Ron Snyder

There is a disconnect implicit in your facts and question: are you really the Plan Administrator, or are you an outside person who performs administrative functions? A fiduciary is required to act prudently. Whether you are the named fiduciary or an outside administrator, the prudent course of action would be to have a duplicate set of all plan records off-site (typically at the office of the plan's legal counsel, accountant, third-party administrator, consultant, financial planner, etc.). Failure to take this prudent step has now caused you to potentially be in violation of your fiduciary duties. Are you an employee of the company who allowed yourself to named as a fiduciary without realizing the import of the designation? Or did you know that you were an ERISA fiduciary but fell asleep on the job? It seems that an inside employee would have known about the records being carted off in any event. Or are you an outside administrator who only became aware of the confiscation at a meeting in October? If so, don't you have copies of all plan records? Whether you are the Plan Administrator (named fiduciary) or a contracted administrator, there was an apparent violation of your duty to the plan which you now seek to blame on the law enforcement officials. However, in a lawsuit between you and a participant, you have failed in your duty and I doubt that your failure will be excused by blaming the cops.

Setting funds aside for future welfare benefits is not a bad thing. However, to avoid abuses, Congress has enacted Section 419A of the IRC for the purpose of preventing such welfare benefit arrangements to be used to shelter an excessive amount of income from current taxes. The amount that is not considered to be abusive is termed "qualified additions" to a "qualified asset account". With qualified retirement plans, excise taxes are imposed on excess contributions. However, no such limitation is imposed under 419A. That is because: (1) Congress did not want to bar companies from funding welfare benefits when they were able; and (2) excess income inside the trust is taxable anyway. The answer to your question is actually within the statutes and the committee reports that accompanied the passage of IRC 419 & 419A. There has been no mention of UBIT on this thread, so your question is unexpected. Did you confuse non-deductible employer contributions with taxable income inside the trust? Despite the confusion, you have asked an interesting question: how much UBIT can a VEBA have without losing it's exempt status? Or, what is the purpose of a tax-exempt trust is you're using it for taxable transactions? I could easily argue both sides here (pro): the amount of UBIT is irrelevant to the tax-exempt status since the UBIT issue is self-correcting. A trust which secures income which is not tax exempt pays the price of it (UBIT). The extent of the income doesn't matter because IRS is perfectly happy to collect taxes from a tax-exempt trust. (con): A VEBA exists to provide certain benefits and must invest consistent with its purposes. Occasional incursion of UBIT is common, particularly in connection with debt financing of real estate. However, it is inconsistent with a VEBA's purposes to be engaging in a trade or business or other forms of UBTI activities. Once the investments become the issue rather than the benefits to be provided, the trust has lost its identity as a VEBA and should lose its tax-exempt status.

You appear to state the rules correctly as they apply to your facts.

No, it means that amounts in excess of the account limit are not deductible.

It would either become the correction or make a correction impossible, depending upon the facts. The difference between the 2 is potentially that if it makes correction impossible, IRS could impose a 100% excise tax.

You might review the Manhart decision (Manhart v. LA Water & Power).

That seems like a good idea: file the 5500 each year and mark them all final. Maybe that will get IRS off our backs. Seriously, why is IRS writing about filings that go to the DOL? Should the DOL be following up on missing 5500s?

You imply that a corporation sold its business and terminated its employees as of 05-15-2007. A valuation must be done if assets have not yet been distributed. The termination of all of the employees is a reportable event that will result in full vesting for all participants who have terminated employment and don't yet have 5 consecutive breaks in service. The problem with your approach is that you had a choice: (1) either do a final valuation for a short plan year ended 05-15-07 (thus prorating the limitations for the year) and distribute the assets, or (2) do a valuation as of 12-31-2007. You chose the second and no language in the statute nor in your plan document permits you to pro-rate compensation and hours under the plan for a regular plan year. The harder question: Are you within the amendment period for amending the plan year to a short plan year for 2007 (to May 31st?) with 5500s due 12-31-07? Is such an amendment even "remedial" in nature? I believe that it is now time to consult the plan's legal counsel for clarification.

I have a hard time envisioning a situation in which this would be possible. Clearly "fund" includes a "trust, corporation, or other organization", but I believe that the type of corporation referred to here would be a taxable nonprofit corporation established to provide the welfare benefits promised (similar to a VEBA but without meeting all of the requirements of IRC Section 501©(9)). Can an employer skipped setting up a trust and just call themselves a "fund". Recent Revenue Ruling 2007-65 would certainly disallow tax deductions under such arrangement. I therefore wonder what purpose would be served by such arrangement other than set aside a part of a company's retained earnings to avoid excess profits tax.

An employer can pay a bonus, severance benefit, accumulated sick leave, accumulated vacation pay, etc. at an employee's retirement. The payment is current income to the employee and is deductible under IRC 162 so long as it does not exceed the amount permitted under Section 162(p). There have been several cases where employers have chosen to fund medical benefits for retirees in a lump sum and claimed the deduction in one year (including one of my clients). This is no different. Section 419 permits a deduction for the current cost. Section 419A©(2) permits a deduction for the future years portion. Section 419A(e) limits medical and death benefit reserves to nondiscriminatory amount, and limits that amount of death benefits that can be provided tax free to participants to $50,000, consistent with Section 79.

Found a pretty good explanation at http://edzollars.com/2006-08-12_Life_Insurance.pdf

What if the VEBA is sponsored by an employer? Who can be the trustee then? The VEBA can be an association of employees or have an independent trustee. This should be an entity that under state or federal law is endowed with trust powers. Currently, the employer is the Trustee of the VEBA and the VEBA was formed by a collective bargaining agreement. You omitted stating that the existence of the VEBA was negotiated in good faith negotiations between this employer and employee representatives. Assuming that to be the case [i.e., that the VEBA is not a sham 419A(f)(5)], since the employer is not independent, it could be the trustee only if a joint labor-management committee directed the trustee. Should the VEBA have a trustee independent of the Labor organization and the company? Either that or a joint board could serve as the trustee or administrator who directs a directed trustee.

There are PLRs on point for both of these issues.

Can you support your theory that a lifetime term policy premium would be deductible? Support it logically or legally? There are no definitive rulings or caselaw on the subject, but as an actuary operating under 419 and 419A, it appears to me that the law implies the need for a level funding. There is no requirement that a policy terminate at NRA even though we are only permitted to prefund a $50,000 paid up policy. In accordance with the statute the employer may provide a lifetime death benefit, with the contributions for the excess over $50,000 to be deductible in the participant's year of retirement (or subsequent thereto). However, in order to provide a lifetime death benefit, it is necessary to assure that insurance can be provided in the amount promised. This can be done through obtaining policy that will continue in force after retirement (ie, a lifetime term or term to 100 policy). The difference in the premium isn't prefunding, it is the cost of providing guaranteed insurability for the participant. ART and YRT will not provide that assurance. You seem to be suggesting that the current life insurance deductions can be extended even farther actuarially, over the entire lifetime of the active employee. No, I am suggesting that the current premiums for the lifetime term are deductible in the current year, a contribution to build up a conversion fund for a $50,000 is deductible over years of employment and the cost of the balance of the premiums for post-retirement coverage in excess of $50,000 after NRA is deductible at or after the participant's NRD. When you wrote that the IRS did not object to using the cash values for other than death benefits, I disagree. The recent Revenue Ruling 2007-83 stated that "any deduction with respect to uninsured benefits (for example, uninsured medical benefits) is not based on the premiums of the life insurance policies." In other words, premiums for life insurance policies used to pay for medical benefits will not be deductible. This also means that life policy cash values cannot be set aside to pay for medical benefits. You are misreading the ruling. In RR 2007-65, IRS was referring to deductions for cash value life insurance policies (example I) and for cash value life insurance policies plus self-funded disability benefits where no benefits were paid (example 2). It specifically excludes post-retirement medical benefits from that holding. Only the actual expenses for medical benefits will be deductible. However, if the medical benefits were insured, then a medical policy (not a life policy) would be the funding vehicle. Here, the premiums would be deductible, because the benefits are insured, not uninsured. You are correct, but this only applies to current (419), not reserves for post-retirement benefits. You wrote that the excess over $50,000 of post-retirement life insurance may be deducted. This seems to contradict Revenue Ruling 2007-83 which state that "account limits for reserves for post-retirement may not take into account life insurance benefits in excess of $50,000." Are you suggesting that premiums are still deductible, if they exceed the account limits? There is not limit in the amount of paid up life insurance that may be provided to a participant under IRC 419A. There is only a limit on how much of the insurance may be pre-funded on a tax-deductible basis, $50,000.

It doesn't. Here's a chart that compares HRAs and FSAs: http://www.shrm.org/government/federal/lht_published/CMS_006509.pdf

I am a pension actuary trying to establish an understanding of this 419 stuff. I am a pension actuary who has been working with 419 since 1993. My understanding is that prior to these recent IRS notices and rev ruling on 419 deductions there were plans that were cash value death benefit only plans that purported to be welfare plans. Correct. * * * some promoters suggested that the cost of insurance could be an employer deduction and the remaining portion of the premium would be compensation to the owner/employee. That approach would work under the rulings. The problem is that many promoters ignored the amount that was currently taxable to the owner/employee, or glossed over the fact that the scenario you described is a split dollar arrangement which did not comply with the split dollar regs. My understanding is that one reasonable calculation of the term cost would be the one year term cost based on the person's age and face amount. Correct. However, some promoters were claiming that a very large portion (say 75%) of the annual premium could have been deemed as the insurance cost by computing the annual cost as a level premium based on the entire life of the policy. Apparently this is when the IRS determined that the situation was being abused. While this is one of the abuses they looked at, it certainly was not the only one. The current term premium for a lifetime term premium should be currently deductible. However, the method of calculation of the current cost was being done without an actuary's statement in most cases, so no determination of the reasonableness of the assumptions and methods could be made. No portion of the premium for a pre-retirement death benefit can be deducted. Previously a reasonable amount for the term insurance cost could have been deducted. Wrong. The current term premium is still deductible so long as the plan does not discriminate in favor of Key Employees. A corporation can purchase group term life insurance and claim a deduction without a welfare benefit plan, so it can certainly do so with one. A portion of the premium to fund up to $50,000 for post ret life insurance can be deducted. The excess over $50,000 may also be deducted but taxable income is imputed to the employee based on Table I. A portion of the premium to fund claims incurred, but not paid (such as someone on disability with future sef insured claims to be paid) can be deducted. Premiums paid to insurance companies are deductible. The portion of self-insured amounts that may be deducted may not exceed 25% of current claims. If current claims are $0, the set aside is also $0. A portion of the premium to pre fund for popst ret medical, health type benefits can also be deducted. 100% of current health insurance premiums (or current health claims, if self-funded) is deductible. Prefunding of post-retirement medical benefits may be deducted levelly over the employee's working lifetime based upon current medical costs (premiums or claims) with no COLA. [Example.] It seems that according to IRS Notice 2007-83 a listed transaction has occurred and s/b reported. Would you agree? Absolutely. How else do you think this s/b handled? By the taxpayer or the promoter? It is already a listed transaction and the penalty for failure to report it is substantial to either. Alternatively, what about amending a tax return to provide for a deduction limited to the amount under IRS Notice 2007-83 and thus avoiding a listed transaction. Does this seem like a feasible approach? No. As I read the Notice, the entire premium less the Table I amount on the first $50,000 would have to be included on the employee's W-2. And they don't even get the $50,000 exclusion if the plan discriminates in favor of the Key Employees. The split dollar rules would be much better than this. So if the premium were 100k and the Notice 2007-83 limit were 25k then 25k would be an employer deduction. What about the remaining 75k? Corporate income? Comp to employee? Either taxable to the corporation or to the employee depending on who owns or is entitled to the increase in value of the policy. You are describing a non-compliant split dollar plan, NOT a welfare benefit plan. Interestingly enough, you have not asked for a legal way to operate a welfare benefit plan, but simply a way of legalizing a split dollar arrangement. The easy way to legitimize a split dollar arrangement is to comply with the split dollar regs using either the economic benefit regime or the loan regime described in the regs.

Don- "* * *I assume they were referring to non current benefits. If that is the case, then the cost of the current benefits (yearly renewable term life premiums) should be deductible." You are correct, although I would argue that the premium cost of a lifetime term policy (rather than ART) is deductible. "In the case of non current benefits (post-retirement life and health benefits), if the premiums were within the bounds of the reserves allowed for such benefits, then deductions would seem to be in order." Correct again. "I think the problems the IRS cite revolve around 2 areas, both of which entail non permissible benefits: 1. Benefits which discriminate in favor of HCEs. 2. Life insurance proceeds used for benefits other than death benefits." I agree with 1., but we disagree on 2. IRS primarily objects to claims that a deduction may be taken for the entire premium for cash value insurance contracts, not the use of the cash value for benefits other than death benefits.

The plan provisions could be written up as a separate plan document, included in the trust document or could be provided by incorporating a reference to the policies used to provide the benefits. In my work I favor writing up a separate plan document, but have seen all three approaches.

For those who aren't yet aware, on October 17, 2007, the IRS issued Notice 2007-83, Notice 2007-84 and Rev Rul 2007-65. Each of these attacks a different part of single-employer welfare benefit plans that IRS considers to be abusive. Notice 2007-83 names as "listed transactions" (potentially abusive tax shelters) those welfare benefit plans that provide and fund for cash value life insurance contracts. Notice 2007-84 lists concerns about plans which purport to be non-discriminatory but which in fact result in the owners and key employees receiving all or most of the benefits. IRS threatens to re-characterize such arrangements as deferred compensation, disqualified benefits or other onerous tax treatment. Rev Rul 2007-65 disallows tax deductions for purported welfare benefit plans that are really the purchase of cash value life insurance policies, as well as deductions taken for disability reserves when no disability payments have been made. Under both Notices IRS threatened severe penalties against tax return preparers, promoter of the arrangements and those who aid and abet such promotion. This would conceivably include insurance companies who allow their products to be issued and banks whose trustee services facilitate the transaction. As a result: (1) Most life insurance companies have announced that they will no longer issue insurance policies (or cash value insurance policies) under welfare benefit plans; (2) Most of the plan promoters have to register as such and provide a client list to IRS; and (3) Innocent clients have no way to get out of such plans (other than death), since one of the abusive practices IRS expressed concerns about was closing plans down and distributing assets.

The whole transaction does not pass the smell test. A VEBA can own an insurance agency (as a majority or minority owner). The earnings from such ownership will be subject to UBIT as unrelated business taxable income. It can even do business with the insurance company it owns. The problem occurs if another owner of the insurance agency, who would necessarily be a joint venturer with the VEBA, obtains any income from any transactions with the VEBA. It is clearly a prohibited transaction. The issue you raise, re: a capital contribution. I share your concerns, although not for the same reasons. If the agency were 100% owned the transfer would be fine. The implication is that the transaction is not for the benefit of the VEBA but for the benefit of the agency and its primary owner(s). It could also constitute prohibited private inurement.

The key to the answer is in the fact that the policy is a group policy issued in state B. It is therefore delivered in state B as being issued there. The answer is "no".

The payer has to report interest paid to VEBAs as well as others. Whether the VEBA is taxable depends on what the investment represents. Although the trust is generally tax-exempt, accumulations to provide future medical benefits are taxable as unrelated business taxable income (UBTI), and are subject to UBIT (except for collectively-bargained benefits).

Nondiscrimination rules for health plans are included in section 105 of the IRC. Welfare plans have nondiscrimination rules under IRC section 505.

Did the VEBA receive a determination letter from IRS? Has the VEBA been filing 990s and treating the VEBA as qualified? If the answer to those questions are yes, the agency would likely be estopped from arguing that it wasn't really a tax-qualified VEBA. If it is a qualified VEBA it may not be amended to provide for reversion of contributions to the employer, because that would constitute prohibited inurement. If the answer to the questions is no, the plan could probably be amended from a pretend VEBA to a 115 trust. But the earnings in the trust for the time it existed are taxable, and form 1041 is the income tax return filed by the trust. When you ask the consequences, I presume that you are wondering about under tax laws. However, it is likely that the VEBA was part of an ERISA welfare benefit plan as well, so there may be consequences there as well, although most governmental entities are exempt from much of ERISA. It is arguable that the greatest potential problems with the proposal are: (1) If a participant sued for violation of his/her rights under the plan and trust; (2) under state laws, because many states have fairly specific requirements for benefit plans of government agencies. Government agencies are already tax-exempt and don't need VEBAs. I already recommended how to get out in my prior post.

414(b) & © provide controlled group rules and provide for both the 80% rule and the 50% rule. MEWA rules apply to health and welfare benefit plans. If a plan covers unrelated employers, it is required to comply with EBSA registration and filing requirements. 414(m) ASG rules require only > 10% overlapping ownership. But these rules apply to retirement plans and require aggregation of affiliated companies for testing purposes. Why would you wish to cover the employees of such entities under 1 self-funded health or welfare benefit plan? We are required to file as a MEWA with respect to plans that we administer. The MEWA filing requirements are not onerous, but a fairly reasonable nuisance. Warning: If you administer such a plan, it is likely required to comply with state insurance laws for the state or states in which the corporations operate. Most states don't regulate single-employer self-funded plans, but to regulate MEWAs or other arrangements which cover employers that do not meet the single-employer definition.