Don Levit

I have already addressed the questions you posed. VEBAs are mentioned indirectly, for they are non commercial insurers. I already gave you the GCM material attesting to that fact. How can one think out of the box, if he is always going in circles? Don Levit

George: Excepted benefits are (1) those provided under a separate policy, certificate, or contract of insurance; or (2) are otherwise not an integral part of the medical plan. Examples would be limited-scope dental or vision benefits and other similar, limited benefits. ERISA 732©(1)and 733©(2). Don Levit

vebaguru: You are correct that the discussion about 501©(3), 501©(4), and 501(m) do not deal with VEBAs directly. But they do deal with the differences between commercial and non commercial insurers. Because VEBAs do not sell to the public, they are non commercial insurers. One characteristic of a non commercial insurer is not selling to the public. Another characteristic is selling products which the commercial insurers do not make available to the public. Thus, VEBAs have the opportunity of offering innovative plan designs. Don Levit

George: Good question. The cafeteria plan is a funding method. I believe the proposed cafeteria regs attest to that. Whether or not part of a cafeteria plan is an ERISA plan or not depends on the benefits. For example, if a benefit was one of the "excepted benefits," and the employee paid the premium, would that benefit be part of an ERISA plan? Don Levit

George: The practicality of adding an individual medical policy is certainly an issue, although, of course, the legality of such an arrangement is primary to its convenience. I agree with you that the proposed cafeteria regs will make such an arrangement even more likely. I disagree with you that each and every portion of a cafeteria plan would meet the parameters of an ERISA plan, even though some features would. The DOL safe harbor guidelines, if satisfied, would be adequate to make that portion of the cafeteria plan a non ERISA arrangement. Don Levit

John: The parameters you cite to avoid being an ERISA plan seems to qualify the individual health policy under a cafeteria plan. The employee brings his individual policy to the employer. Thus, the employer had no involvement with the employee obtaining the policy. And, if the cafeteria plan contributions are employee contributions, the employer is not subsidizing any of the premiums. Have any courts actually decided that having a cafeteria plan, in and of itself, establishes an ERISA plan for every participant? And, is it possible for the cafeteria plan to be an ERISA plan for some participants, but not for others? For example, an employee may participate in a 401(k) under a cafeteria plan, which, of course, is an ERISA plan. However, the component that deducts premiums for his individual medical policy need not be an ERISA plan. In McMahon v. Digital Equipment, First Circuit, 1998, it states, "The exclusion of payroll practices from the scope of employee welfare benefit plans follows from the policy underlying ERISA, because these types of employee benefits are not vulnerable to either of the evils that Congress intended to address within ERISA. There is no benefits fund to abuse or mismanage and no special risk of loss or nonpayment of benefits." Both these characteristics extend to cafeteria plans, in which the individual medical policy with the characteristics I outlined exists. Thus, for that portion of the cafeteria plan for this medical policy, it is merely a "payroll practice." By the way, are you aware that even former employees may be participants in a cafeteria plan? Don Levit

John: Thanks for your reply. What features of a typical cafeteria plan might subject the individual policy to the group health plan mandates? If the contributions are considered employee contributions, wouldn't the individual policy which the employee brings to the employer meet the 4 conditions of the safe harbor guidelines excluding the policy from ERISA coverage? Don Levit

George: Correct. So, if an employee pays the premium on an individual policy which he brings to a new employer, in a cafeteria plan, has the employer established an ERISA plan for that one employee? Don Levit

Folks: This proposed regulation deals with "amounts that an employer has received from employees or withheld from wages for contribution to employee benefit plans." The distinction between these 2 methodes seems to include cafeteria plans. It also seems to suggest that these plans are employee contributions, for an employer has received them from employees. Therefore, even though employees receive tax-preference due to their status as employees, the contributions themselves are employee, not employer contributions. Agree or disagree? Don Levit

George: Without either of us reading any documents, maybe you could comment on the specific excerpts I have provided, and tell us how they are outdated. What specific provisions or regulations supersede the excerpts? If you are unable to provide the documentation, then a rational conclusion is you feel the excerpts are outdated, but you don't know exactly why. The same conclusion is extended to vebaguru. Don Levit

George: It would be helpful if you would be more specific as to why the EO papers and GCM are irrelevant. I can't respond to your comments, unless you provide more details. Don Levit

George: You asked this non commercial insurer question before. I directed you to General Counsel Memorandum 39817, and provided specific excerpts. This Memorandum dealt specifically with the differences between a commercial insurer and a VEBA. I have several other documents as well. One is a paper published by the IRS which can be found ar http://www.irs.gov/pub/irs-tege/eotopicl92.pdf. This describes in detail why Blue Cross lost its tax exemptions through 501©(3) and 501©(4). On page 1 it states, "Congress determined that the Blues had evolved where many of the characteristics that distinguished them from the commercial insurance carriers were no longer apparent. Therefore, there was no longer any justification for the continuing exemption if their primary purpose was providing medical insurance indistinguishable from that provided by commercial carriers." This paper and other documents such as the GCM I provided strongly suggests that VEBAs can offer innovative plans, distinct from what is commercially available. To my knowledge, none of the VEBAs is presently doing so. That assessment, of course, is quite a stretch, and I would hope that it would not be true. Don Levit

George: In regards to the VEBA regulation which disallows dual purpose funding for other than medical benefits, I refer to the 1999 IRS paper. It can be found ar http://www.irs.gov/pub/irs-tege/eotopicf99.pdf. On p. 3, it states, "Although viewed in isolation the benefits provided by such a trust may appear to be permissible VEBA benefits (a medical benefit plus a death benefit), this combination suggests the trust is operating as a permanent wealth-building vehicle. Such a payment upon death is not a permissible VEBA benefit." I will deal with your other 2 questions seperately. Don Levit

Steelerfan: Excellent point. The same holds true for individual savings accounts that are dedicated to one of the qualified benefits, such as medical expenses. This is why any unused balance in one's individual medical account must be returned to the VEBA at the participant's death. Using these accounts for anything other than medical expenses prohibits the 105(b) exclusion, as well as violates the VEBA regulations. George: I agree with you on the amount of reserves issue. The building is seen as an important asset, just like the reserves, in order to carry out the VEBA's mission. One clarification: a VEBA is not only a trust, and a business entity; it is also a non commercial insurer. As a non commercial insurer, it has the opportunity of providing innovative plans and operations to set itself apart from commercial insurers. Don Levit

George: Thanks for pointing out my confusion on avoidance v. evasion. While the contributions are not deductible, I wonder if the growth of those contributions would be taxable. If the growth is taxable, then there would not be tax evasion. The purpose of limiting deductions and UBIT for excessive contributions, is to deal with excessive reserves. It is clear from the specific limitations that the IRS wishes to discourage unreasonable tax-advantaged accumulations. In addition, the amount set aside must have a substantial relationship to the purposes of the organization's reason for eiostence. Unreasonable reserves defeats that purpose. Don Levit

Steelerfan: According to PLR 9834037 it states, "The Committee report for DEFRA (1984) states no deduction for advance funding is to be allowed with regard to a plan which provides medical or life insurance benefits exclusively for retirees, because such a plan would be considered a plan of deferred compensation rather than a welfare benefit plan. Of course, if a plan maintained for retirees is merely a continuation of a plan maintained currently or in the past for active employees, then the retiree plan would not be considered a plan of deferred compensation because medical benefits would have been provided without the necessity of retirement or other separation from service." Don Levit

George: Please provide specific wording from the text you want to look at. I read 512(a)(3)(E), and do not see where UBIT would apply. Individual accounts in a VEBA are savings accounts dedicated to various benefits, such as medical expenses. They are separate accounts which can be funded by employees. They are like HSAs, without the mandatory high deductible health plan. Don Levit

George: Overfunding to an unreasonable extent could be viewed as tax avoidance. In addition, having excess reserves can be viewed as providing insurance far above the cost. Don Levit

George: The reason I mentioned 501(m) is to illuminate the difference between a commercial and a non commercial insurer. This is to also highlight that a VEBA is to remain a non commercial insurer in order to continue its tax exempt status. Two of the distinctions of a non commercial insurer are: 1. Conducting its operations differently from commercial insurers. 2. Offering products which are different from commercial insurers. Because Blue Cross was unable to do these 2 things, they lost their tax exempt status through 501©(3) and 501©(4) in lieu of 501(m) or 833. Of the 1985 and 1988 texts, which items are outdated that are relevant to our discussion? Don Levit

vebaguru: If you wish not to respond more constructively, that is your choice.. Of course, we fail to learn, together, that way. Don Levit

vebaguru: IRC 512 (a)(3)(E) does not address this issue. Could you put your opinion in words, and provide the proper citation? Individual accounts to help pay medical expenses means a lot. If these individual accounts are cash values of life insurance policies, it means that the accumulations are disallowed. Don Levit

Steelerfan: I agree with you. There are many IRS papers on UBIT, so, apparently, this is an important area they look at very closely. If there is continuous overfunding to a large extent, I assume the entity may lose its tax-exempt status. Don Levit

vebaguru: How can you have UBIT if there are no more years in which to accumulate income, and the assumptions are within reasonable parameters? Why do you think premiums were not deducted in the Letter Ruling? A VEBA does apply to medical accumulations, if individual accounts are set up. Don Levit

steelerfan: The answer to number one is no. The amount can be deducted in the year the reserve is created (Wells Fargo v. Comm., 120 TC 69 (2003). If insurance is purchased, as opposed to self-funding, it appears that premiums are not deductible. Letter Ruling 200404055. Don Levit

I am not familiar with the new cafe regs, but I do have something to offer here. In addition, I am also interested in retiree medical benefits, and whether or not they are deferred compensation. If you do not offer a lump-sum payment to those between 60-65, it appears that the medical benefits would not be deferred compensation. In Rev. Rul.75-539, "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 the insurance. The ruling holds that such payments for health insurance are includible in the employee's gross income." "However, the ruling also holds that if the employer places the value of these accumulated credits in escrow solely for the payment of health insurance premiums, and that such credits may not be received in cash by the employee, such amounts are not constructively received by the employee." Don Levit