Don Levit

vebaguru: Can you provide another link to that case. I could not access it on my laptop. Even better, can you cite the pertinent excerpts? And, why don't you respond to my previous citations? Don Levit

One other source which succinctly describes UBIT for VEBAs can be found at: http://www.irs.gov/irm/part7/ch10s12.html. Scroll down to 7.25.9.10 Unrelated Business Taxable Income of VEBAs. Don Levit

George: Thanks for those 2 links. They were very helpful. TAM 199932050 has a couple of statements which reiterate what your links provided. "Exempt function income includes all income which is set aside for the payment of life, sick, accident, or other benefits including reasonable costs of administration directly connected with such purposes." "A set aside for the payment of life, sick, accident, or other benefits may be taken into account only to the extent that such set-aside does not result in an amount of assets set aside in excess of the account limit determined under section 419A." "The UBIT of a VEBA will equal the lesser of the income of the VEBA or the excess of the total amount set aside over the qualified asset account limit.' Thus, if the excess of the total amount set aside is zero, the UBIT is zero. Don Levit

vebaguru: What cases are you referring to? How would you define exempt function income in a VEBA? What tax-free income is not subject to UBIT? Don Levit

I am not very familiar with 501©(5) organizations, but, according to the IRS manual, accident and health benefits can be provided as a way to better the members' lives. However, these benefits are not to be the primary function of a 501©(5). I am wondering if the benefits can even be legally provided through a 501©(5) directly, particularly if any self-funding is involved? Don Levit

vebaguru: While you are correct that the accumulation would be subject to UBIT, would there be an actual tax owed, if the funding target is satisfied and the reserve is actuarially determined? Don Levit

In addition, 403(b)(12) Non discrimination requirements For purposes of (1)(D), a plan meets the nondiscrimination requirements of this paragraph if (ii) all employees of the organization may elect to have the employer make contributions of more than $200 pursuant to a salary reduction agreement if any employee of the organization may elect to have the organization make contributions for such contracts pursuant to such agreement. For purposes of clause (ii), there may be excluded any employee who is a participant in an eligible deferred compensation plan within the meaning of section 457. Don Levit

I am not real acquainted with this area, bit I did find TAM 200305006 very illuminating. Don Levit

I have read over several IRS documents, and they seem to be very confusing in regards to differentiating between employer and employee contributions. In addition, some contributions are excluded from income tax and FUTA, but not FICA. Does this address any of your concerns? Don Levit

Sieve: I agree that plan assets are easier to determine if we look at employee contributions versus employer contributions. The case I provided had to do with employer and employee contributions for a self-funded health benefits plan. As you know, employer contributions are not required to be placed in trust for health benefits. Rather, the benefits can simply be paid from the employer's general assets. I thought it was interesting that the decision found the employer to be liable for the unpaid contributions, including the unpaid employer contributions. And, we aren't even alluding to retirement benefits, in which a trust must be established. What I am wondering is whether or not the employees were expecting the retirement benefits to be funded at the time? I think that may also have a bearing on the employer's liability. Don Levit

I agree with everything that has been said, but I do have a little to add. In Pfahler, Strine, Ramsey and Devan v. National Latex Products, U.S. Court of Appeals, 6th circuit, Dec. 14, 2007 the case dealt with an improperly funded health plan. It included both employer and employee contributions. The suit involved unpaid employee medical expenses. One of the questions dealt with whether or not the trustees had fiduciary responsibilities to fully fund the plan (employer and employee contributions). "A misrepresentation will be deemed material if there is a substantial likelihood it would mislead a reasonable employee in making an adequately informed decision. A promise that all claims would be paid would plainly affect a beneficiary's decision as to whether to seek health care." "Because ERISA does not require an employer to fund a plan, a plan fiduciary is not duty-bound to bring suit to collect contributions from an employer unless an employer is bound contractually to make those contributions." Don Levit

LRDG: A cafeteria plan can cover former employees, which current employees who eventually retire would be. In addition, Sec. 125 (2)(D) states an exception to deferred compensation for HSAs. Don Levit

One of the reasons for the HRA not being subject to cafeteria plan rules is because of the carryover provision (in my humble opinion). What you may want to look at is HSAs funded by a cafeteria plan. HSAs are not considered deferred compensation. Don Levit

steelerfan: It may be helpful for us to have the context in which this excerpt is provided. I don't understand how a qualified reserve would not be not tax-exempt. I also don't understand why the contributions to a qualified reserve would not be tax deductible. I agree that only exempt function income escapes taxation. Section 419A©(2) provides the account limit of a reserve for post-retirement medical benefits. If the reserve is appropriate, Section 1.512(a)-5T, Q&A-4(a) states that income that is either directly or indirectly attributable to the existing reserve will not be treated as UBIT. Because earnings of the existing reserve are directly attributable to the existing reserve, such earnings shall not be treated as UBIT. Furthermore, earnings on such earnings are indirectly attributable to the existing reserve and also should not be treated as UBIT. To help clarify that the appropriate reserve for post-retirement medical benefits is calculated separately from the reserve for current benefits, we look at Treasury regulation 1.512(a)-5T under Q&A-3. The amounts set aside in a VEBA to provide for the payment of life, sick, accident or other benefits may not be taken into account for purposes of determining exempt function income to the extent that such amounts exceed the qualified asset account limit under section 419A©. In calculating the qualified asset account limit FOR THIS PURPOSE, a reserve for post-retirement medical benefits is not to be taken into account. Don Levit

Sieve: Very funny. Yes, there are indeed smart and stupid people, but I believe in Will Rogers' statement about ignorance could substitute words like stupid or smart: We are all ignorant, just on different matters. By the way, do you know the difference between genius and stipidity? Genius has its limits. Don Levit

George: You're right. I did take a detour, but you led me back to the issue at hand: there is a mixture of federal and state characteristics in VEBAs, and both should be honored. Don Levit

George: The point I am trying to make is that there are federal characteristics to state-regulated VEBAs. These should be recognized and dealt with appropriately. If not, then their federal tax-exempt status could be jeopardized. Don Levit

vebaguru: You are correct about their being subject to GASB, but that is not mandatory. States don't have to compy with GASB standards. Texas is one unfortunate example. Don Levit

vebaguru: VEBAs are a creation of federal law, passed by Congress in 1928. Yes, states have the right to regulate non-profits. And, states do have full authority to regulate self-funded multiple-employer VEBAs. I am saying that, in my opinion, it would be prudent to regulate them in relation to their federal characteristics, and in particular, because they are not in the "business of insurance," as are commercial insurers. State regulation of VEBAs will not cause them to be taxable, but it may cause them to have excessive set-asides, which result in unnecessary UBIT. You may be correct in your prediction about state regulators. They certainly have the legal authority to regulate VEBAs as if they were United Health Care. That reminds me of the difference between genius and stupidity: genius has its limits. Don Levit

It seems as if the employer is not willing to budge on this change of election. Assuming that this is a significant change in premium, benefits, etc., and that the employee can opt out, is the employer precluded by law from providing the 125 plan for Susan's individual policy, or is it merely up to the employer's discretion to do so? Don Levit

John: Thanks for your reply. I believe that VEBAs provide opportunities for unique products due to federal regulations. I have cited those regulations in describing non commercial entities, including insurers. In addition, the VEBA itself is a federal entity. This does not mean that states are unable to regulate multiple employer VEBAs. As you know, the 1983 MEWA Amendment provides for states to use any and all laws to regulate self-funded MEWAs. Several states regulate self-funded MEWAs, as if they were full-blown commercial insurers. While they have the right to do so, they also have the opportunity, in my opinion, to regulate self-funded multiple employer VEBAs in relation to the federal constraints imposed on VEBAs. For example, we are discussing in this thread how UBIT applies to VEBAs. We know if the set-aside is excessive, that UBIT results. Well, if states which regulated a self-funded VEBA (multiple employer) as if it was a commercial insurer, the reserves set-aside would be excessive, according to federal law. Thus, substantial UBIT could be the result, providing lower benefits to the VEBA's participants (in violation of the trustee's fiduciary responsibilities). This is one example how regulating self-funded VEBAs, by the book, can prove to be detrimental to the participants. I am not looking for preemption here; rather I am looking for state regulation in the context of federal VEBA regulations. I also think the VEBA can fit in very well for small employers in the same line of business, across 3 contiguous states. Don Levit

Exec_Ben stated in #1 that while the contributions were deductible, the earnings were taxable. I am saying that would be incorrect, as long as the reserve was actually funded. If the set-aside limit is complied with, and thus, the contribution is deductible, no UBIT occurs. Don Levit

steelerfan: 512(a)(3)(E)(ii)(I) states Clause (i) shall not apply to any income attributable to an existing reserve for post-retirement medical or life insurance benefits. This is because clause (i) deals with current medical benefits, not post-retirement medical benefits. The set asides and, thus, the reserves are 2 distinct calculations for current medical benefits and post-retirement medical benefits. The account limit for post-retirement medical benefits is calculated over the current employees' working lives. Such a reserve may not be included in the account limit unless it is actually established and funded. If the set-asides are within the limits, no UBTI occurs in either the current medical benefits reserve, or the post-retirement medical benefits reserve. Don Levit

steelerfan: Can you cite the statute? Being subject to UBIT, and actually having to pay the tax are 2 distinct issues. If the amount set aside is within the guidelines, why would any of the interest need to have a tax? Don Levit

Exec_Ben: If the amount is deductible, how does one determine what portion of the interest is UBIT? I am under the impression that if the set-aside is appropriate, there is no UBIT. Can you cite any regilations which state all (or a portion of) a proper set aside is subject to UBIT? Don Levit