Ron Snyder

It appears to me that health reimbursement arrangements (or employer-funded flex plans) are subject to HIPAA. This is inconvenient, especially to those flex plan administrators who are used to not having to provide a certificate of creditable coverage to terminating employees relative to their participation in the employer's flex plan. The relief granted under DOL's Technical Release No. 97-01 clearly does not apply. 1. Is there another way out of this requirement? 2. Is one certificate of creditable coverage (from the primary health plan) sufficient to meet HIPAA's requirement, or must each plan provide such a certificate? 3. Can the certificate be provided on request only, since the HRA (or flex arrangement) is secondary coverage? 4. Can such a certificate of coverage be used to trick a subsequent employer or insurance company into waiving pre-existing conditions even though the employee wasn't really covered under a group-health plan but merely given an allowance to cover OOP medical expenses up to a certain level? [Note: I am also posting this under flex plans as it seems to have a wider audience.]

GBurns- Apparently you misunderstood. I stated that "you can charge employees a premium to participate in an HRA. However, the employees' monies will need to go directly toward payment of insurance premiums in order for employees to obtain pre-tax treatment of their contributions." I did not state that the employees' premiums went into the HRA, only that they were paid in conjunction with the HRA. In fact, the premiums go through a POP, but HRA contributions are contingent upon the employee's taking the POP salary reduction. This, of course, is subject to passing the non-discrimination testing under 105(h), but all HRAs are. VG

A plan design is possible in which, pursuant to a uniform policy or collective bargaining agreement, an employer cashes out unused vacation and sick pay into a VEBA trust to pay for their health insurance premiums. This approach saves FICA and Medicare taxes for both employer and employee, and permits the employee to save income taxes. Under such an arrangement, medical reimbursements are limited to 213(d) medical expenses. We have been involved in setting up several of these arrangements, and I am familiar with several competitors doing the same or very similar things. Contact me off board if you would like details.

The Technical Release was intended to address the situations where the employer held funds in a separate account, not a situation in which a TPA commingled assets of separate plans. Your post is inconsistent: you correctly state that "an employer simply has to hold the assets in a general account until they pay it out". But yet you state that "we decided to go with maintaining one checking account for all COBRA clients and one checking account for all FSA clients and a general opertaing account in which to deposit the employer funds". Yet your initial post indicated that you are a TPA, not the employer. If you are a TPA, your approach likely violates state banking law as well as resulting in a MEWA subject to DOL and state regulation, unless an exemption is provided under state law and you have qualified for that exemption.

The DOL issued proposed regulations for wellness plans early in 2001 that might affect your approach. They can be found at http://www.dol.gov/ebsa/regs/fedreg/proposed/2001000107.pdf. But within the limitations imposed by those regulations you could accomplish what you are proposing.

Benegal: Yes, you can charge employees a premium to participate in an HRA. However, the employees' monies will need to go directly toward payment of insurance premiums in order for employees to obtain pre-tax treatment of their contributions. After-tax employee contributions could be used as funds inside the HRA, but once contributed by the employee: 1. They would likely be considered "plan assets" under the DOL regulations; 2. They cannot be refunded to the employee, except as reimbursement of medical expenses realized. I am very much pro-HRA, but you haven't presented significant evidence as to why one would be appropriate for your firm. Also the plan design you suggest is flawed.

This is an matter that should be considered carefully, as it raises a number of issues. The alternatives appear to be: 1. Separate accounts for each client. This is a safe method of handling the funds. The TPA should not have signature authority over the account, although software permits printing of the employer's signature. No need to order separate checks for each client in this day of laser printers, so this approach is acceptable from most perspectives. The TPA can claim that it is not a fiduciary under this method, although that is a fact question for the court to determine. 2. One TPA claims payment account. This method would seem to work in states where TPA firms are licensed under state law (and bonded). The TPA would have signature authority over the account and would be a fiduciary. Since TPAs are licensed and regulated under state insurance laws (in about 15 states), this would avoid a problem with an illegal trust business. 3. Single-employer trust. This method would work but is almost identical to no. 1 above. The only difference is that the account is a trust account, so this would require additional (financial) reporting each year. There is no advantage to the employer or TPA with this method, only to the participants. (Their interests would be more protected.) TPA cannot serve as trustee, as that would create a trustee business and violate banking laws. 4. Multiple-employer trust. This method could work, but raises issues of MEWA reporting and disclosures and would require an independent (bank?) trustee, thus incurring additional expense.

Each of the provisions you describe could be done legally, but I have to endorse the comment of GBurns: This could be done without an HRA and you evidence no intent to have funds roll over from year to year.

Presumably the GVUL contract is owned by the employer, since the plans are generally used for executive compensation. If so, any cash value would revert to the employer, who never wrote off the premiums in the first place. There are no adverse tax impacts on the participants, but there is one "negative consequence": the employee has lost a benefit he previously had.

1. Yes, separate 5500s would be required, IMHO. However, in the old days a SPD plus corporate minutes evidencing intent that all plans be considered as one might have been sufficient to treat the plans as one. 2. Of course there any possible consequences if a single 5500 has been filed without appropriate documentation. People get in trouble for out-of-date documents all the time. However, since we may still be in a remedial amendment period for required amendments, it may be possible to do a wrap plan with a retroactive effective date. (I did not say to date back!) 3. If plans are not bundled, enrollment in one plan can be contingent upon enrollment in a separate plan if that language is contained in the separate plan and it does not cause prohibited discrimination. Ask the plan's counsel if a retroactive A&R of the wrap plan can be done now.

This is not a black-letter area of law. IRC Section 101(a) states that death proceeds of life insurance are tax-exempt. Since the employer receives those death proceeds, it would be entitled to receive them tax-free. Many companies fund executive deferred compensation arrangements through life insurance with the death proceeds providing a reimbursement of costs to the employer. What is the nature of the payment to the employee's survivor? Is it a group-term life insurance benefit? Is it key man insurance? Or buy-sell? What documentation exists relative to this arrangement? These are the keys. I have seen opinion letters to the effect that the death proceeds of life insurance paid to the employer pursuant to an employer-provided death benefit plan can be passed on to the employee's named beneficiary tax-free. The theory is a quasi-trust conduit, but it would likely only work under the following circumstances: 1. The policy is for the purpose of providing a death benefit to the employee. 2. The death proceeds are never used by the employer for any purpose other than to be passed on to the beneficiary. (Preferably, the funds are never deposited to the general bank account of the employer, but are kept separate.) Of course, this raises several questions: (1) Does the employer declare the death proceeds as taxable income? (2) Does the employer, therefore, get an offsetting tax deduction for the payment to the beneficiary? (3) Is the payment subject to withholding taxes? And mainly: (3) Why not simply name the beneficiary in the insurance policy and avoid all doubt who is supposed to get the tax-free benefit?

1. (A) Your first approach is sensible. If a lump sum settlement is not permitted under the terms of the plan/trust, however, it might not be an allowable use of the VEBA funds. However, IMHO, on plan termination funds in the plan are to be used to settle liabilities and, so long as the claimant is not a HCI or "private shareholder or individual", such settlement should be fine. (B) Use of funds to pay premiums on life, LTD, etc. policies is fine, so long as it is in accordance with the terms of the plan/trust documents. You might need an amendment (first) and a plan termination to accomplish this approach, but it can work. Company A gets no more "benefit" than any other employer gets from providing benefits to its employees. © If the insurance contracts have any cash values or nonforfeiture options or rights to be exercised, they should be issued to the VEBA. However, some carriers resist this. (D) Policies could be transferred/distributed upon termination of the VEBA. But care needs to be taken that such contracts have no value. They could also be reissued to or renewed in the name of the employer. 2. In my scenario, above, the claimant would not need to agree. But if the VEBA were not terminating, the VEBA funds could be used to continue making the monthly LTD payments to her and to pay premiums on the new life, LTD and AD&D policies, so long as the plan/trust documents so provide. I have a hard time believing that you obtained a determination letter with a corporation who is a member of a controlled group serving as the trustee. VEBA rules require either an independent trustee or control by the members of the plan. Such trustee could never be independent. And making Company A trustee of its own VEBA has the same effect as terminating the trust IMHO. A VEBA could have 2 trustees as you describe, but it would likely need 2 funds. Again, the documents should be consistent with the actions and procedures.

I don't believe that municipalities eligibility to declare bankruptcy is pursuant to Federal bankruptcy statute, but a matter of state law. In such a situation, the governmental unit would not cancel its debts but reorganize and be protected from creditors during its reorganization. That is what Orange County did. An entity with taxing authority is like an individual with earnings potential: it can go bankrupt if its liabilities exceed its assets. Individual taxpayers do not personally guarantee or become liable for the debts of the municipality in which they live. A governmental entity may terminate a qualified retirement plan at any time. The US constutition limits the Federal government, not state governments. The 14th Amendment makes due process rights applicable to states, but that would not apply to retirement plan obligations.

As an actuary who does single-employer plans I am also curious to get an answer. However, my recollection is that the Multi-Employer Pension Plan Amendments Act of 1979 imposed joint and several liability on employers participating in a multi-employer (Taft-Hartley) trust, but that may have only imposed withdrawal liability.

MGB is correct. However most people who refer to a "105 medical plan" are really referring to a Section 105(h) (self-funded) health plans. This is the section used by TPA firms to establish self-funded and partial self-funded health plans for their clients. There is much information available on the internet about such arrangements, but I recommend contacting a health TPA firm for specifics. As yukon suggests, HRAs are also 105 plans.

The answer is not exactly. IRC Section 408(e)(2)(A) provides: "If, during any taxable year of the individual for whose benefit any individual retirement account is established, that individual or his beneficiary engages in any transaction prohibited by section 4975 with respect to such account, such account ceases to be an individual retirement account as of the first day of such taxable year." IRC Section 4975©(3) also contains special language that applies to IRAs: "An individual for whose benefit an individual retirement account is established and his beneficiaries shall be exempt from the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if, with respect to such transaction, the account ceases to be an individual retirement account by reason of the application of section 408(e)(2)(A) or if section 408(e)(4) applies to such account."

The "model" legislation is intended as a standardization of duties and remedies among the states. Some are currently stricter while other are more lax. Similarly, some states hide behind governmental immunities (like my state of Utah) statutes while others don't (like California). Practice and statutes vary widely. It seems to me that what may be prudent practice in Alabama may be imprudent in Alaska. Practitioners who advise employers in this area, including the insurance companies and mutual funds who offer products for sale, need to be fully familiar with the laws of their jurisdiction. Finally, governmental immunities aren't always enough. A few years ago a local governent adopted and maintained a flex (125) plan for several hundred firefighters. When one of the firefighters was audited personally it was discovered that the flex plan was not being operated in conformance with IRC section 125. This led to audits of all firefighters under the CBA, and taxation of all salary reduction contributions to the 125 plan, including income taxes, penalties and interest. Pursuant to the CBA the members of the union filed a grievance. The city ended up paying despite governmental immunities. It seems to me that districts that permit salary reduction arrangements without verification of compliance with applicable laws and regulations are taking a similar risk. They might as well do it right and in writing rather than trying to hide under the slippery rock of governmental immunity.

Becoming "fully vested" is relatively meaningless in this context. If the employer is not subject to the anti-cutback rules, can't it simply unaccrue all benefits not in pay status before the plan terminates and benefits vest?

Yes. That is the reason why a "wrap" plan document might be considered appropriate.

Typically with 403(B) plans each vendor has its own plan and adoption/execution materials for the employer to sign. That is why most school districts limit the number of approved vendors, because it is a lot of stuff to hand out to employees. Remember that 403(B) plans are funded through employee contributions. Eligibility is generally anyone on the payroll. So the plan documents are quite simple. Remember that IRS did a 403(B) audit project 3 years ago. They said that of 30 plans they audited, none were in compliance. They even considered creating a determination letter procedure so that a higher level of compliance could be obtained.

If a governmental defined benefit plan were insolvent (and several are), I would recommend to the employer to go ahead and terminate the plan, cancelling all benefit obligations. [Non-ERISA plans are not subject to vesting or anti-cutback requirements of IRC Section 411.] Assets can then be allocated to those in pay status. If desired, the employer can continue to promise similar retirement benefits in the form of a non-qualified deferred compensation plan without a need for advance funding.

You made quite a leap! Just because a plan is not specifically subject to the ERISA reporting and disclosure requirements doesn't mean that they will choose to have "no written plan document or SPD". It simply means that the plan document and employee's summary are not required to comport to the ERISA requirements. Duties do not arise only under ERISA. All exemption from ERISA requirements does is imply the application of state laws. In fact the reason for the ERISA exemption for governmental plans is the separation of powers clause in the Constitution. Almost all state laws, including the common law, impose duties on fiduciaries, including the employer. While those duties may vary with respect to investments, I have a hard time believing that an employer-fiduciary could discharge its duty under state law without written documents. The administrators have the duty to determine eligbility, distributions, loans, etc. Any funding provider, by holding the assets of such a plan, is also a fiduciary. As such, before they accept the assets they need to know that someone is administering the plan. If they are contracted to provide administrative services as well as investments, that should be consistent with the plan documents and the contract between themselves and the public employer. They should then fulfill all of their duties under the plan document and the contracts to which they are party.

Thank you, Kip. I had missed that.

I said "probably" because the facts were not complete enough to know whether or not this was a POP or a full flex. (Most of the 125 plans I see are flex plans.) Are you implying that the premium reduction portions of a full flex plan are exempt from ERISA?

My first impression is that your arrangement does not work, whether or not you receive a determination letter from the IRS, for any of the following reasons: (1) While as medical students you share a "common bond", since you are not employed, it is not "employment-related". (2) Your state insurance department may consider your arrangement to be a MEWA subject to their requirements. (3) While states may not be subject to ERISA, most have enacted state COBRA and HIPAA requirements. Two questions: 1. Is filing Form 1024 to gain a 501©(9) exemption necessary for a VEBA that functions merely a pass-through for premiums and does not accumulate assets to pay benefits? In other words, is the 501©(9) exemption necessary (or desirable)? 2. May the VEBA cover Groups 1 and 2? 3. If the answer to 2 is No, then what is the consequence of providing such coverage? 1. Yes. A VEBA is not a VEBA unless it has been approved by the IRS. See IRC Section 505©. However, if the question is what is the point of being tax-exempt if there's no income, then the answer is no, you don't have to file. 2. IMHO, no. However, a non-VEBA trust could. 3. The answer to this question is implicit in my comments above. The primary consequence is that you might get in trouble with the state insurance department.