Ron Snyder

Having studied IRC 409A and the regulations under it, it appears to me that any plan that permits setting aside funds (including funds of the employer and/or of the employee) for use at a future time is deferred compensation with the need of complying with the requirements of 409A. A welfare benefit plan typically sets aside funds for welfare purposes, such as: medical reimbursements, death benefits, education reimbursements, disability benefits, etc. However, a great number of so-called "419 plans" or "419(e) plans" provide a mechanism whereby an employer, by dropping out of a multiple-employer or by terminating a single-employer plan, can trigger a cash distribution. IMHO, such a cash distribution would fall under IRC 409A. A plan that permits such distribution must comply with 409A by 12-31-05 or be subject to the penalties provided thereunder. If I had a client that participated in a WBP or "419" plan, I would make sure that no cash distributions were possible (with the exception of medical payments or reimbursements) or get my client out of the plan by 12-31-05.

If I understand you correctly, that is, if "ABC Trust Co." is a state- or federally-chartered trust institution, then the answer is yes.

Thanks for your answers. A couple of more questions: Are plan and trust documents separate or combined? Is/was the plan a 419A(f)(6) plan? You may consider contacting Bruce Ashton (of Reish & Luftman) or Nicolas Saakvitne, as they are attorneys knowledgeable about such plans. Louis Kravatz & Associates, an actuarial/administrative firm may be able to assist you. (There are several others as well.) The cash surrender value has generally been considered to be the taxable value for distribution purposes. However, due to abuses, IRS has recently been applying new rules (using total premiums paid, for example). Throughout your initial post, you speak of the employer's VEBA. Now you throw in "This trust is a part of MET." Which is it? Who received the determination letter?

jhall gave no indication that this was a VEBA. Regs. under 501©(9) don't apply to MEWAs. You want a "checklist": 1. Review plan and trust document termination procedures. 2. Determine whether such provisions need to be amended. 3. Based on plan and trust provisions, determine proposed distributions. 4. Notify participants. 5. Make distibutions. 6. Provide W-2 forms with respect to such distributions. 7. File final 1041.

You raise several issues, some intentionally: 1. Why do you describe your company's plan as a VEBA? Did your company apply to IRS and receive a letter of determination? 2. What plan termination provisions are included in the trust document? 3. There are several knowledgeable attorneys in So. Cal. who can assist you. However, they are not inexpensive. Don't know about SJ. 4. Who has been administering the plan? Are they unavailable to assist you with closing it down? 5. Rolling the policies into an ILIT will NOT avoid tax consequences. The taxable value of the policy (less any basis) would be taxable income to the employee. Each employee would set up his or her own ILIT. 6. Who owns the policies now? Have the employees been paying taxes each year on the Table I amounts?

If long-term care is purchased by an individual employee without use of an HRA, FSA, etc. the insurance premiums are not tax-deductible. If long-term care is purchased by an individual employee through an HRA, flex account, etc. the insurance premiums are tax-deductible. Proceeds of a LTC policy purchased under an HRA, FSA are taxable on receipt. If long-term care premiums are paid by an employer, they will normally be deductible to the employer as part of health benefits provided, an HRA, etc. If not deductible under such arrangement, they would still likely be deductible as compensation to the employee. Either treatment will be reflected on the W-2 provided by the employer.

Yes, several of us have had experience that would be of assistance. That is why we are united in advising you to take this up with your attorney. If you don't get this corrected now through the DRO, you will be stuck with a result you won't like.

While ERISA is correct that there is an incidental requirement for death benefits, that is not determinative. You postulated that the funds were rollover funds, and accumulated funds, which includes rollovers, are not subject to the same requirement. The real problem is the nature of the funds. Simply because we can now roll IRA monies over into a 401(k) plan doesn't make those funds 401(k) funds. My educated guess is that the funds could be used for insurance only if the IRA rollover was a retirement plan distribution coming from a conduit IRA. Gary Lesser, the IRA/Rollover master, would be a better one to ask. I suggest posting this on his IRA thread. In any event it would not be discriminatory if only 1 participant desires to buy insurance with his rollover money.

An insurance company will generally allow dating back insurance coverage for up to 6 months to save an age change. When a policy is issued without payment, they will generally only allow up to 60 days for the delivery requirements to be met, including the premium payment. Beyond that time frame, the contract is voidable at the insurance company's option, but they may allow it to become effective if it is in their interest. No matter what the premium mode is, the modal premium is due in full before the policy is effective. Do not rely much on a model insurance code. I don't know of many states adopting it.

You need to consult your own CPA who can run out the numbers, factor in your subjective view about future tax rates and give you an answer. Certain banks and brokerage firms will provide this "service" for free, since they want to sell you something. I would not place my tax decisions in the hands of unknown strangers who post on a bulletin board.

Even if the separate maintenance order is a domestic relations order, it cannot be a QDRO since it does not purport to divide the benefits.

As Andy points out, there are problems with your facts/assumptions: a. NRD of 50 is likely a problem; b. In-service distributions may be a problem for a DB plan; c. Distributions before 59-1/2 will be subject to 10% penalty; d. Distributions are not eligible for IRA rollover treatment; However, with that said, there is no legal reason why a plan cannot allow for the participant to withdraw amounts at the participant's discretion, so long as the amounts fall within legal minimums and maximums.

Is this a change of subject, or are you still referring to employer real estate? Assuming you mean employer real estate, are you referring to a situation in which the qualified plan owns a facility used by the employer in its business and leases it to the employer? Or are you referring to some other arrangement? A mortgage obtained by a qualified plan on ANY real estate might give rise to UBIT (unrelated business income tax), by creating "debt financed" unrelated business taxable income. See Code section 512 et seq. Mortgages make great investments: several clients have invested their funds into first and second mortgages to obtain a prudent, secured investment. However, when the plan goes the other way, becoming the borrower instead of the lender, several problems may ensue. This is more so with respect to employer real property. You mention PTs; DoL would have to grant a private ruling (ERISA exemption letter) with respect to such a transaction. Search through the EBSA website and you will find a few examples of situations that the DoL has granted exemptions for.

Assuming that they pass the nondiscrimination tests of section 105(h), this is ok. However, the plan documents must track what is actually being done. Oriecat asks a good question: I sugget that the answer might be that the participants are named in the documents (or on an attachment to the plan documents).

Now that we're at 50, I would like to add my voice to the pleas for Mike Preston to come on over. In case he doesn't, Andy, provide me with a link to your 415 question: I'll try to answer it.

Several issues here, including ones you don't raise. My comments: 1. You are right to be concerned about lack of documentation, although I am willing to bet that there is a Summary of Coverage (or similarly titled document) for each benefit/contribution structure. If so, they should either redo their documents, or they should consider a "wrap plan" that incorporates the various coverage summaries. See ERISA attorney ASAP to address this. (Wrap plans have been discussed in several threads.) 2. This sounds to me like a MEWA that is operating without complying with the laws of the states in which it provides benefits to non-employees. BIG RED FLAG. SEE ERISA ATTORNEY NOW. Your paranoia is justified.

A business entity is most definitely a "person" for purposes of such laws. Amit-You are wrong. Go back and reread the instructions. They say to report any compensation of $5,000 or more except: "1. Employees of the plan * * * less than $1,000 per month * * *; 2. Employees of the plan sponsor who did not receive * * * compensation from the plan; 3. Employees of a business entity (e.g., corporation, partnership, etc.), other than the plan sponsor, who provided services to the plan; or 4. Persons whose only compensation * * * consists of insurance fees and commissions * * *."

The reimbursement may be pro-rated monthly, may be limited to actual contributions made with no recourse against the company, etc. Your can only find the answer by reading the plan documents and the SPD. Other documents are not relevant.

Several issues have been identified, but not satisfactorily resolved: 1. Can a plan cause forfeiture of a participant's vested accrued benefit simply because the participant dies prior to retirement? Of course. However, the plan document must explicitly so state. Look at the language under vesting and forfeitures. Otherwise the participant is likely entitled to his vested accrued benefit PLUS the death proceeds of his life insurance policy. (Yes, Corbel has other options, but no plaintiff's attorney cares about them.) 2. Can the cash value of a life insurance policy ever equal or exceed the face amount of the policy? No. Under DEFRA's definition of a life insurance policy, no matter what the cash value grows to, a corridor death benefit will be provided that exceeds the cash buildup. 3. While insurance cash values are plan assets for funding purposes, they are in no way like distributing a stock. On death no policy is distributed. Under IRC 101(a) the death proceeds of the insurance policy are paid tax-free to the beneficiary. If the cash value is also distributed (which, as a plan asset, it may or may not be) it will be taxable to the beneficiary. 4. When the incidental death benefit rules were written, it was to make sure that a qualified plan was not primarily an insurance plan. 100 represented a reasonable approximation of the expected number of months after retirement that a participant might live. To provide a death benefit beyond the expected lifetime was not considered incidental. Other rationales were later endorsed that provided alternatives with greater death benefits than the 100 X rule, and they are now more commonly used (ie, the 25%-50% rules, the 2/3-1/3 rule, etc.). The only comment I agreed with on this thread was from AndyH!

Try the EBSA website. Note particularly the section entitled Self-Compliance Tool for Part 7 of ERISA: HIPAA and Other Health Care-Related Provisions .

Gary- My answers were directed primarily toward Kirk. Sections 419 and 419A limit tax deductions; they do not authorize them. Section 419(e) simply defines the terms "welfare benefit", "fund" and "welfare benefit fund". Read IRC sections 419 and 419A. The qualified cost is the ratable portion of the current death benefit coverage without cash-value build up. This can be accomplished through term insurance or a split dollar approach. To the extent that a welfare plan provides more than a current death benefit (as represented by cash-value build up), the contributions for that portion of the benefit are limited by Section 419A which permits qualified additions to a qualified asset account. The largest death benefit that can be pre-funded through qualified additions to a qualified assets is $50,000, per IRC 419A(e)(2). To answer your question directly, therefore, in addition to paying the current term insurance charges on the entire amount of coverage, it is possible to tax-deduct an actuarially-determined level contribution amount sufficient to provide a paid-up death benefit of $50,000 at the participant's normal retirement date. Some insurance companies have software that can illustrate this deduction amount. (It could be argued that an amount is "actuarially determined" if it comes directly from the rates of the insurance company that were determined by the company's actuaries.) The way to prepare this illustration is as follows: 1. Determine the plan's formula and death benefit amount. 2. Run a ledger on the policy showing that face amount as being in force from the issue age until the participant's normal retirement age. 3. Have the policy reduce to $50,000 at the participant's normal retirement age. 4. Tell the software to calculate the level premium payable from the current age to the normal retirement age. My guess is that you will be very disappointed in the results. It will be possible to deduct only a portion of the total UL premium. Only through using a blended rate (the blend will vary by age, but start with 80% term) will you be able to find a premium which accomplishes your objective and is fully deductible within the limitations provided under IRC sections 419 and 419A.

I agree with Mbozek on this one. This is obviously outside your area of expertise, and there are issues beyond the ones you raise. Find an expert. Note: most insurance companies (who routinely set up split dollar arrangements in the past) have disclaimed any responsibility for compliance with the new deferred compensation rules, so they will not help. Of course, once your client goes to a tax attorney, the real question is "Why do I need the life insurance?"

If a plan were limited to Section 419 deduction amounts ("qualified" or current costs), it would not be worth it. Besides, anything that can be done in a welfare benefit plan under IRC 419 can be done directly by the employer. Under 419A, however, qualified additions to a qualified asset account are permitted. Those amounts may range from inconsequential to substantial. For example, I recently assisted an insurance company to establish a VEBA for funding health benefits for retired employees. They were able to make a (one-time) tax-deductible contribution of $3,000,000 in the first year to fund those liabilities. Even smaller companies may be able to realize a significant benefit from pre-funding both life and health insurance benefits. Although 419A(e)(2) limits the amount of post-retirement life insurance that can be pre-funded, nothing prevents an employer from obtaining a tax deduction for handing an employee a paid-up policy for $1,000,000 or more. That would give the employer a substantial tax deduction in the year of retirement. However, because that would be a form of deferred compensation, the plans we administer do not premit the transfer of the insurance policy. (Policies held in the WBP after a participant's retirement continue to provide tax-free death proceeds under IRC 101(a), but are not subject to the Table I reporting requirements. Sometimes such plans are worth it, sometimes not. We can't tell without running out the numbers. However, the primary factor that determines whether such plans are beneficial is the cost of covering rank and file employees.

Answered on other thread.

Term insurance seldom has "guaranteed policy rates" and "assumed policy rates". 419(e) does not permit tax-deductible premiums to an insurance policy for cash value buildup; it only permits the current cost of coverage to be deducted. That cost of coverage may be determined in any number of reasonable ways including: (1) using actual term premiums; (2) using theoritical term premiums; (3) using a portion of the permanent insurance premium that represents the current term portion (such as under a split-dollar arrangement), etc. The only deduction available for life insurance in excess of the current term cost is under 419A, and is limited to an annual amount to provide a paid-up policy of $50,000 or less at the participant's retirement date.