Ron Snyder

But the amount that is imputed as income to the employee under Table I is not based on the employee's health or circumstances: it is the same for each member of the group who is insured, based upon his or her age within an age band. As such, if the employee is covered by insurance, even if nobody pays any premiums for or during the year, the excess over $50,000 creates taxable income for the employee. Sorry

First you describe an employer permitting an agent to solicit plans that would clearly qualify as "voluntary benefits" (after-tax and non-ERISA). Then you describe them as "pre-tax". Which is it? The only way to reconcile the information you provided is to assume that the agent was soliciting participation in insurance contracts pursuant to a 125 plan. As such, it would normally be an ERISA plan. K Johnson is correct, above. But what is the point of the question? Are you trying to decide whether to go to Federal or state court? Are you waiting for an SPD that complies with DOL Regs? Or are you trying to figure out whether you should be able to get an answer to a question in writing within 30 days?

Recovery from a tortfeasor is not necessarily a "reimbursement" of medical expenses, although it may be. This is a developing area of the law. With that in mind, the fiduciary's duty to the plan is discharged if he behaves reasonably, both subjectively and objectively, in deciding whether to litigate to pursue a claim or whether to settle for less. While good records ought to be maintained by the fiduciary in case a claim against him/her/it is filed (in hopes of getting free money from the E&O carrier, the fiduciary still has to make the best decision possible. It is certainly not a breach of duty per se to settle or compromise such a claim.

Dependent ages are established by the underlying health plan. There are no age limitations in Section 152 of the Internal Revenue Code. All that is required is the relationship and meeting the support test.

Presumably the "tax-exempt" status you refer to was as a 501©(9) trust. As such the excess funds may only be used to provide benefits to employees, their dependents and beneficiaries. Funds may not revert to the employer, nor may they be used to provide disproportionate benefits (or inure to the benefit of private shareholders or individuals). A couple of private letter rulings have approved distribution of such excess funds on the basis of (capped) compensation during years of participation in the plan. But any non-discriminatory distribution should be acceptable.

The PEO firm is apparently confused. Retirement plans have a similar proscription, the "exclusive benefit rule" found in IRC 401(a)(2). Welfare plans are not subject to such a requirement. If your PEO is located in a jurisdiction that does not have an employee leasing company act and the health plan is self-funded (or partially self-funded), it would be a MEWA. While MEWAs are not "illegal", they are subject to various state regulatory requirements that the PEO does not comply with. Your PEO probably doesn't understand the subtleties and nuances of government regulation. Few of them do.

The 1984 Proposed Regulations contain the following paragraph: "(7) FSA EXPERIENCE GAINS. If a health FSA has an experience gain with respect to a year of coverage, the excess of the premiums paid (e.g., employer contributions, including salary reduction contributions and after-tax employee contributions) and income (if any) of the FSA over the FSA's total claims reimbursements and reasonable administrative costs for the year may be used to reduce required premiums for the following year or may be returned to the premium payers (the participants for premiums paid by salary reduction or employee contributions) as dividends or premium refunds. Such experience gains must be allocated among premium payers on a reasonable and uniform basis. It is permissible to allocate such amounts based on the different coverage levels under the FSA received by the premium payers. However, in no case may the experience gains be allocated among premium payers based (directly or indirectly) on their individual claims experience."

Forfeitures in 125 plan may: 1. Be used to reduce the employer's next contribution. 2. Be reallocated to participants within the plan on a basis that does not factor in experience. 3. Be used to provide other welfare benefits for employees. 4. Be used to pay administrative expenses of the plan. They may not be returned back to the employees. If the employer wishes to give its money to charity, it may do so. However, this would not be possible if the funds are held in trust for benefit of the employees or participants. The big issue here is: What does the plan document say to do with the forfeitures? That would seem to override all of the other possibilities. And if the document is silent, you have a problem with draftsmanship. This is an essential plan provision.

GBurns- I don't believe that Rev Ruling 2002-41 and Notice 2002-45 prohibit HRA participation from being conditioned on health insurance plan participation. All that is required is passing the 105(h) non-discrimination testing. V

If the PEO plan is terminated then it can be handled like a single-employer plan termination. However, each adopting employer has the ability and the right to set up and aponsor a successor plan into which its share of assets can be transferred. If the PEO plan is amended and restated or merged into a true multiple-employer plan, there is no plan termination to deal with. This would make the most sense to me for most PEOs.

I responded to this on the other thread.

The first of my questions concerns whether the trustees of a governmental plan (specifically, the DB plan of the municipality's Police Officers and Firefighters) can use part of the plan's overfunded surplus to make a COLA increase to the retirees' health insurance allotment without also having to give the same stipend to the current participants. There are multiple ways of accomplishing your goal. And nondiscrimination is not a problem. The problems are: the existence and language of applicable collective bargaining agreement(s), and drafting of the desired provision. At least one other municipality in GA has authorized annual, automatic COLA's for its policemen, but those COLA's are part and parcel of that city's pension, and they do not necessarily owe their source of funding to that plan's overfunded surplus. We may also want to add such a provision to our workers' plan, but we would like to use the surplus as the means to the funding end. I worked with a fire district that terminated their overfunded DB plan and replaced it with a new DB plan providing the same benefits. After transfer of the PVABs, the excess funds that reverted to the employer were used to fund retiree medical benefits through a welfare benefit plan. This approach permitted the retiree medical benefits to be paid and received tax-free. The welfare benefit plan was done as a DC plan with individual accounts rather than a guarantee of a COLA. Next, we are concerned about the State Constitution's anti-impairment of contracts provision. For example, if we were to authorize a 1.5% COLA, would we ever be able to scale it back (or undo it)? We do not suppose that the application of the aforementioned State Constitution provision would cause us much of a headache in regard to current employees, who are exchanging services for their pay (whether in cash or benefits), but the potential headaches Re: the retirees could be bad ones. The ERISA anti-cut back provisions come to mind (even if our governmental plan is not subject to ERISA per se), and the immediate, funding impact, on the actuarial bottom line also gives us pause. I'm willing to bet that even an Alabama benefits attorney would have a hard time answering regarding the "anti-impairment provision". This provision means what the State Supreme Court says it means if and when they rule. In my view, the facts of the case that comes before them will determine whether the anti-impairment provisions were intended to stop governments from taking away a benefit that has been promised. As they say, "bad facts make bad law." I suggest that you seriously consider a DC approach rather than a DB approach so that your case is not the test case that gets to the Ala Sup Ct. We would welcome any input from your subscribers. Please suggest if and how ERISA Sections 420 and 401(h) may apply even though our plan is not subject to ERISA per se. ERISA Section 420 would not be necessary and 401(h) would truly be a pain in this case. They do not apply!

Okay, I'll give you my reaction. 1. The employer ceases paying any of the health insurance premium So far, so good. 2. The participant pays the entire amount of the premium through pre-tax dollars under a cafeteria plan Okay. This has always been available. 3. The employer establishes a medical reimbursement account for each participant, presumably funded in the same amount as the health insurance premiums it was formerly paying on behalf of the participant under the insured arrangement. Notice 2002-45 and RR 2002-41 specifically prohibit the HRA balance's being related to employee contributions, as they apparently would be here. However, by establishing an HRA contribution that was not related to the premium the employee was paying, this could presumably be done. 4. The participant is reimbursed with dollars that are not subject to tax for his or her health care expenses that are not covered by the insurance ("Noncovered Expenses"). This is permissible so long as they expenses are for Section 213(d) medical expenses. Admittedly, the only tax savings inherent in this arrangement are that the Noncovered Expenses are paid with pre-tax dollars. However, that saves income taxes for the participant, as well as employment taxes for both the employer and the participant. The same end is accomplished by the employer's adopting a flex plan and permitting the employee to be reimbursed with pre-tax funds. Also, I concede that you could achieve the same result, if the employer continued to pay the insurance premiums and employees all made contributions to a health care flexible spending account in an amount equal to their Noncovered Expenses. However, that will never occur in the real world. In your model employees don't have to worry about "use it or lose it", but they do have to trade a lower salary for funds in the HRA that may carry over to future years. My guess is that most employees would rather estimate their expenses and keep the rest in their paychecks. I also am not addressing the fact that the amount of the Noncovered Expenses will probably be less than the amount of the insurance premium that the employer was formerly paying. That is because the amount that the employer contributes to (1) pay the insurance premium and (2) to the health reimbursement account can be adjusted to achieve an equitable result. If you're not going to address it, neither am I.

The provision doesn't make sense. Either it is a loan or a distribution. The determination of whether or not a loan is taxable is made in accordance with IRC Section 72(p), not in the plan documents.

In favor of UL: 1. The interest guarantees are higher. 2. The current interest crediting rates are higher. 3. The client believes that the stock market is going down. 4. Policy owner passes investment risk and worries on to insurance company. In favor of VUL: 1. Higher returns if expenses are comparable, since market returns have exceeded fixed rate returns over all 10 year + periods. 2. Generally the commission load is lower. 3. Disclosures are pursuant to securities laws and more complete. 4. Assets are kept in separate account of insurance carrier and will not be lost even if carrier folds. 5. If policy owner is sophisticated in investments he should be able to do much better than insurance carrier. Now that I have listed both sides, my recommendation (to you and to my clients) is that the owners consider a IUL (indexed universal life) product. It has the advantages of both arrangements, without the responsibility to pick the right investment.

Many unions don't permit a member who retires to retain his membership. How is that handled?

I suggest that you read Notice 2002-45 and Revenue Ruling 2002-41 for starters. You might do a search on Google for "health reimbursement arrangement". I found several articles, mostly from law firms, that gave a good overview of HRAs. Also most of the national actuarial and consulting firms have articles on their websites explaining HRAs.

There are hundreds of them. What kind of research are you doing? If you're simply looking for a TPA firm for your own plan, you should be able to find one within a relatively short distance from your location. There are at least a dozen software providers that sell flex software. You can go to BenefitsLink and page through their commercial listings. Do a search for 125 plan administrators or software. I did a search on Google for "125 administration" and turned up 10 pages of listings.

Not at all. In fact, under the new IRS regulations, it is pretty much inconsequential whether the employees are "leased", since IRS considers PEOs to be payroll services. Applying the common law tests, the employees work for the recipient employer and can only be covered under a plan of the true, recipient employer. Of course that could be provided through a PEO firm if and only if the PEO offers a true multiple-employer plan. But the plan can be provided through the true employer whether or not the employees are leased.

As mentioned in the other thread where you also posted this, a VEBA cannot revert to the employer and connot be used to provide deferred compensation benefits. If, as you say, "the Trustees do not want to administer the Plan any longer", you should consider rolling the assets to a service provider who wishes to provide those services. My firm charges $1,000/year for administration of a VEBA plan and trust. There are several other firms out there that can provide similar services for similar fees.

I would point out that a municipality is likely to have several years of claims information. I know multiple TPA firms who specialize in partially self-funded plans. In general they are able to save clients with 50-500 employees between 6% and 12% on their health plans.

Since we're posting uncorroborated opinions, I will post mine: groups from 50-500 can save significant amounts by using self-funding concepts. Although 500 lives would be required to have a "true actuarial group" (meaning that experience is likely to mirror the general population). With a smaller group in good health it is possible to obtain significant savings by raising the deductible under a health insurance policy to $5,000 or higher. 80% of all individuals do not spend over $1,000 per year for medical and 92.5% of individuals do not spend over $2,000 per year. Why pay an insurance company to cut the checks for claims below those levels? In fact groups of 50 can self-fund up to $5,000, groups of 50-100 can self-fund up to $10,000 and groups of 100-500 can self-fund between $15,000 and $75,000 quite well. This can either be done in connection with a high-deductible health plan or specific and aggregate stop-loss coverages. And most TPA firms and their actuaries can advise as to appropriate stop loss limits. So speaking as an actuary and an attorney, I believe that you can be successful with a group of your size.

1.83-1: "In general, such property is not taxable under section 83(a) until it has been transferred (as defined in section 1.83-3(a)) to such person and become substantially vested (as defined in section 1.83-3(B)) in such person."

I am currently working with TPA firms that provide self-funded benefit plans to governmental groups. And as one who formerly practiced in Phoenix, I know that you have some good TPA firms in Arizona. While it is true that municipal governments are not covered by most of ERISA, most states have taken portions of ERISA and put them into state laws (such as COBRA and HIPAA). Your consultant/adviser/attorney needs to be familiar with your state's requirements. Caution: There are a couple of states that due to state statute governmental units are not legally permitted to self-fund health plans. Note: To find an attorney, go to www.martindale.com/xp/Martindale/Lawyer_Locator/Search_Lawyer_Locator/loc_search.xml and search for lawyers and law firms practicing in Health Care in your geographical area. Make sure that the lawyers are "A-V" rated. (A refers to level of expertise and V refers to ethics rating.) Among the attorneys that come up pick one with a firm that also represents local governments so that they can address your concerns specifically.

Example: PEO maintains multiple-employer 401(k) plan. Plan assets are invested by participants with mutual fund group or group annuity with insurance company. Securities/insurance commissions are paid to: (1) employee of PEO firm; (2) officer of PEO firm; (3) individual related to officer of PEO firm; (4) 10% joint venturer with officer of PEO firm (or firm itself); (5) entity related to PEO firm, etc. How about a payroll firm? If payroll firm offers multiple-employer retirement plan, the issues are identical and the liklihood of PTs is equal. Only if the payroll or PEO firm sets up separate plans for each client company with the client company selecting their own trustee and investments could the PEO or payroll firm share in commissions. Obviously you would need to find out who is getting the commissions on your plan or plans to determine whether or not there is a problem. But I have yet to find a PEO firm that is not engaging in such PTs.