Ron Snyder

It's nice to engage with someone who does his homework. The post on 8/29 referred to a premium reimbursement arrangement. That type of arrangement reimburses current medical expenses for current employees or retirees. Tax deductions are taken as amounts are paid out. In the more recent post I was referring to a tax-deductible set aside for reimbursement of future premium expenses. Such an arrangement is a self-funded medical plan currently (in the year of set aside) and needs tested. The premium reimbursements do not need to be tested. I believe that any fund created for future reimbursements is a "self-insured plan", and therefore Treas. Reg. 1.105-11©(3)(iii) is relevant. Your commentaries from Mark Hamelburg are not inconsistent with my position. You claim that "The employer adopted retiree medical plan I propose would be insured by a third party insurer, so it would not be a self-insured plan according to Treas Reg. 1.105-11(B). " However, that would only be true if you were not pre-funding the reimbursement accounts. I acknowledge your interpretation of the language relative to the two or more plans language. However, I do not believe that IRS intended to say that combined testing on two or more groups cannot be done simply because one group is insured or partially insured rather than self-funded. Incidentally, I know of very few self-funded plans that contain no insurance. If we were to follow your interpretation, we would deduct the stop-loss premiums from the contributions or claims before testing. I doubt that you can find anyone who does the testing that way. Bob Fontenrose is a very good source at IRS. He did the update of the VEBA Manual for IRS a couple of years ago and is up to date on relevant issues. He obviously agreed with me that you needed to include NHCEs at each level of benefits, thereby acknowledging the nondiscrimination test. It sounds like were getting closer.

I'm glad to see you have considered the issues. We're not far apart. Notice 2002-45 permits reimbursement of employees and former employees under an HRA. But an HRA is inherently a MERP under IRC section 105. You were attempting to avoid the nondiscrimination test under section 105. Your proposal is to reimburse medical premiums which would indeed fit under 213(d). The participants in such an arrangement would pay tax on the payments from the plan but would be entitled to claim an itemized medical deduction for those premiums. The difference is in our understanding of MERPs under Treas. Reg. 1.105-11. Your simple solution to my interpretation is not so simple. Yes, the Employer can sponsor a post-retirement medical plan. (Many do.) Yes, the retirees can use the balance in their PRA to pay the premiums. However, and employer-sponsored PRA that is funded is still subject to the nondiscrimination testing requirements of 105(h) IMHO. Regs section 1.105-11©(3)(iii) provides that "To the extent that an employer provides benefits under a self-insured medical reimbursement plan to a retired employee that would otherwise be excludible from gross income under section 105(B), determined without regard to section 105(h), such benefits shall not be considered a discriminatory benefit under this paragraph ©. The preceding sentence shall not apply to a retired employee who was a highly compensated individual unless the type, and the dollar limitations, of benefits provided retired employees who were highly compensated individuals are the same for all other retired participants. The next paragraph of the Regs. provides that An employer may designate two or more plans as constituting a single plan that is intended to satisfy the requirements of section 105(h)(2) and paragraph © of this section, in which case all plans so designated shall be considered as a single plan in determining whether the requirements of such section are satisfied by each of the separate plans. My reading of that provisions is that it is not limited to 2 or more self-funded plans but 2 or more plans when one of them is subject to this test. It sounds to me as though the IRS did not understand that you meant to exclude HCEs from the VEBA. With whom were you speaking? Try Jim Holland, or even Harry Beker.

OHH- You state that the "premium reimbursement arrangements I propose * * * will be paid pursuant to a plan for the benefit of employees." You seek treatment as a plan that provides premium reimbursements for employees, but by your own admission your plan will be used to provide premium reimbursements for former employees. The sentence is to be read in the context of the paragraph in which it occurs. The paragraph begins, "The rules of this section apply to a self-insured portion of an employer's medical plan or arrangement even if the plan is in part underwritten by insurance." This is clearly referring to an employer's medical plan. The mention in the third sentence of "premiums paid under an insured plan" refers back to the same "employer's medical plan" mentioned in the theme sentence. That explains why the next sentence states that "medical expense reimbursements not described in the [employer's medical] plan are not paid pursuant to a plan for the benefit of employees, and therefore are not excludable from gross income under section 105(B). So there are 2 reasons why your model will not work: (1) Benefits are provided to former, not current, employees, and (2) you intend to reimburse individual premium expenses rather than the retirees' share of premiums under the employer's health plan. The way to get a current deduction for future premium payments was referred to earlier: the employer can deposit the funds (within the limitations of 419A©) into either a VEBA or a taxable trust. IRC Section 505 provides that "In the case of any benefit for which a provision of this chapter other than this subsection provides nondiscrimination rules, paragraph (1) shall not apply but the requirements of this subsection shall be met only if the nondiscrimination rules so provided are satisfied with respect to such benefit. That means that you can get out of the nondiscrimination rules of 505 by complying with the much easier nondiscrimination rules of 105(h). Much easier because it is possible to aggregate all health and/or welfare benefit plans together in doing the testing and nondiscrimination is determined as a percentage of compensation. Here's a revelation: non-HCEs generally cost as much as HCEs to provide health insurance for. Therefore it is theoretically possible to make additional retiree health contributions for HCEs only without discriminating in favor of HCEs, because the plans are aggregated. The Regs under 105(h) provide that a percentage of salary allocation will not be acceptable, but it is certainly possible to accomplish the same result by means that are x dollars for each class of employee. This is what my VEBAs do (and why I call myself VEBAGURU)! I have been establishing such arrangements for several months now. So yes, VEBAs can be used to accomplish this. However, VEBA or not, investment earnings inside the VEBA on retiree medical funds are subject to UBIT. Also watch out for 419A(d) that counts contributions to such an arrangement on behalf of key employees as annual additions toward the IRC Section 415© limit (the dollar limit, $40,000 for this year).

I am working with some local governments (cities and towns) in Oklahoma to terminate their participation in a DB plan and switch to DC. I previously worked with a fire district in Missouri to terminate their overfunded DB plan. They used the $10 million of reversion funds to fund a post-retirement medical benefit plan for the firefighters.

You pose an intriguing premise: although under Code Section 414(t), accident and health plans require inclusion of all entities in determining whether or not they discriminate, nothing under Code Sections 106 (listed under 414(t)) or 105 (incorporated because it defines the terms used in Code Section 106), requires nondiscrimination with respect to insured health benefits unless those benefits are: 1. Funded through a VEBA or other welfare benefit fund needing to comply with Code Section 505 so as to avoid Code Section 4976; or 2. Self-insured as a medical expense reimbursement plan under Code Section 105(h); or 3. Are intended to be deducted in the year the amounts are contributed to the arrangement rather than the year in which the premiums are actually reimbursed. This sounds like pretty good stuff. However, I'm afraid you didn't read far enough in Regs. Section 1.105-11(B)(2). In context, the quotation is: "However, a plan which reimburses employees for premiums paid under an insured plan is not subject to this section. In addition, medical expense reimbursements not described in the plan are not paid pursuant to a plan for the benefit of employees, and therefore are not excludable from gross income under section 105(B). Such reimbursements will not affect the determination of whether or not a plan is discriminatory." In other words, such reimbursements of premiums are not subject to nondiscrimination requirements and are taxable to the (retired) employee. The employer gets a deduction later and the employee pays tax on it when it is received. Not such a good deal after all.

While the model you're selecting will avoid the Code Section 4976 tax, it will not result in a tax deduction for all contributions, only for the actual expenses, as you acknowledge. My copy of the Regulations does not contain a 1.105-11(a)(2). The sentence you quote is in 1.105-11(B)(2). It sounds as though your approach will work. However, by the way you keep trying to wiggle out of non-discrimination rules, it sounds as though you are trying to "carve out" a select group of employees for coverage. Be aware that a carve out will not work due to Code Section 414(t). All employees of the controlled group or affiliated service group must be included in determining whether or not the plan discriminates in operation.

If it is a small plan, it files Schedule I. On item 4e of Part II, it asks if "During the plan year" "Was the plan covered by a fidelity bond?". That is straightforward, and the answer is "no". Of course if it is the first plan year, contributions were not even required to be made until the tax return, including any extensions thereto, is due. I believe that the IRS factors in whether it is the first plan year before setting out to audit a plan due to purchasing the bond after the end of the plan year. In any event, some plans are not even subject to the bonding requirement, so answering "no" does not automatically trigger an audit. Answer the question truthfully.

A 401(a) plan inherently uses a trust. The use of variable annuities is customary and appropriate. The use of a 401(a) plan is also appropriate for such an arrangment.

You refer to a "sole proprietor" while the IRS refers to "partners", "shareholder employees" and other self-employed persons. The same rules apply to all self-employed and deemed self-employed, including members of LLCs. If an individual is self-employed in one entity but is a bona fide employee of a "C" corporation in the same controlled group or affiliated service group, that individual may receive employee treatment on amounts paid by the "C" corporation. The same applies to LLCs that elect to be taxed as corporations under the check the box regulations. I'm not sure how a sole prop. and an LLC owned by his or her children are legally related unless the children are minors. In that case the children's interests are imputed to the self-employed parent. You refer to meeting the requirements of the plan. However, you should be more concerned with whether they are actually common law employees or self-employed individuals.

Most of the vendors who provide such documents do so in connection with provision of plan administration services for the HRAs (as we do). We work with existing relationships (health carrier, broker, etc.). Since the HRA plan is new, there is no existing relationship to disrupt. Some of my competitors require that the health insurance or health plan TPA services be through them in addition to the HRA administration services. I would expect that within a short time attorneys and services such as CCH or BNA will be providing documents, but probably not before the end of the year.

Certainly there are examples out there. HRAs were being drafted before Notice 2002-45 was issued. I have implemented several. Several of the defined contribution health plan providers such as Definity, Vivius, Lumenos, etc. have their own documents. Are you really asking whether these vendors have finished their revisions to comply with RR 2002-41 and Notice 2002-45? We are in process of making those revisions and will be done within the next week. I expect that other vendors are in a similar situation.

MGB is correct that Notice 2002-45 and RR 2002-41 were not related to deductions. However, tax deductions are granted under 162 and 105 subject to limitations under Code Sections 419 and 419A. As provided in Code Section 419, contributions to a "funded welfare benefit plan" are deductible in the year made to the extent that they represent the current year's "qualified" cost. Under Code Section 419A©, additional contributions for post-retirement medical benefits (without projection) may be deducted over the employee's working lifetime. Note that under Code Section 419(e)(3) welfare benefit fund includes VEBAs as well as a taxable trusts. Therefore I must take issue with MGB on that issue. In fact, use of a VEBA is of limited value (although I believe in them and favor them) because trust earnings attributable to post-retirement medical funds are subject to UBIT. Tax-favored investments are therefore appropriate for funding vehicles for such accounts. In other words if the employer uses a model of HRA that is funded, current deductions are available. If the employer does the HRA through "phantom" (unfunded) accounts or accounts under the employer's ownership and control, deductions will be allowed only to the extent of the current expenses (qualified costs) plus a 25% additional amount for unpaid claims. PS Those "non-discrimination" rules you are concerned with (Code Section 505) will likely apply to any arrangement that seeks to avoid the 100% excise tax under Code Section 4976. Besides, the non-discrimination rules under Code Section 105(h) apply in any event. Also note that Code Section 419(t) applies the controlled-group and affiliated service group rules to such arrangements. My recommendation: accept the inevitability of non-discrimination rules (bite the bullet!) and run with it using a VEBA.

I would like to respond to your original thesis, whether the underfunding of pension funds particularly affects certain value stocks more than other companies. IMHO as an actuary familiar with FAS 87 as well as 412, 404 and 411 valuations, the FAS disclosure rules sufficiently address the question of underfunding or overfunding of retirement plans on an ongoing basis. In my mind the more serious issues are: (i) Understated liabilities of DB plans likely to terminate due to changes within an industry, and (ii) understated liabilities for post-retirement health plans that use a 3-5% Medical COLA when actual increases are running from 10-14%. Should investors look at funding levels? Absolutely! Pension plans should not be contributing anything to a company's earnings, let alone 25-30%. When a paper profit is created because of supposed or actual "gains" in retirement plan funding levels, it should be considered as an extraordinary gain and nothing else.

Which brings us back to the original question posed by the reporter: Are pension plan liabilities undervalued significantly? Each of you has made good points. Interest rates are used for several purposes. Some are objective and others are subjective. Ultimately, all of them are tools to be used for a specific purpose, to give a partial picture. Is GM's plan underfunded or overfunded? It seems to me from the available data that their actuaries and financial analysts (including the Board of Directors) all have defensible positions. Our writer friend was looking for a litmus test, a black-letter answer to the question posed. The problem is, such answer or test does not exist. Reasonablility of assumptions, like beauty, is in the eye of the beholder.

Q. is this a 13G reporting issue you are raising?? A. Looking for indirect PT Q. QPAM issues under 84-14 to facilitate any biz btw the two? A. Don't know what you mean here. Not RP 84-14. Not RR 84-14. Not PLR 84-14. Not Notice 84-14. Not Announcement 84-14. Q. party in interest issue in general?? A. PT issue. Q. not sure where you are going here!! A. Looking at prudence requirement. Q. diversification and prudent man, investor rule under ERISA 404 A(1)© i presume A. Right Q. affiliate and party in interest issues? A. Yes, for PT analysis. Q. non erisa issues that create accounting concerns or reporting requirements A. Not that I'm aware of, although I suspect that control would require disclosure on audit. However, since A & B are not a controlled group, consolidation would not be required.

An ERISA analysis would raise the following questions: Is the ltd partnership simply an indirect route? It is likely that It would be viewed as such. Is the company to be acquired related in any way to any fiduciary or party in interest? Does Company B do business with the plan sponsor, any other fiduciary or party in interest? Is the balance of the ownership of Company B owned publicly or privately held? Is the purchase of the stock purchase prudent? Is purchasing through the LP prudent? Who is the General Partner? Does the GP have any relationship with a fiduciary, party in interest or Companys A or B? It does not appear that the acquisition would have accounting consequences other than disclosure if the plan is audited.

At the Enrolled Actuaries Conferencce last year we had a presentation relative to long-term rates of return and reasonable expectations. The consensus of the presenters was that 8% is too high for actuaries to assume for long-term rates of return. While it is arguable that certain plans have achieved higher rates of return than that, it is also the case that many have not achieved even 6%. A review of the General Motors defined benefit pension plans discloses the following assumptions employed by the actuaries for the plan, Watson Wyatt: Salaried Employees Plan (001) Interest Rates RPA - 6% OBRA 87 - 6% Plan Liabilities - 9% Actual investment return - 13.0% Hourly Employees (003) Interest Rates RPA - 6.29% OBRA 87- 6.59% Plan Liabilities - 9% Actual investment return - 11.9%

Like Lisa, I would be interested in seeing Potlicker's source. Until then, it is better not to rely on unsubstantiated rumors. I believe that the answers to your questions are: 1. Yes 2. Yes See, for example, RR 91-26.

Sorry we can't help but your nomenclature is not standard for the US. Here we speak of 415 compensation, 4301 compensation or or 414(s) compensation, referring to sections of the Internal Revenue Code.

This message is in the wrong thread and therefore hasn't had responses. You are not really large enough for a self-funded health plan: generally a true actuarial group of 500 or more would be required to be able to absorb the swings of risks and claims. However, your group is (barely!) large enough to consider a partial self-funded approach. The way it would typically work would be to purchase a high-deductible health plan. I have just obtained a rate quote on a similar sized group who found that they could reduce their health premiums from $26,000 per month to $16,000 per month by raising their deductible from $100 to $1000 per year. They also priced $750, $1,500, $2,000 and $2,500, but the optimal level of coverage was the $1,000. For coverage below that amount they can either (1) self-insure, paying claims from the funds saved by increasing the deductible based on the EOBs from the insurance company, or they can (2)create health reimbursement accounts for their employees with the savings. Either type of plan should be able to be administered by a flex plan administrator. (1) is simply an employer-funded 125 account, while (2) is an HRA as provided for under Notice 2002-45. The difference between the 2 arrangements is who gets to keep the funds not spent at the end of the year.

419A(d) requires separate accounts for retiree medical and retiree death benefits, but only contributions to the post-retirement medical account are treated as annual additions under the 415 dollar limit. The term "key employee" means "an employee who, at any time during the plan year, is * * * an officer of the employer having an annual compensation greater than $130,000" * * *. The definition of officer is given in Regs 1.414-1, T13, and is based on facts and circumstances, not title. Code Sections 419 and 419A are specific limits on tax deductions for welfare benefit plans. Since a tax-exempt entity does not need deductions, it need not comply with Sections 419 and 419A.

I believe that the relationship of the employees to the self-funded health plan is akin to the relationship of a policy beneficiary to an insurance company. Once the employees' monies have been paid into the plan, they are no longer employees funds. Think of it as though the coverage were fully insured. The employer pays x amount toward the policy premiums and the employee pays y amount. Once the insurance company receives x and y, there is no requirement to separately account for those funds, they are simply premium income. PS: Speaking as an actuary, your actuaries should already know the answer to this question.

GASB 12 ("Disclosure of Information on Postemployment Benefits Other Than Pension Benefits by State and Local Governmental Employers") has been out since 1990. And GASB 34 ("Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments") was issued in 1999, although it doesn't apply to small governments until as late as 2003. When the dust settles, it is likely that governmental employers will have the same type of disclosures as audited firms do under FAS 106.

I know of no exemption from the Schedule A requirement for plans that are either audited or file a Schedule H. Many plans do both and still have to file Schedule As. If avoiding the Schedule As were the goal, they shouldn't have included 38 health plans in the VEBA, they should have adopted them outside the VEBA.

If each plan is separate (separate documentation, eligibility, etc.) then you would not be over 100 IMHO. If either by the facts or the documents the plans are or have been aggregated (say for reporting or SPD purposes) the plans would be considered one plan. Do you run separate discrimination tests, or test together? Etc.