Ron Snyder

Circular 230 does not directly apply to TPAs, only to professionals who give tax advice. Some TPA firms may in fact be subject to the 230 rules, but many will not. Each firm should confer with its legal counsel and make a determination of whether they may be providing tax advice, and, if so, what sort of disclaimer should be used for each type of communication. For example, even if the firm considers that an actuary's letter advising the client as to the maximum tax-deductible contribution for a year to be tax advice, a letter from the same actuary requesting year-end census information would not. Similarly, a TPA firm may calculate the ADP and ACP amounts and appropriate refunds for a year, and advising a client on those issues may be construed as tax advice, but other services provided will not be.

Yes, as ERISA covers employee benefit plans provided to employees by employers. However, it may fall under the "Top Hat" exception so far as ERISA compliance is concerned. Familiarize yourself with those rules and you can make that determination, or employ suitable counsel to answer that question (rather than relying on strangers on a bulletin board). Top Hat plans are still ERISA plans, but are exempted from much (but not all) of the reporting and disclosure requirements. Whether the retirement benefits provisions are a retirement plan for ERISA purposes turns on what exactly they agreed upon. The contract could read "we will provide you with a retirement benefit", but the question won't be answered until the actual retirement plan document is provided. The contract may read that we will provide you with a benefit or contribution of x$ (or x% of pay), and it could either be a qualified or a nonqualified plan, depending upon the details. In any event, the plan MUST be prepared in compliance with the appropriate section of the IRC (ie, 401(a) or 409A), the funding must be done correctly or there will be immediate tax consequences to the employer or to the employee (or both). Assuming it is a Top Hat plan gets you nowhere except in trouble. Determine which type of plan it is and comply with those rules.

A VEBA need not be a trust. It can be a nonprofit organization which is controlled by its members, with membership conferred by virtue of participation in the plan. However, this may not relieve the employer of actual or potential liability for operation of the trust, for operation of the plan, etc. Who will sponsor the VEBA? And how can this be established without the employer's being a fiduciary? Those are the hard questions. There is a possibility of an "association" of employees sponsoring the plan and trust. Some states have specific exemption from state insurance regulation for association plans in addition to union sponsored plans. However, most don't. If you try to go down this road, your attorney had better carefully research state law. The association concept will not meet the union exception unless it is employee-controlled AND enters into arms length, good faith negotiations with the employer with respect to the benefits to be provided. If I were one of the employees working with the employer, I would specifically bargain for the employer's continuing liability to provide the benefits promised. Good luck going down this rabbit hole. You may not like where you wake up!

Let us assume that the IRS is correct that the tax deduction for 1999 was improperly claimed. The statute of limitations for 1999 ran out in 2007 (at the latest) even if the taxpayer participated in a fraud or materially misstated his taxes. Has the taxpayer signed a consent to extend the statute of limitations? This taxpayer needs a good tax representation. I could recommend a good (but not inexpensive) attorney, or a CPA with over 30 years experience working for the IRS to handle the appeal on this matter. Please note that the kindler, gentler IRS of the George H W Bush and Bill Clinton administrations was dismantled by the G W Bush administration. It is too early in the Obama administration for this to have changed, even if they are going to. Currently, IRS auditors are capable of making ridiculous and frivolous assertions about why taxpayers should owe big bucks as taxes. And since the office of tax shelter analysis has labeled 412(i) plans as "listed transactions", they think taxpayers are getting off light if they don't assess the $200,000 fine/penalty for participating in a listed transaction.

The question of whether a trust is a Rabbi Trust is important when there is a change in control. What will the trustee do when there is a change in control? Listen to the employer's new officers and act as they desire? Listen to the employer's former officers and do as they desire? The trust company we use as a trustee charges $1,000 per year to be the trustee of such a trust, and it will do as the documents require upon a change in control. Is that an "enormous" fee?

This is how I understood your comments: Upon sale of the employer the actuarially determined amount funding the VEBA loses its tax exemption and becomes excess benefits subject to UBIT. Then later, the excess benefits can used to provide retiree health benefits to the (retired) employees just by amending the plan, and if it qualifies for tax exemption it will once again be a VEBA. I guess I was hung up on the deduction rules for employers contributing to retiree benefits funds. But I guess all that doesn't apply in this situation, where the funds were for an approved VEBA plan for LTD & severance, which just didn't end up providing any benefits Edit: The business sold in 1995, 9 years after the VEBA was set up, and I just confirmed that they have not been paying UBIT. This is how I intended for you to understand my comments: Upon sale of the employer the VEBA became a wasting trust that had to be distributed within one year. The "tax exemption" of a VEBA is meaningless when the accumulations are subject to other taxation (such as UBIT). The fact that the VEBA had excess assets means that the deductions were probably claimed fraudulently. However, the 7-year statute of limitations (for fraud or substantial underpayment of taxes) is now over. However, IRS would like to tax all amounts for the oldest open tax year, including penalties and interest, to anyone with a vested right to the benefits. It can never quality for tax exemption again. It has no sponsor. IRS will not issue determination letters to trusts that primarily benefit HCEs.

It seems as though companies not required to capitalize costs under IRC Section 263A can deduct IBNR as long as they accrue it without having to fund same. Service companies such as accounting and consulting firms come to mind. The question is not WHETHER they have to fund it (that is a given), but WHEN. In general, the employer must pay such expenses before the end of the tax year. Under the rules described in the article, the employer, under IRC section 461(a), may claim a deduction for services provided by another person prior to the end of the year, even though the amount is not actually paid prior to the end of the tax year. This contrasts with the rule announced in General Dynamics that in order to be deductible for the current year the amounts had to be paid before the end of the tax year. Sec. 419©(3)(B) refers to the time "when such benefit would be includible in the gross income of the employee if provided directly by the employer", which would be the year of payment. This rule still applies for reimbursements paid directly to employees, or for which employees must file claims to have the payment or reimbursement paid.

The termination should be adopted by the corporation, a timetable established for shutdown and notices provided to participants. Then the plan can be closed down. The timetable should include a final date for incurring claims and a final date for submitting them, with at least a 90 day lag. How can you know about unpaid reimbursements? Claims may well come in of which you are currently unaware.

This has been a wasting trust since 1995. The fact that a determination letter was received in 1986 notwithstanding, this is no longer a VEBA nor a viable welfare benefit trust. You are correct that the severance benefit is no longer applicable. So, also, are the STD and LTD coverages applicable (no compensation to replace). I agree that the plan/trust need amended. The clause you refer to does not establish any other benefits nor the right to pay them. However, with no employer, who can amend the plan? Review the plan and trust documents to see if the issue is addressed. Why would you re-characterize contributions made previously. There simply are excess assets that need to be disbursed for providing welfare benefits, as you desired. The UBIT you refer to was actually created by selling the sponsoring corporation in 1986. The fact that they haven't been reporting this leaves them liable for taxes for open tax years (assuming net income in the VEBA). Whoever was handling the VEBA in 1986 messed up, and the problem has compounded since then. IMHO, unless the plan and trust documents provide an escape (amendment capability, termination provisions, etc.) the participants are screwed. Expect the possibility of excise taxes - review IRS Notice 2007-84 for example. This should have been used up or closed down before October 2007. Finally, you fail to mention whether the plan assets are $30,000 or $3,000,000. If the assets exceed $500,000, they should engage legal counsel to walk them through the correction process.

I perused the Deloitte Washington Tax Bulletin dated April 13, 2009. It relates to COBRA coverages and is found here: COBRA Guidance Highlights Potential Problem Areas It does not seem to relate to your post.

This would not seem to be a VEBA question, since VEBAs are for funded welfare benefits, not unfunded ones. IRC 419 specifically requires that amounts must be "paid or accrued" for a specific tax year.

A VEBA is only a VEBA when it has been approved by the IRS. See IRC section 505. Short of that it is likely a taxable grantor welfare benefits trust. Contributions to VEBAs are not inherently tax deductible, and contributions to welfare benefits trusts are not inherently non-deductible. The rules relative to tax deductions are found in IRC section 419 and 419A. The only advantages to being a VEBA are: (i) The trust is "tax-exempt" and (ii) The IRS has reviewed and approved the trust. However, the tax-exemption is not worth much because medical accumulations are subject to UBIT in any event. And other benefits are generally disposed of during the current plan year. The benefit of being tax-exempt is illusory. For all plan years you should be filing IRS form 1041 for the trust. Losses on investments will not be taxed in any event. All welfare benefit plans are subject to nondiscrimination rules. cf, IRC section 79, section 105, section 505, section 414, etc. You mention life insurance and this brings up additional issues. Review IRS Notice 2007-83 and 84 along with Rev Rul 2007-65 for guidance that may apply to such arrangements. Generally, life insurance plans for owners are not tax-deductible as provided in IRC section 264.

* What about PS 58 costs? Are they allocated to all participants? No PS 58 costs. * Is there an insurable interest under state law? Only on key employees. * This happens to be a governmental plan. Any special issues (other than whether state law permits that type of investment)? No key employees typically. Since the death of a plan participant is a distribution trigger * * * This is a red herring. 1. Are we talking term insurance or something else? Legally no difference. 2. * * *will the plan have sufficient liquidity to effect distributions to participants? A facts and circumstances test. 3. Since when did life insurance become a rational investment for someone (in this case, some thing) who doesn't need death benefit protection? Stated differently, how can the plan fiduciaries possibly justify this? As any deferred compensation actuary knows, life insurance can be a profitable investment with relatively stable investment yields. However, (i) the group must be large enough to be an true actuarial group (500 lives?); (ii) the tax benefit is lost in a qualified trust, reducing the effective net yield. Is a plan fiduciary's relative earning the commissions? This raises a separate issue, the possibility of a prohibited transaction. If all your questions can't be answered with acceptable answers, is it a breach of fiduciary duty to have such investments? Even if ERISA does not apply, there are fiduciary duties, although enforcement and penalties in that cases I am familiar with are essentially nonexistent. Another facts and circumstances test.

Nothing in ERISA addresses this issue other than the fiduciary standards. (The hypothecation transaction must be "prudent".) The Internal Revenue Code, however, speaks to this issue: such borrowing will likely subject the trust to UBIT under Sections 512-514 of the IRC. (This may also make the transaction imprudent.) The trust will never permit the "sponsor" to borrow against the trust's assets, only the trustee acting in its fiduciary capacity. The trust document must permit such borrowing and hypothecation.

The union (ISTA) owns and administers the VEBA. They can send a case out for bid at any time. Why would they collude with MetLife Resources, as you aver? The terms of the relationship was negotiated between the ISTA and MetLife. Altering a "settled contract" seems to me to be one of the duties of union leadership. We call it negotiation. The leaders of the union negotiate with the representatives of the employing school districts and change wages, benefits, working conditions, etc. all the time (although usually just prior to the expiration of the CBA). It appears to me that your problem here is not in the relationship with MetLife, but with the leadership of the ISTA. What can a union member do when he/she thinks his leadership does not represent him or her? (i) Run for union office; (ii) Talk up the problems with the union leadership and members, or (iii) file suit. There is no requirement that the ISTA permit transfer of an individual's funds to another VEBA. In fact, portability, although legally permissible, is not at all common among VEBAs or other health and welfare plans.

No way to know. Ask the Plan Administrator.

How about using a IRC section 420 transfer to retiree medical accounts? IRS has approved in PLRs distributing excess assets to charity after all benefit liabilities are paid out.

Ignoring the administrative issue, there is the issue of control. Remember that to avoid being vested in their benefits (and therefore taxed immediately) participants cannot exercise control over those investments. Offering a brokerage window would seem to beg IRS to call the account balance taxable (unless only the trustee or investment manager could use the window, and then it wouldn't work the way anticipated).

Are you the securities attorney that provided the plan fiduciaries with an opinion that the transaction complies with US securities laws? If not, why are you so certain about the inapplicability of securities laws. A few posts ago you described the transaction not as a "partnership interest" but as a "subscription agreement" for a "private equity fund". While I am an ERISA attorney and not a securities attorney, I believe that a profits interest is a security and subject to federal and state securities laws. Of course, if the plan's legal counsel gives an opinion that such a transaction complies, okay. These boards are not for arguing securities laws anyway. However, it seems to me that such a transaction would likely violate the prudence requirement of ERISA unless such an opinion were obtained.

Perhaps what they meant was that the employer elects to take any unused funds left over in the 125 plan and make an elective employer contribution to the 401(k) plan.

In reading through this thread, I am surprised that no one pointed out the obvious: you are attempting to invest ERISA assets which must remain within the jurisdiction of US courts into securities which do not comply with US securities laws. The provision of ERISA was put into the law specifically as a minimum standard of protection the purpose of which was to protect plan participants from the idiocy of trustees by imposing additional duties and limitations on them. You are specifically attempting to avoid those duties and limitations. The fact that you are asking these questions should be a red flag to you. However, if you insist on pursuing this course, a legal way of accomplishing it would be to form a corporation (or LLC) which is wholly owned by the plan, qualify that corporation or LLC in the foreign jurisdiction and go to that jurisdiction to execute all papers relative to the transaction. That way you have complied with ERISA in that the asset is US domiciled, and you have not violated or caused the seller to violate US securities laws as well.

A belated comment: The large-plan (seriatim) valuation package is a necessity if a large plan design. Small plans use valuation software that values only the normal retirement benefit at the normal retirement age. Other benefits are drafted as and assumed to be related to the "accrued benefit", a ratable portion of the NRB. Actuarial assumptions attempt to estimate the overall extent of the actuarial gains or losses by applying salary scale, mortality, turnover and morbidity assumptions. Large plans use valuation software that uses the actuarial assumptions to separately estimate the probability and cost of each potential benefit event (NRB, early RB, disability benefit, vesting benefit) and value that portion of the benefit. They then total up all of the values to put the valuation together. Neither method is "correct" or "incorrect". The valuation results from the 2 methods may be similar or quite different. However, the primary differences in results are more a function of plan design rather than differences in methodologies. Are ancillary benefits a ratable portion of the NRB, or are they developed separately. Is there a "window" benefit to value? The other difference between the 2 is that larger plans employ "group" actuarial cost methods (ie, FIL and aggregate cost) rather than individual cost methods (individual aggregate, entry age normal). Both use unit credit or projected unit credit methods, although for different reasons. Datair is not capable of providing a large plan or seriatim valuations. You may wish to have a service bureau provide the actuarial valuation numbers for you. You can continue to use Datair for plan administration, benefit tracking and statements, but export the data files to transmit them to outsource running the valuation numbers. As a small plan actuary who did several large plan valuations, that is what I had to do.

I wonder if your are trying to justify something beyond a simple bank loan. For example, large bank loans sometimes have participation by others behind the scenes. If that happens and the other party is a party in interest, IRS will argue that it is a circuitous PT.

Yes, yes and no.

Your question is ambiguous. Do you really mean that the employees were terminated for the purpose of offering COBRA coverage? That seems like a strange reason to terminate employees. Or do you mean "Can an employer continue to sponsor a health plan for the purpose of offering COBRA coverage after all employees are terminated?" If so, the answer is "yes", if the plan is self-funded, and "no", if the plan is offered through an insurance company, because the insurance company will have to offer the COBRA coverage thereafter.