Employers can have more than one group plan, each with separate COBRA regulations. Part of being "similarly situated" is having similar plans, which includes deductibles. If the deductibles vary, the premiums can vary as well. Don Levit

Similarly situated employees cannot be charged different rates under one group plan. But, they could be charged different rates, if another policy was primary. For example, if an employee had a policy with a $25,000 benefit per year, his deductible under his group plan could be raised to $25,000. Don Levit

GBurns wrote about the employer allowing you to disenroll. If the questioner decided to buy an individual policy (and was double covered until the next open enrollment period), he could decide not to participate in the group plan, right? Don Levit

Excellent question, Brenda. I will give you my opinion. Others are certainly welcome to critique it. DOL Advisory Opinion 2003-17A may be helpful. The DOL said a group of employers is a bona fide group or association if under the facts and circumstances, the employers meet 2 tests: 1. They have a commonality of interests. 2. They exercise control over the plan, both in form and in substance. If the employers are in the same line of business and control and direct the MEWA, your plan would be one ERISA plan. Therefore, the COBRA for 20 or more employees would apply. If not, it would have an ERISA plan for each employer. So, the COBRA provisions for the 20 employee threshold would apply for each employer. Don Levit

This is a fascinating question, and I will do some research on it. I would agree with Papogi at this point. In a different scenario, let's say the employer provided a longer COBRA extension than the minimum of 18, 29, or 36 months. Let's assume the employer provided a 10 year extension. Could the employer reduce the extension period to the minimum at any time? Don Levit

George: Thanks for your reply. Of course, I believe that states have the right to regulate self funded MEWAs. The difference is in the degree of regulation. For example, WA state recently passed a law allowing self funded MEWAs to exist. Before the law was passed, only fully funded MEWAs could be offered in WA. I believe the prohibiting of self funded MEWAs was illegal, for ERISA specifically provides for such an entity. CA forbids any new MEWAs from forming. This 9 year old law is illegal, because the state law is inconsistent with ERISA. Back to WA state. My interest lies in introducing a plan I have designed to be offered by multiple employer VEBAs in the state. My hope is that competing plans will be introduced to invigorate the market, and force the commercial insurers to offer different plans. Under the MEWA law for WA, a MEWA must meet 2 requirements (along with several others that I believe are reasonable). The 2 "unreasonable" requirements are that the MEWA must have $2million in surplus, and must be in existence for 10 years. If you have questions about these 2 requirements, I will respond as to why I believe them to be unreasonable. My "negotiations" with the WA OIC are continuing. My court cases focus mostly on ERISA preemption issues. The VEBA is a federal entity which states, I believe, can regulate, but cannot eliminate. In addition, the regulation must be reasonable to primarily ensure timely payments of claims. Don Levit

VEBAGURU: Before you jump to the conclusion I am mistaken, I am willing and able to discuss this issue with you. I have many court cases to back my premise, and have communicated extensively with attorneys who disagree with me. Not one has mentioned the 10th amendment. You (or anyone else) can E-mail me at donaldlevit@aol.com. This is probably best to discuss offline, although if the demand is there, I will be happy to do so online. Don Levit

Thanks, George, for supplying the article entitled, MEWA Mindset. Two comments. First, it stated the DOL also gives states authority to regulate MEWAs to any degree not inconsistent with Title 1 of ERISA. So, 90% of the nitty-gritty regulatory authority over MEWAs including prohibiting them from existing rests with the states. I disagree that states have the authority to ban self funded MEWAs. First, self funded MEWAs are expressly allowed for in ERISA. To disallow them would be inconsistent with ERISA. Second, in 1983, Congress could have disallowed self funded MEWAs from existing. If you read the section in 514, you will see that the primary purpose of state regulation of MEWAs was to ensure timely payments were made for claims. Prohibition is quite a stretch from legal regulation. The article also states, VEBA in a discussion about ERISA status or regulation is irrelevant. This is true if the VEBA is a single employer, but not a multiple employer. Beacuse VEBAs are mentioned in sections 501 and 419, this federal entity must be allowed to exist in the states, because of the supremacy clause. Don Levit

Go to naic.org. Type in mewa under search for the naic site. One of the first choices is a list of state contacts for MEWAs. The rep. should be able to give you the appropriate code sections. You can contact me, offline, if you wish, to get my "take" on state v. federal regulation of MEWAs. Don Levit

Are you looking at one state in particular? I have researched several states by simply going to their insurance codes. They are usually broken down by articles, with the headings of each article listed. Can you be a bit more specific of what information you are needing? Don Levit

Going back to the original question of 2 HDHPs and one HSA. Would this scenario be kosher? Plan A is a family plan with an HSA, a $10,000 deductible, $50,000 of annual benefits and a $1million lifetime maximum. Plan B has the same features without an HSA. Plan A is primary, plan B is secondary. Don Levit

I remember reading about that case, and will only provide material from my sketchy recollection. The plan was an ERISA plan, and ERISA has exclusive rights regarding claims disputes. By that, I mean that no damages can be awarded above the amount of the claim that was denied. This decision was seen as an eligibility question, rather than a medical decision by the HMO. If I remember correctly, the physician was not an employee of the HMO, so there was no conflict of interest. If there was a conflict of interest, the decision may have been viewed as one of mixed eligibility and medical necessity, thus allowing potentially extra damages, in addition to the claim denied. Don Levit