Ron Snyder

Resign.

I don't believe that the Reg section you cited is a problem. Maximum contribution limits are always uniform and individual, and this is required under IRC section 419A. It doesn't stipulate that the contribution may not be greater for participants closer to retirement, only that the same limits apply. As for your "aside", the plan is considered discriminatory if benefits are proportionate to compensation. However, the penalty provided is that the percentage of benefits / compensation for HCIs that exceeds the percentage of benefits / compensation for non-HCIs is imputed to the HCIs as current income on form W-2. Apparently, it is per se discrimination without a penalty. I know of no reason why a cross-tested allocation would not work for a welfare benefit plan (or post-retirement HRA plan). Of course it has to pass nondiscrimination tests, but that is true anyway. Therefore, I not only don't know of additional materials to buttress your arguments, I disagree with your understanding and interpretation of the rules. Please note, however, that the fact that this is offered in connection with a "VEBA" doesn't make sense to me. A VEBA would be subject to UBIT on all income in any event. A simple welfare benefit trust would make more sense for the structure and would avoid the unnecessary additional rules under 501©(9), such as those referred to by Don.

IMHO, the DOL cares so little about these types of returns that I don't believe that anyone reviews them. A clerk enters the information into the computer for spitting out later, but it is not used. With that in mind, either approach is defensible. However, unless you have a "wrap" plan (which we have discussed previously) they are separate plans. I would file 2 5500 forms. A harder question is whether I would use the same Schedule A for both, or split the one provided into 2 forms.

You might try searching the internet. I found several related responses, including Federal Estate & Gift Taxes, Michigan Bar handout and ALI-ABA. I also suggest Tax Facts, by National Underwriter.

You are making the argument for very complete and very explicit plan document language.

Rather than "amending" the trust from irrevocable to revocable, it may be necessary to establish a new revocable rabbi trust for the plan, and then to transfer the benefits from the irrevocable trust (assuming document provisions, as amended, permit transfer to a successor trust.

This is a bit of a sticky wicket because the answer depends on several unstated facts: (i) what do the plan docs say about mergers and acquisition?s; (ii) what do the plan docs say about plan termination and excess benefits?; (iii) does (or can) Company B have a welfare benefit plan to be merged with Company A's plan? These issues should be addressed and a strategy developed prior to any merger/acquisition, or everyone's hands may be tied.

Having worked as an actuary in So Cal, I can tell you: 1. The price sounds reasonable. 2. Most actuaries who perform small plan (<100 participants) valuations work from a fixed fee schedule (with or without adjustments for extra services required). Actuaries for larger plans tend to charge on a time and charges method, but sponsors of large plans don't typically one man operations, but prefer firms that have deep pockets, E&O insurance, peer review, etc. 3. An actuarial report is a necessity if you need to defend your deductions, change to a new actuary, justify your funding policy (and methods and assumptions) to a board of directors or senior management, etc.

The real question is: can a bulletin board user obtain reliable legal advice from strangers on the bulletin board? The answer to this question is the same as the answer to your question. Corollary: How will you know the answer is correct?

Yes, both self-insured and fully insured plans have been under attack by the IRS. Welfare benefit plans typically provide death benefits, medical benefits or both.

Many of you are old enough to remember the IRS's "actuarial audit project" from the early 1990s. At that time the Service opened audits almost all small defined benefit plans which had NRAs prior to age 65 and attempted to disallow deductions for the "excess" deduction (over the amount allowable if the NRA had been age 65). The benefits community (including the then-ASPA) banded together to fight the IRS. IRS lost the first 2 court cases and immediately dropped hundreds of audits that had been opened. A similar thing is happening now. IRS has opened hundreds of audits of clients in various welfare benefit arrangements. We have known of IRS's dislike for these arrangements for some time (at least since 1995 when Notice 95-34 was issued). Then IRS upped the ante by labeling some of the plans as "listed transactions" [419A(f)(5) and (6) arrangements]. One welfare benefit plan stood up to IRS, hired a former IRS litigator and pressed for a court date. The IRS blinked and dropped the whole case. Another plan, whose promoter IRS officials dislike intensely, is scheduled to have 3 cases go to court this June. Recently the IRS made a very reasonable settlement offer to avoid going to court. Apparently the IRS is afraid that they will have to drop the whole project if they start losing cases in court. So they are avoiding court in hopes of intimidating taxpayers into paying taxes they don't owe and keep the audits going as long as possible. IRS auditors are desperately trying to make up excuses why amounts in the welfare benefit plans should be taxable today. For example, for a client who made contributions in the 1990s but nothing in the past 7 years, the IRS offered to treat the plan as a split dollar arrangement (although our WBP has nothing in common with a split dollar arrangement), making the accumulation value of the insurance taxable to the client in 2005. Is anyone else having experience with these arrangements?

"The conclusions . . . are the same regardless of whether the plan benefits are provided through a taxable trust, an exempt VEBA described in § 501©(9), or any other type of welfare benefit fund as defined in § 419(e). Also, the conclusions . . . are the same regardless of whether the death proceeds are payable from the insurance company directly to the beneficiaries designated by the employees, or are payable to the trust or plan for the benefit of the employees’ beneficiaries. Additionally, the conclusions . . . are the same regardless of the number or amount of premiums, and regardless of the type of life insurance policy." So you take this to mean that this Revenue Ruling abrogates Section 79 of the Internal Revenue Code? Because nowhere is that effect indicated in the Ruling or other related materials provided by the IRS. Rather, the facts are specifically limited to a group term life insurance plan which provides no "permanent benefits". And the IRS notes that: "No other benefits are provided to the employees under the plan or from the trust." There is no legal excuse, under these circumstances, for cash value life insurance. That is what is meant by limited to the facts given. Where does that leave us? There is no finding that the trust is being misused (i.e. a surrogate), only used. And they tell us that the holding is not concerned with how the WBP is structured. And they tell us that the holding is NOT LIMITED TO CASH VALUE INSURANCE. When the RR states that "the conclusions for Situation 1 are the same regardless of the number or amount of premiums, and regardless of the type of life insurance policy", that does not change the statement of facts that "[t]he trustee has obtained a cash value life insurance policy on the life of each employee." So the types of policies referred to are VUL, WL, UL, etc., but not term insurance. And what of Notice 2007-83? If the principal behind its joined-at-the-hip ruling is based on the applicability of sec 264(a) to these plans, and if I am right (which I think I am) that sec 264(a), as the Service points out in the quote above, applies to all insurance, including term, then notwithstanding the language of the Notice putatively limiting it to cash policies, ANY COMPANY IN THE COUNTRY DEDUCTING THE COST OF TERM LIFE INSURANCE PREMIUMS IS ENGAGING IN A LISTED TRANSACTION, no matter how it is structured if owned by a trust (real or otherwise). The $200,000 penalty per year from every company in the country that fails to file a Form 8886 will go a long way to balancing the budget. Notice 2007-83 is self-limited to the narrow group of plans that meet all 4 of the requirements set forth therein: "(1) The transaction involves a trust or other fund described in § 419(e)(3) that is purportedly a welfare benefit fund." (All plans seem to meet this requirement.) "(2) For determining the portion of its contributions to the trust or other fund that are currently deductible the employer does not rely on the exception in § 419A(f)(5)(A) (regarding collectively bargained plans)." (Note: 419A(f)(5) plans were previously held to be listed transactions; this would apply to all other plans.) "(3) The trust or other fund pays premiums (or amounts that are purported to be premiums) on one or more life insurance policies and, with respect to at least one of the policies, value is accumulated * * *." (This would apply to all plans that utilize cash value insurance products.) "(4) The employer has taken a deduction for any taxable year for its contributions to the fund with respect to benefits provided under the plan (other than post-retirement medical benefits, post-retirement life insurance benefits, and child care facilities) that is greater than the * * * (amount deductible under 419 and 419A)." (This is the real test: whether the employer has claimed deductions in excess of those allowed under 419 and 419A, other than for post-retirement medical benefits, post-retirement life insurance benefits and child care facilities.) Please tell me what benefit plan offering death benefits remains outside the scope of this ruling (other than those where the employee owns the policy from day one). A plan that has not claimed deductions in excess of those allowed under 419 and 419A.

There are a number of attorneys who can assist you with this type of project. Expect to pay $5,000 + for a qualified attorney to draft documents for your group. Depending on where you are located, I can make a recommendation to you, or you can simply search on www.martindale.com. In Washington, DC, where most Federal employees are located, there are several firms with appropriate expertise. Email me through the board with the additional information.

IRS has only had 25 years to issue Regs. under section 419A, so they have not gotten around to it yet. The American Bar Endowment case, although decided under prior law, may be useful. Review IRC section 419A©(4) and (5). If your plan is self-funded or partially self-funded, one way to avoid this issue is to establish a captive insurance company who would write the LTD coverage for the plan. Read Regs. 1.419-1T, though they are of little help. The articles referred to by Don Levit can be helpful, but carry no legal weight.

If the DOL orders an employer to pay overtime, it should pay overtime. However, whether the employer must open up prior valuations with respect to such payments depends upon the wording of the plan document, specifically the definition of compensation or included compensation. If that definition is based on W-2 compensation, you are correct. The payments you refer to are similar to deferred compensation, earned in prior years but paid in 2008, and a careful reading and interpretation of the language is needed. You didn't mention what type of plan the employer maintains: DB or DC. I would think it could be a bigger problem for a DC plan than for a DB plan, since it would either result in the employer's making an additional contribution for the prior years or in reducing the account balances of some employees (which would be problematic to the DOL). For a DB plan it is largely a matter of determining the correct accruals for the years in question, and the correct distributable benefits for vested terminees, and those can always be corrected with a little (or a lot) additional money.

The Split Dollar Regs provide 2 ways to "appease" the IRS: the "loan regime" and the "economic benefit". Reverse split dollar is gone effective in 2003. Here is a nice summary of the split dollar regs: Summary of Split Dollar Regulations

I don't believe that the problem is that IRS has gone too far, overgeneralized or attacked cash value life insurance. RR 2007-65 is limited to the facts and issues listed therein. The facts postulate a case where a trust, acting as a surrogate for the sponsoring corporation, purchases cash value life insurance and retains all rights to that life insurance except for the right to name the beneficiary of the death proceeds prior to retirement. It purchases cash value insurance without complying with the rules under Section 79 relative to permanent benefits (nor with the split dollar regulations). I don't agree with the analysis provided in RR 2007-65 and believe that a portion of the contributions equal to the term cost for the rank and file employees would have been deductible by the employer (following the analysis of Judge Laro in the Neonatology cases), the facts are somewhat limiting. Moreover, a Revenue Ruling has no force of law behind it; it is simply a statement of the IRS's current position on a specific issue. If this was to be new rules applying to welfare benefit plans, it would have been included in Notice 2007-83 or Notice 2007-84, which are roughly equivalent to Proposed Regulations.

The vebaguy was busy with year-end business. Your facts didn't disclose whether the plans were to be merged, or consolidated for testing purposes, or tested separately. More importantly, you didn't stipulate whether littlecompany's plan met the nondiscrimination requirements prior to the acquisition. If it did, it is now impossible for the consolidated or merged plans to be out of compliance. (Prove this by running the tests yourself before and after.) Remember that VEBAs are subject to IRC Section 505(b)(1) nondiscrimination rules unless they are subject to nondiscrimination requirements applicable to benefits plan provided under another section of the Code. Here you are describing a medical benefit plan, which is covered under IRC Section 105(h) (for uninsured benefits) and makes plans which favor HCEs over non-HCEs taxable to the HCEs to the extent that the plan is discriminatory. What happens to the participants who were highly compensated/key in littlecompany but no longer are? They become ineligible to continue to participate if the plans are merged into the bigcompany plan. Their account balances/earned benefits could continue to be paid. They are treated as HCEs and HCIs before the acquisition, and non-HCEs (HCIs) afterwards. When do we run the test? Each quarter; however, IRS will only look at it annually. What do we do with the separate accounts under 419A maintained for the old key ees in littlecompany? Maintain them if required. See note above about disposition of littlecompany plan. Since this is retiree medical, what relevance has reg. sec. 1.416-1 which says a former employee is a key employee if he was a key employee when he retired or separated from service. Top-heavy rules under Regs. 1.416 apply to retirement plans, not medical plans. Medical plans are subject to nondiscrimination testing, but not to top-heavy testing. The only mention of medical benefits under those Regs. has to do with medical benefits provided under a 401(a) plan as an incidental benefit.

The prior response is technically correct, but failed to note that executive deferred compensation would not be permitted inside a VEBA, because a VEBA is limited to welfare benefits and subject to nondiscrimination requirements.

Of course there are issues, but our deferred compensation plan has a very similar (except for the vesting schedule). This should be able to work with appropriate drafting.

PTE 79-60 is still viable. However, it imposes specific requirements in order to take advantage of it. Could the problem be that the requirements haven't been met?

The document should also stipulate whether unspent amounts carry forward to subsequent years, whether unused amounts are forfeited, etc.

You might also try a different browser as there are a few incompatibilities.

I don't believe that the analogy applies to my practice, and it should not apply to most others IMHO. I think of it as looking at a spectrum that includes black, white and all of the grays in between. I will allow my clients to go to the point that the client is more likely than not to prevail in court if it comes to it, which means right up to the middle of the gray area. However, I assume a very conservative position for normal practice, staying away from the gray altogether. Only when clients (or their advisers) request will I go into the gray area. And then I warn the client about the potential risks of audit, deduction disllowance, litigation, etc. When possible I put such warnings in writing. although to do so could compromise a client's subsequent case should he elect to take a very aggressive position. In 35 years of practice, I have had only a handful of clients who wanted to go as far as I would allow them. There have been a few others went to other firms who permitted indefensible practices (ie, funding benefits based on expected increases in the 415 limits, ignoring the 415 interest rate limits in a 412(i) plan, illegal loans or investments in the plan, etc.) The vast majority of clients don't want to be an IRS (or DOL) test case. And it is an irresponsible practice that puts those clients in jeopardy without the clients' informed decision to put themselves there.

#1: The only ERISA audit requirement is in conjunction with the annual report requirement (form 5500 and attachments). This is both good and bad. Good that your plan has not violated multiple ERISA provisions, and bad that the penalties for not providing a required audit are the same as the penalties for not filing form 5500. In case you have forgotten the penalties are shown here: http://www.irs.gov/instructions/i5500/ch01.html#d0e1146 #2: Obtaining an audit on a plan that has not previously had an audit is possible, although considerably more expensive and difficult than obtaining an annual audit in a year following a year for which the plan was already audited. Auditing firms have procedures in place to address this situation. Some auditors may turn this engagement down unless the audit spans all (typically 3) open tax years.