Don Levit

GMK: Isn't that fear what this great bailout is supposed to correct? Maybe I am a bit naive, but imo, this bailout does nothing to correct the behavior that caused this "crisis." It simply provides a holding vehicle, the government, in which short-term losses can be sustained, until the markets recover. Theoretically, that's what reserves are supposed to do. Don Levit

I am going to take a guess, based on my general knowledge. The figure used on a yearly basis is the amount the company actually paid, until the cap is reached. At that point, the amount yearly is the cap. Don Levit

You may want to look at: http://www.irs.gov/pub/irs-tege/epchd704.pdf. Specifically, look at pages 7-90 thru 7-103. Don Levit

Gary: If the deductible limit was properly calculated under 419A, then any growth in the amounts set aside is tax-free if used to pay post-retirement medical benefits. Any amounts remaining at the owner's death, as well as his dependents, must be forfeited, however. Don Levit

Lori: I am glad you brought up TAM 199932050. You are correct that it states ""Thus we conclude that to the extent interest on tax-exempt bonds is excluded from gross income under section 61 by reason of section 103, it is also excluded from gross income of a VEBA under section 512(a)(3). Therefore, such income is not included in the income of the VEBA under regulation 1.512(a)-5T. Q&A3(b)." The next paragraph states, "However, pursuant to that regulation, the value of the Taxpayer's assets, including amounts received as interest on tax-exempt bonds, would be included in the amount set aside to provide welfare benefits in determining the amount of the excess set-aside under the second prong of the test, which is the amount by which the amount set aside as of the close of the taxable year exceeds the VEBA's qualified asset account limit under sections 419 and 419A. Thus, if in any taxable year of the VEBA, the excess setaside is less than the VEBA's income, the amount of the excess setaside would generally be UBTI to the VEBA." Thus, we see how even non-taxable income can be (indirectly) subject to UBTI, if there is an excessive amount set aside. Don Levit

Gary: The contribution is dedictible and the earnings are non taxable, as long as used for the post-retirement benefits. Do not set up a VEBA, though. A one-person VEBA does not qualify for exemption. Revenue Ruling 85-199 Don Levit

George: You are partially correct. In addition, Gary asked "I am not sure why the contribution to a H&W plan trust would not be deductible if it is for a resrerve for post retirement medical expenses and the amount contributed is less than the amount under 419? Vebaguru did not address that question. I assumed he wanted Gary to look through those 2 sources for an answer. By the way, I can't remember one time in which you and vebaguru did not support each other's answers. How do you know what vebaguru meant... unless... No, that can't be true. Don Levit

George: Good point. Excessive income is not totally accurate. What I meant to say is income generated by an excessive amount set aside, an amount set aside exceeding section 419A. Don Levit

vebaguru: And what specific section of the code supports your interpretation? Are you saying that amounts that exceed the 419A account limit can be used to pay for qualified benefits of a VEBA, and not be subject to UBTI, if invested in non-taxable vehicles? If yes or no, please supply the appropriate code section. We are trying to learn here, together. Don Levit

vebaguru: Are you saying you can be more specific, but it will cost us? Don Levit

vebaguru: So, are we to ask you offline the specific sections, and you will provide the answer for a fee? Don Levit

vebaguru: I didn't understand your answer. Can you provide an excerpt from a specific code section to elucidate youir point? Don Levit

Lori: Thanks for your reply. I am asking about specific UBTI consequences, not whether the amounts are subject to income taxes. When you wrote that a VEBA has a much broader and more inclusive UBTI base, I take that to mean that unless the income is specifically excluded from UBTI, it is subject to potential UBTI. I understand that a VEBA does get passive income exclusions, if the income is derived from an appropriate amount set aside according to section 419A. If the set aside is excessive, the income could be subject to UBTI. Specifically, according to Treasury Regulation 1.512(b), it states, "The UBTI of a VEBA will equal the lesser of two amounts: the income of the VEBA or the excess of the total amount set aside as of the close of the taxable year. Thus, if there is an excessive amount set aside, the income could be subject to UBTI, even if the income is income tax exempt. At least, that's how I read it. Don Levit

vebaguru: You wrote that excess earnings are not taxable, if invested in tax-exempt vehicles. Then how would you explain Treasury Regulation 1.512(b), which states "the unrelated business taxable income of a VEBA will equal the lesser of two amounts: the income of the VEBA; or the excess of the total amount set aside ." How do you have excessive income? One would think by having an excessive amount set aside. If that is the case, then the income of the VEBA, even if non taxable, is subject to UBTI, if the income is less than the excessive amount set aside. Don Levit

vebaguru: What specifically in those 2 publications support your theory? Don Levit

vebaguru: What specific excerpts in the case and code section you provided supports the concept of VEBAs using life insurance cash values? What specific DOL regulations support the same? Don Levit

vebaguru: Are the excess earnings ever taxable as UBTI in a VEBA for a private employer, even if the earnings are tax-exempt? I say yes; you seem to say no. I can provide the IRS citation. Don Levit

vebaguru wrote "if the insurance policy is surrendered the gain is realized and taxed." I agree with that statement. How would the amount be taxed, if the cash value was withdrawn or borrowed against, and the policy was still kept intact? Or, are you implying that is not an option. I have 2 papers from the IRS which state that option is not available. Vebaguru wrote "UBTI includes plan earnings on medical accounts." Where in the code is that written? My understanding is that if the amount contibuted for medical expenses is deductible, and thus, within the amounts allowed to be set aside, any growth from those contributions is not subject to UBTI. I can provide the citations if you need them. Don Levit

Lori: Is it possible that tax-exempt income, say from life insurance, could be subject to UBIT in a VEBA? Don Levit

vebaguru: Thanks for your reply. Sounds like your answer would differ if the plan was not maintained by a municipal government. That is where my question is directed. Would these earnings for excessive contributions be tax exempt, even if invested in tax-exempt vehicles? Don Levit

vebaguru: Your response stating that deductions are limited to the amounts needed to fund the current benefits over the working lifetimes of the participants is correct. You have stated before that additional funding can be made, but it will not be deductible. Will the earnings of that additional funding be taxable? Don Levit

George: You are right on. You must be speaking the truth, since we both agree. In fact, the general lack of concern about our public debts is due to this lack of knowledge you wrote about. By the way, is the book you are referring to "Amusing Ourselves to Death," by Neil Postman? Don Levit

masteff: I agree with you completely. It is interesting how you compute the total debt in proportion to the total current revenue. Most economists I have seen quoted refer to the current debt as a percentage of the current GDP, which looks to be reasonable. Your proportion is much more accurate, imo. By the way, it is interesting to note that of the public debt total, about half, I believe, is intragovernmental debt, that is debt owed by the trust funds to the treasury. The CBO came out with a paper recently which, in effect, stated that intragovernmental debt was of much less concern than the other portion of the debt, that owed to individuals (investors). Apparently, debt owed to the citizens, collectively, is of less concern than debt owed to specific people. Don Levit

HarborLights: I am curious if your particular state limits 115 investments to cash-type investments. It doesn't appear to be part of the federal code. Upon termination of the VEBA, any assets remaining after satisfying all liabilities, are applied to provide other benefits , as long as they are not applied disproportionatly. The amount distributed can be set by a collective bargaining agreement , or on the basis of objective and reasonable standards which do not result in unequal payments to similarly situated members. Treas. Reg. 1.501©(9)-4(d). Don Levit

The Final 409A regulations state, "Most of the comments with respect to amounts that are payable due to the death of a service provider related to whether a beneficiary of the service provider could be given the opportunity to elect a time and form of payment under a plan without violating section 409A. The final regulations clarify that elections with respect to the time and form of payment to a beneficiary are subject to the general rules governing subsequent deferrals and accelerated payments, including elections by either the service provider or the beneficiary (with an exception for amounts payable under a domestic relations order). " "Commentators requested that beneficiaries be permitted a limited period of time in which to change the time and form of payment withour being subject to the subsequent deferral and anti-acceleration provisions. The Treasury Department and the IRS do not believe that the statutory language supports this type of late deferral election or payment acceleration. Accordingly, these suggestions are not adopted in the final regulations." Don Levit