Don Levit

Folks: We were discussing recently whether an excecutive who was 85 years old could voluntarily waive his retirement benefits. Can someone direct me to that discussion? The reason I have an interest is a paper I am reading on whether employees who have been misclassified as independent contractors can sue for lost benefits, even though they signed up as (misclassified) independent contractors who voluntarily waived the benefits? In one of the IRS or DOL rulings, as I remember, it stated something to the effect that voluntarily waiving a contracted for retirement benefit was not an option for the employee. Don Levit

This web site has been so helpful to me over the years. The information is first-rate, and the message boards feels like a beloved community. Don Levit

GMK: I thought it was spelled "bonzai." Don Levit

George: The way the government "reserves" for liabilities for Social Security and Medicare (as well as for the PBGC) is through intragovernmental borrowing. The premiums (contributions) go to the Treasury, which then buys government bonds (IOUs). In effect, the government is borrowing from itself, yet an asset and a liability are created. This is a unique type of reserving and accounting, wouldn't you think? Don Levit

George: You are correct; I wasn't quite clear in my statement. It is not the forecasting that is improper. As we know, there is forecasting done for the PBGC, as well as for Social Security and Medicare. In fact, Social Security and Medicare are forecasted over 75 years! The problem with the cash-based budget is that "it does not adequately reflect the government's cost or the economic impact of federal insurance programs because costs generally are recognized when claims are paid rather than when the commitment is made. In any particular year, the cost of the government's insurance commitments may be understated or overstated, because the time between the receipt of program collections, the occurrence of an insured event, and the final payment of a claim can extend over many budget periods." Page 4. So, for example, PBGC can show a surplus in its trust fund, yet the commitments forecasted to be paid in the future could very well wipe out the funds. Because the legislation guaranteeing the benefits can be changed at any time, the liability is considered extended only for the current fiscal year. Thus, cash-based budgeting is the more official way of recognizing liabilities, even though it may not be the most accurate way of doing so. Don Levit

goldtpa: Excellent questions. One of the problems in forecasting is that the liabilities of the PBGC are not recognized until they are paid (a cash basis accounting). "Liabilities from terminated, undefunded pension plans taken over by PBGC are not recognized in the budget. Changes in the government's exposure to future claims due to the annual growth in insured benefits or program changes are not recognized in the budget as they occur." Go to: http://www.gao.gov/archive/1997/ai97016.pdf Page 171. Don Levit

Would the government actions as a potential trustee mirror its behavior as trustee of the Social Security and Medicare funds? Don Levit

I believe these services would be beyond those that a VEBA would provide, unless it is for its own participants. This looks more like services a for-profit commercial insurer would perform, which should take the income out of the exempt category. Don Levit

John: The incentive for the employee to increase his deductible would be to get a lower premium from the insurance company, due to its lower exposure. The savings can be used for other benefits. Don Levit

John: If an employee has a carryover HRA, is his deductible increased to the HRA balance? Don Levit

John: Good question. According to the HR Training Center, the "Choice Method" is one of the alternative coverage options. Here, the person is given the choice between electing COBRA or waiving COBRA in favor of some other, different coverage. Go to: http://www.hrtrainingcenter.com/readArticl...amp;RID=1010100. Don Levit

Everett: While it seems there are restrictions on using the cafeteria plan to pay for retiree health benefits, there is an opportunity to provide current benefits, that if not used, could be "rolled over" at a new employer, or could be utilized as a former employee, if self employed or retired. Former employees, whether "retired" or not, can continue as part of the VEBA. Don Levit

Everett: Thanks for the link. It does look like paying for retiree health insurance premiums would be disallowed. What about the scenario in which the VEBA provides current benefits, and upon leaving the employer, the employee takes the plan and continues paying premiums to the VEBA at the new employer, or simply retires, but continues paying premiums? Don Levit

Everett: Is there any way you could send me the link to the proposed regulations? George: I have always wondered why the "experts" say there are no ways to pre-fund retiree health liabilities through a VEBA, via employee contributions. We know there are no account limits for employee-pay-all VEBAs. Maybe the reason that is so, is because the contributions must be after-tax. I have read many times articles referring to employee contributions being after-tax. But, I have seen no guidance to that effect...until Everett provided the proposed regulation. If it has been repealed, then I think we're still in the ball game. If not, we can look to Penelope's post with after-tax employee contributions. Or, there is still the traditional employer contributions according to 419A. Are we in agreement that the interest accruing for proper set-asides for medical expenses are not subject to taxation, either through income tax or UBTI? In addition, are we in agreement that interest on individual medical savings accounts via after-tax employee contributions are not subject to income tax or UBTI? Don Levit

Everett: I can see where you would come to that conclusion. One could say that compensation is deferred, for the benefits are not payable in the current year. I believe there is also a basis for coming to the opposite conclusion. As you know, VEBAs are not intended to provide deferred compensation either. This is why profit-sharing and other retirement plans are forbidden, because these benefits are definitely payable, and accrue due to the passage of time. However, while retirement health benefits accrue over time, they are payable only upon a contingency, i.e., a medical claim. PLR 9323006 may be helpful. "School District D decided that instead of paying cash to its employees for their unused sick leave, it would contribute such amounts to a VEBA Trust to provide to its employees and retirees, supplemental medical benefits." "Rev. Rul. 75-539 provided that an employee, upon retirement could choose either to receive a cash payment for accumulated sick leave or to have such payment applied to the cost of such insurance. This ruling held that if the employer places the value of unused accumulated sick leave credits in escrow solely for the payment of healh insurance premiums and the plan provides that such credit may not in any event be received in cash by the employee, his spouse, or dependents , then such amounts are not constructively received by the employee." "An eligible or retiring employee has no choice regarding whether his employer will pay out his sick leave credit in cash or in supplemental health benefits." "D's contribution to the VEBA Trust is not taxable under the constructive receipt doctrine of section 451, and payments from the VEBA will not be taxable to the employee except to the extent it constitutes excess reimbursement under section 105(h)." If the employee makes payments for retiree health benefits, instead of receiving the money in salary, and he cannot receive this money other than by having a medical claim (no surrender value), and he never has constructive receipt, then why are not his contributions deductible under a cafeteria plan? Don Levit

Penelope: I would agree with you that the contributions are voluntary, and not mandatory. The question is would the benefits defer compensation, and thus not be available through section 125. One of the exceptions to deferred compensation in cafeteria plans is health savings accounts. Bear in mind that money in an HSA can be surrendered without having a medical expense, although a penalty may apply. With an individual savings account in a VEBA, the money can be used only for medical expenses. Those dollars remaining at death go back to the VEBA. So, it is my contention that dollars in a post-retirement medical savings account in a VEBA would also apply for an exception to the deferred compensation plans in a cafeteria plan, although not specifically enumerated. The growth of the medical savings account would also be excludable from tax, for they must be used only for medical expenses, and cannot be surrendered merely due to the passage of time. Don Levit

Everett: Why do you say that employees cannot fund a future retirement health benefit through a cafeteria plan? Is this because you believe that medical benefits are a form of deferred compensation? According to the IRS, VEBA funded cafeteria plan benefits are not necessarily inconsistent with exempt status under 501©(9). See http://www.irs.gov/irm/part7/ch10s12.html. Don Levit

Penelope: Are you asking whether the election to pay higher contributions is discrimimnatory? My off the cuff answer would be no, as long as benefits vary in direct proportion to contributions made. That is also assuming the contributions are considered employee contributions. Don Levit

If exempt function income is not taxable, then why is interest on a properly set aside reserve for medical expenses, taxable, as you previously asserted? Don Levit

LMPett: I see why the gross premium would be the same for people with different HRA balances, but the net premium for the person with a $5,000 HRA should be less than the net premium for a person with a $500 HRA. A $5,000 deductible would have a lower premium than a $500 deductible. Don Levit

401 Chaos: That is an excellent question. I cannot provide an answer, but I have a question regarding premiums and potential discrimination. Would it be discriminatory to offer different premiums based on the deductible one selects? For example, the employer offers one health insurance plan, with deductibles in $5,000 increments, up to $50,000? Don Levit

George: Could you provide a case which strongly suggests these violations? Don Levit

George: I agree with you. The major part of the responsibility lies with the insurer. The employer has a minor, tenuous relationship to the law, imo. Don Levit

John: ERISA does not address continuation of group life insurance, correct? If true, then how can ERISA preempt state law? Don Levit

vebaguru: I could not find in form 1041 where interest on the medical income from a proper set aside is taxable. Can you provide the specific parts of the form and the instructions which discuss this? Do you agree that exempt function income of a VEBA is not taxable, either through income taxes or UBTI? Referring to TAM 199932050 it states regarding the taxation of income from a set aside which abides by the 419 limit ""Section 1.512(a)-5T, Q&A-4(a) states that Code section 512(a)(3)(E)(ii)(I) provides that income that is either directly or indirectly attributable to the reserve in section 512 will not be treated as UBTI. Because earnings of the existing reserve are directly attributable to the existing reserve, such earnings shall not be treated as UBTI. Furthermore, earnings on such earnings are indirectly attributable to the existing reserve and also should not be treated as UBTI." So, where is the taxation of the earnings of a properly set aside reserve, either through income taxes or UBTI? Don Levit