Ron Snyder

These are the kinds of questions that need to be directed to expensive attorneys rather than addressed on public bulletin boards. Would you really have your client rely on the opinion of a self-styled expert with a "handle" like VEBAGURU? (There are worse ones!).

To JLEA: The answer is of course, they can have a NQDC plan. The real question is "why?" when contributions to such a plan are not tax-deductible. To JSimmons: I give. Why do you assume that because they are a closely-held corporation that they are also an S corporation? Your one-year deferral example is not likely to comply with IRC Section 409A and is not how NQDC plans operate.

Doesn't make sense to me. While governmental plans are exempt from ERISA and (most) IRC rules, they are subject to GASB. If their position is that the plan is a collectively-bargained plan rather than a governmental plan, they could make an argument that it is not subject to GASB, but it would then be subject to FASB rules instead. (From the frying pan to the fire.) However, there are many rulings that a plan that covers governmental employees (whether under a CBA or not) is a governmental plan.

In my experience, the EBSA can occasionally be helpful in getting answers to such questions. You should write a formal letter to the national office for guidance with respect to the issue. While formal guidance is not likely to be issued, you will hear back from one of their technical representatives who can give you his or her thinking on the issue. I have not heard of such an exception either, but a waiver might be possible.

A 401(k) plan may include a 401(m) account which may cause a health plan Schedule A to be attached to the 401(k) 5500.

Benefits Link (our host) also provides a pretty good job board that includes actuaries: Benefits Link Jobs

I doubt that the "situation is fine". Who owns the contracts? A. The Employer - The employer is the de facto trustee (as well as a named fiduciary), and employer contributions are not tax deductible because they were not paid over to an independent third party. (Yes, the insurance company is an independent third party, but they have not signed documents making them a party to the plan. They are, therefore, only an insurance issuer, and the insurance products are not different from a brokerage account in the name of the employer. B. The Participant - The participant has constructive receipt of the contribution in the year made, the employer gets a current tax deduction and the entire contribution must be included on the participant's W-2. C. Someone Else - The someone else is the trustee of an implied common-law trust is such trust is permitted under state law. However, the trust provisions which need to be included in the document are lacking, so IRS could easily disqualify the plan as well as the trust. Remedy for A: Have the insurance company sign an agreement which designates them as the "custodian" of the plan. Remedy for B: Have someone else own the contracts. Remedy for C: Create and execute an appropriate trust/custodial agreement.

I believe that VEBAs provide opportunities for unique products due to federal regulations. Federal laws provide opportunities that state laws don't? Such as what? The only "opportunities" are federal pre-emption of state mandated coverages or benefits. And those are not pre-empted for MEWAs, as previously noted. I have cited those regulations in describing non commercial entities, including insurers. You have cited them ad naseum and they still don't relate to VEBAs in any way. In addition, the VEBA itself is a federal entity. Wrong. A VEBA is a common-law trust created under state law (not Federal common law) that complies with 501©(9) and obtains a favorable ruling from IRS. This does not mean that states are unable to regulate multiple employer VEBAs. You finally got one right. 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. Huh? You seem to be saying that state regulation of MEWAs will cause them to become taxable. However, lots of insurance companies operate at no profit, and it is possible to have excess investment income (taxable) while needing to increase reserves for state law purposes (at risk capital). 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. Your specious arguments have the mistaken premise that some state regulator is going to be swayed by your sophistry into failing to enforce state insurance laws. It's time to give it a rest; it's not going to happen.

Several insurance companies make such indexed annuities available, including AIG, Allianz and Aviva (formerly Amerus). I believe that Sun Life also has similar features for its indexed annuity. Indexes available generally include the S&P 500, the Russell 2000 and sometimes the STOXX 50 (European) and the DJIA. They generally also include fixed interest alternative that will be based on the insurance company's current interest rate. Such annuities also provide a minimum interest guarantee, usually 2% per year for a 5-year period. Does this really sound "too good to be true"? All the insurance company does is purchase the appropriate stock market option calls with a small portion of the premium and the rest is invested into a bond portfolio. The insurance company exercises the calls when the market index has gone up but in any event it keeps the bond yields to themselves. Only in the rare event that the stock market index failed to increase by 10% in 5 years does the customer get any return from the bonds, as those are held to secure the guaranteed 2% return. (A bond portfolio in today's market will still pay over 5% per year). Please note that you could use the same strategy (on a no-load basis) in your own investment portfolio. Invest most of your funds into bonds or bond funds and purchase stock market calls on the selected index or indexes. If the index goes up, exercise the call (even if you have to do so "on margin"). This is not too good to be true, but simply a reasonable investment strategy. The only reason to prefer using an insurance company annuity is: (1) if you want someone to get a sizable commission; (2) you prize the insurance company's guarantee, or (3) if you have no idea what I was talking about.

Okay, I'll bite. Why would a 3-state VEBA that is "properly licensed, and monitored" be better than a national welfare benefit plan that is not limited to 3 contiguous states? Properly licensed and monitored means licensed as an insurance carrier in each state in which it operates. So the VEBA could purchase an insurance company charter that is already licensed in 3 or 50 or some other number of states. How do you get enough funds into a VEBA to fund this venture? Casualty companies are already potentially tax-exempt under 501©(15 ) and life and health companies already receive favorable tax treatment under IRC section 801 et seq. What possible reason could anyone with the millions required to fund such a venture choose to comply with the additional VEBA requirements? I'm really sick of your cluttering up these boards with irrelevant arguments about a non-issue.

Read my statement: If a plan explicitly vests medical benefits, it still does not become an ERISA provision. It would be a matter of state law (either contract or labor) that would not be pre-empted by ERISA.

Despite state courts holding to the contrary. the only ERISA vested rights created for welfare benefit plans are those benefits that are in pay status (ie, claims already incurred). It is possible (but generally not politically expedient) to terminate promised retiree medical benefits, even for retirees. And it has been done many times. Those benefits may be "vested" under state contract or employment law concepts, but will not be for purposes of ERISA.

There are groups that offer plans similar to what you describe, including our own. However, because of the additional limitations on VEBAs and the fact that we don't get a tax exemption on the medical accumulations, it made more sense to us to use taxable trusts and tax-favored investments. That way the 3-state limitation doesn't come into play. I know of no one who presently offers such plans through a VEBA structure.

This is not new or particularly innovative. Defined contribution health plans have been around for years now in their various forms. Although most don't use a funded model, those done for governmental employers and union groups frequently use VEBAs for such arrangements. I have established several of these plans for government and union groups. cf, Illinois, Burbank, etc.

There is a difference between viatical settlements (where the insured has a terminal condition and chooses to sell the policy) and life settlements. The organization whose members engage in this practice is called the Life Insurance Settlement Association LISA. I see no problems if an executive who has an insurance policy provided through the qualified plan takes a distribution and does not choose to receive the policy as an asset. The plan may then choose to retain the policy until the executive dies, surrender the policy or sell it to a life settlement fund without concerns with ERISA. The insurable interest requirement is apparently satisfied with respect to executives, but not for rank and file employees. The trustee, therefore, upon the retirement or severance of a non-executive, should cancel or surrender the policy. (See the WalMart from about 4 years ago.) Several questions arise if a qualified plan decides to purchase such contracts. Is the investment prudent? Are there legal risks as well as economic? Does paying for the right give the plan an insurable interest? Is the investment sufficiently liquid if the insured lives another 40 years? There are life settlement funds which are registered as securities and operate like mutual funds, i.e., provide liquidity. However, the groups that purchase the policies and bundle them together into such a fund usually take most of the profit out of the transaction, leaving the investor with another mediocre investment.

Retiree medical benefits are subject to forfeiture in the event that no post-retirement medical treatments are rendered. They are an unpredictible contingent event and therefore not vested until the medical expense is incurred. At that point they are taxable unless there is a specific exemption (which there is for 213(d) medical expenses).

None of the materials you refer to in connection with your obsession with "commercial vs. non-commercial insurers" relates to VEBAs. IRS was concerned about 501©(3) & (4) orgs which were competing directly with commercial insurance cos. Coverage under a VEBA is limited to employees of a single employer, a controlled group or geographically limited group of employers who share an employment-related common bond. That is why the issue doesn't arise: they are no competing with commercial insurers because they don't and can't offer policies to the general public.

Of course the Committee Reports are referring to an immediate deduction. Deferred compensation is deductible as compensation when the benefits are not subject to a risk of forfeiture in any event.

How can you have UBIT if there are no more years in which to accumulate income, and the assumptions are within reasonable parameters? See IRC 512(a)(3)(E) et seq. Why do you think premiums were not deducted in the Letter Ruling? Premiums are only deductible in the year in which paid, per section 419. A VEBA does apply to medical accumulations, if individual accounts are set up. This doesn't mean anything.

The nomenclature more than likely applies to an "executive bonus" plan, not a form of deferred compensation but a method for an employer to pay life insurance premiums and then include the premium amounts on form W-2 as a bonus. A "double bonus" plan refers to a similar arrangement where the employer not only pays the premium but also gives the employee enough additional compensation (bonus) to pay the taxes on the life insurance premium and bonus which are taxed to the executive. This type of arrangement is not subject to 409A.

I charge for my legal work and for my legal opinions. You got a free opinion and it was worth every penny.

Because the exemption granted under 419A(f)(6) is broader than that listed in 419A(f)(5). 419A(f)(5) plans are exempted from the account limits imposed under 419A, but 419A(f)(6) plans are explicitly exempted from all limitations imposed under the subpart, which consists of sections 419 and 419A.

TCP- Unfortunately for your client, failure to take a deduction doesn't really save them from Notice 2007-84. They are still participants in a purported welfare benefit plan and may be subject to alternative taxation rules upon distribution of assets from such plan. They should insist that policies be retroactively titled in their personal names and not in the name of the WBT to avoid such awful consequences (potential 100% excise tax under 4976, 20% excise tax under 409A, etc.).

1. Yes, unless the group for which benefits were provided was a collective bargaining group. 2. Yes. Life insurance permits tax-free inside buildup and health insurance would use up the premiums without generating income. Favorable experience is rewarded with better rates in a subsequent year. 3. A VEBA gives you no real advantage since the tax-exempt nature of a VEBA does not apply to medical accumulations.

Deductions for 10-or-more employer plans were never "unlimited". They were simply excluded from the additional limitations imposed by IRC Sections 419 and 419A, but they were still subject to the limits that applied before the 1984 addition of subpart b as part of DEFRA. Sections 419 and 419A were largely a restatement of existing law, regulations and court rulings, with several exceptions: (i) future medical expense increases were not allowed to be projected; (2) the amount of retiree death benefit that could be pre-funded was limited to $50,000; (3) non-discrimination rules were clearly incorporated; (4) contributions for key employees became "annual additions" for purposes of IRC Section 415©. These are the specific rules that 10-or-more employer plans were exempted from. No deduction is allowed if the account is overfunded is not the same as no funding is allowed is the account is overfunded.