Ron Snyder

That sentence applies to group term life insurance arrangement within a cafeteria plan and specifies that the greater of the employee's contribution (not the employer's share of premiums) or the Table I amount is imputed to the employee as taxable for the year.

One reason for separating the VEBAs of current employees from that of retirees is that the employer's level of commitment may be different. The employer may desire to provide an absolute guarantee of benefits for current employees, but may limit its commitment for retirees to the assets in the VEBA. UBIT may apply to medical amounts that carry over from year to year inside a VEBA whether for actives or retirees. Also note that even in a collectively bargained context, UBIT may apply with respect to those retirees who are no longer covered under the CBA.

Generally an employer can adopt or terminate any welfare it desires. That includes the ability to terminate a benefit and add a separate benefit, so long as funds are applied to provide benefits for employees (whether active or retired), their dependents and beneficiaries. Without reviewing the plan and trust documents and subject to other limitations under IRC 501©(9), the answer to your question generally is "yes". Obviously there would have to be funding of each benefit provided, but excess funds in the trust could be allocated to provide such benefits.

IRS Notice 89-110 (in the part applicable) deals with dependent group coverage, not employee group coverage. This was primarily for determining how much income was imputed to the employee group term life insurance on his or her spouse or dependents and did not alter the group term life insurance provisions under IRC section 79. It provides that $2,000 or less of dependent coverage (typically under a health plan) is not taxable and the excess is taxed only to the extent it is funded by the employer and not by the employee's after tax contributions.

Employees are taxed on the Table I rates, not on the greater of the Table I or current premiums. However, you should make sure that other rules under the Regulations under Section 79 are also complied with (relative to nondiscrimination, underwriting, etc.).

I had such an article back in the 80s. Perhaps I could still find it around here some where, but it would not be in electronic format. My suggestion is that you review Tax Facts 1 with respect to the incidental death benefit rule. "1. A 412(i) can be invested only in life insurance" is incorrect because it should say in "insurance products", not "life insurance". Normally under a 412(i) plan, the face amount of the policy will be payable to the named beneficiary and will fall within the limits applicable to incidental death benefits. However, there are some promoters taking the approach that it is likely that for a small group a death will actually take place. So they fund the entire retirement benefit including a death benefit in excess of what could be paid out as incidental under the various tests. In such case, they are requiring that any excess death benefits are paid to the plan which will bring the plan back under 412 and out of 412(i), as described under your number 2. Your third assertion, "The(re) is no fiduciary requirement for an employer to fund a plan in the most efficient manner (i.e. using annuities at a normal cost as compared to the increased costs of life insurance only)" is more difficult to argue either for or against. If there were an argument that purchase of more insurance than necessary was a breach of fiduciary duty, (1) there wouldn't be a Code section 412(i) and (2) the same argument would be made against cash value life insurance instead of term insurance. Instead, the facts of the actual purchase need to be reviewed: How much more expensive is it? What return would alternative investments likely get? How do the guarantees compare? Does the risk vary between the contracts? Etc. But, in general, I would agree with the assertion that there is no fiduciary requirement to fund a plan in the most efficient (whatever that means, since there is a relationship between risk and reward) way possible. With respect to your fourth assertion, ("A plan that is funded with life insurance only could provide for the sale of the contract (subject to the IRS ruling on sales of policies from a plan) for cash that is used to either purchase annuities or normal plan investments. At that time, if the plan assets do not satisfy the 412(i) requirements, the plan will be subjsect to the normal funding rules unser Section 412.") is generally correct. Certainly the DOL has approved the sale of a life insurance policy for its cash surrender value to a plan participant. And just as surely, if non-insurance assets are put into a 412(i) plan, it is no longer a 412(i) plan. There is something troubling about your post. You have attempted to construct a syllogism to justify the use of expensive life insurance contracts under a 412(i) plan. There are some threshold questions to address that you have ignored. 1. Does the client need life insurance? If so, how much does he need? 2. Is the 412(i) plan a thinly veiled attempt to create a wealth transfer using pension plan laws? 3. How do the contracts proposed fare under the "springing cash value" rules? 4. Is the proposed sale of the insurance contract an arm's length transaction? How will the policy be valued? (Note that the DOL letter doesn't apply to springing cash value situations.) 5. Will the plan purchase similar policies for all participants? 6. If the plan is overfunded due to the death of a participant, the plan will be subject to excise taxes that will offset any tax benefit of the excess life insurance. 7. Does the amount of death benefit applied for comply with the incidental death benefit rules? Because if not the penalty is disqualification, not an excise tax.

I believe that this is a group out of Southern California. The principal called me a few months ago for some free advice. We discussed what he was trying to do and I cautioned him that his approach would be a MEWA and needed to have an insurance company providing the benefits unless the plan qualified as an insurer. What benefits does the plan offer?

From the above-listed site: "Good News For Some Fringe Benefit Plan Sponsors On April 4, 2002, the Service issued Notice 2002-24, 2002-16 I.R.B. 785, announcing the indefinite suspension of the requirement for taxpayers to file Schedule F (Form 5500) Fringe Benefit Plan Annual Information Return. Specifically, Notice 2002-24 suspended the filing requirement imposed by Code section 6039D on certain fringe benefit plans, such as cafeteria plans, educational assistance programs, and adoption assistance programs. Since the release of this notice, questions have arisen over how this suspension affects the completion of the 2001 Form 5500. Some filers are confused as to whether they need to file a Form 5500 at all or, if they do, how to complete lines 8c and 10c of the form. Here is the key point: Employers who in the past had filed the Form 5500 (and attached the Schedule F) solely to meet the reporting requirements of section 6039D, need no longer file either the Form 5500 or Schedule F. The Service has not suspended (in fact, it does not have the jurisdiction to suspend) the Form 5500 reporting requirements for welfare benefit plans. Therefore, an employer who maintains a welfare benefit plan (not otherwise exempt from the Form 5500 filing requirements), together with a cafeteria plan, educational assistance or adoption assistance program, must continue to file the Form 5500. In these cases, however, the employer no longer needs to attach a Schedule F. Also, in these situations, boxes 8c and 10c on the Form 5500 are to be left blank." My concern is alluded to by the IRS in the foregoing announcement: The IRS doesn't have the right to suspend the filing requirement for a form that is filed with the DOL.

As pointed out above, no provision of ERISA permits treatment of illegal aliens any different from any other employees. A plan may exclude salaried or union members those who earn more than $45,000 per year or any other identifiable group so long as that exclusion does not discriminate in favor of the highly compensated. But if plan provisions do not specifically provide for exclusion of a group of employees, there is no basis for denying them benefits and no basis for your "mistake of fact" argument. And no amendment can reduce an employee's accrued benefits. There is no basis for your spurious claim that this is a "false participant". [in 30 years of practice, I have never seen a plan document defining that term and exclusing them.] Sorry, but your jingoistic bigotry cannot be justified under an ERISA plan. Note that it is just as illegal for employers to hire illegal aliens as it is for them to work. The employer's hands may not be clean in the situation presented. If you feel the way you do (and I don't), you should put language into your plan documents that excludes aliens with US source income, even though you will receive a caveated determination letter and have to pass the general test. Then you won't have to concoct lies to try to justify your own illegal behavior.

Do you know what the Statute of Frauds is? It states basically that a written instrument cannot be superceded by an oral representation. Harry Becker's opinion is not the IRS's published position and cannot be. If it were IRS's position, they would have amended the Notice or at least clarified it in writing. We have no evidence that the unnamed person at EBIA and Harry Becker had the conversation other than hearsay which is never acceptable evidence. And the accuracy of the reported heresay is questionable since it is refuted by IRS's published position. Prove that I am wrong and I'll gladly tell people that they don't have to file. But the "proof" you offer is heresay with no probative value at all.

We have been discussing this on the thread entitled Premium Only Plans. I suggest that you be very careful, perhaps to the point of asking your legal counsel for an opinion on this issue. I cannot find anything on which I can rely that obviates the need for sponsors of 125 plans to file form 5500. None of the references cited above changes that. If you prefer to be safe than sorry, all 125 plans must file form 5500, but no longer need to attach Schedule F.

There are some old PLRs that use the approach you mention. You may wish to file for your own PLR to make sure that the approach will not be attacked. The statutory/regulatory requirements prohibit reversion of funds to the employer and private inurement to any individual. The funds clearly can be used to provide benefits to employees, their dependents and beneficiaries. Previously, once all promised benefits had been provided, the funds left over could be distributed to employees. Cash payments to covered employees cause IRS some heartburn, especially recently, because they sound like a form of deferred compensation. The simplest form of using up the funds left over would be to utilize the funds to provide benefits to employees, their dependents or beneficiaries. It may be possible, for example to use the funds to pay for a the employees' portion of group health premiums, for example, or to fund the purchase of paid-up group life insurance. Of course the plan must be amended to provide for the benefit for which the funds will be used. In IRS's view, once employee contributions have been made to the VEBA, those are akin to premiums having been paid to the insurance company for coverage under a policy: the employees do not ever get their premiums back but only the benefits promised and provided under the plan for which the premiums were paid in the first place. Termination of the trust is not considered to be a triggering event. So I don't believe that benefits have to be proportionate to the funds paid in by employees, only non-discriminatory.

To David Shipp: Some good suggestions made. We have arranged for IRA rollovers without individuals signatures. Place the amount due in a rollover and let it escheat to the state. To MGB: Why was the participant count reduced by the illegal aliens? I know of no law that permits discrimination against illegal alien employees, forfeiture of benefits or otherwise. Of course the plan could have specified that non-citizens are not eligible, but then it would have to go through the more difficult non-discrimination testing, the the D-letter from IRS would be caveated.

The references provided do not provide anything on which a taxpayer may rely. The first article quotes a telephone call between Corbel and IRS. The second article quotes from the notice itself that specifically states that "This notice does not affect annual reporting requirements under Title I of the Employee Retirement Income Security Act of 1974 ( ERISA), or relieve administrators of employee benefit plans from any obligation to file a Form 5500 and any required schedules (other than the Schedule F) under that title." We are supposed to rely on the heresay assertion that "In response to inquiry by SunGard Corbel, the IRS has since clarified that the Notice operates to suspend both filing requirements, when related to one of the three types of fringe benefit plans (cafeteria, education assistance, and adoption assistance)." IRS did not subsequently amend Notice 2002-24. And I know of no evidence that the conversation between an unnamed person at Corbel and an unnamed person at IRS took place, was understood correctly by both sides and supercedes IRS' published position. So I would still advise my clients as well as practitioners that barring evidence to the contrary that IRS in fact abrogated the filing requirement, they must still file form 5500.

If participants leave just ahead of the INS, what do you need the social security number for? Are you saying that they have vested balances that you expect to pay out? Or that you paid out already and found the SSN to be in error? I have a hard time believing that illegal aliens will keep you informed about their future addresses. And I find it harder to believe that they would opt in to a 401(k) by making salary reduction contributions, or that they would stay long enough to vest uner most plans. So even though I have administered many plans with illegal aliens participating in them, I have not had to deal with this issue. I used to administer a plan for commercial farms in Arizona. The hardest problem for me was when an illegal alien came back after a break in service and was employed under a new name and SSN. (This happens regularly after an amnesty program especially.)

A non 2848 power of attorney is acceptable to IRS. However, the powers delegated must specifically include the right to sign tax forms, preferably listing the form and year. And the signature from the client must be prior to the date the TPA firm signs the extension request form.

I hadn't incorporated it into my comment. Notice 2002-24 suspended the Schedule F filing requirement, but not the requirement for filing of form 5500 for fringe benefit plans, including cafeteria plan arrangements. Therefore, all fringe benefit plans, including cafeteria plans must file form 5500 by the due date. I have heard orally that IRS has backed off the position on the Notice and claimed that the 5500 filing requirement has been done away with, but have been unable to verify this in any published material.

On page 1 of the instructions for the 5500 we read: "Every employer maintaining a specified fringe benefit plan as described in Code section 6039D (except Code sections 79, 105, 106, 120, and 129 plans) is also required to file each year." And on page 2 it states: "The exemptions below do not apply to fringe benefit plans. A Form 5500 for a fringe benefit plan must be filed under Code section 6039D even if it is associated with a welfare benefit plan that is exempt from filing under one of the categories below." Finally on page 4 we read (under Fringe Benefit Plan): "Cafeteria plans described in Code section 125, educational assistance programs described in Code section 127, and adoption assistance programs described in Code section 137 are considered fringe benefit plans and are required to file the annual information specified by Code section 6039D." There is no rule that exempts plans with 100 or fewer employees: that applies to welfare plans only (although not to welfare plans that include fringe benefit plans).

I would suggest that the simple answer is "no". But that is only helpful in determining whether related entities are responsible for breaches of fiduciary duty imposed on the actual fiduciary. The issue you are probably asking about will not be answered by stating the the subsidiary is or is not a fiduciary. Section 1002 of ERISA (29 USC 1002) includes definitions for "fiduciary" (21), "administrator" (16), "party in interest" (14), "relative" (15), and "person" (9). A careful review of those provisions will convince you that the related entity is a party in interest and may not engage in transactions with the plan, etc.

OK I'll bite: What is a REBA (other than MacEntyre)? In Washington state it's the Real Estate and Business Agents association. On the internet it's the "Regional Education and Business Alliance". http://www.reba.org/ I have never heard of a REBA plan. It was, however, one of the names we considered using to describe the accounts set up for a health reimbursement arrangement before we decided to go with "Employee Medical Accounts".

What you are describing fits the definition of a "Health Reimbursement Arrangement" under the new IRS Notice 2002-45 and Revenue Ruling 2002-41. You may wish to consult those for clarification of rules that apply to employer-funded HRA/FSAs. They are not subject to the "use-it-or-lose-it" requirements applicable under IRC section 125. And the direct answer to your question is yes, people are already doing this. I have helped several groups set up HRAs already, and others are doing the same. There are several models extant, and yours is not uncommon among them. I have a TPA client who is changing all of his clients over one by one to such arrangements. There is a lot of information on the internet abour such arrangements. Do a search on "defined contribution health plans" and "consumer driven health plans" and you will find a myriad of articles.

Reimbursement practices vary widely between localities, and from state to state. In one state it may be common for reimbursements to be paid at the 65th-75th percentile. In another state no provider will accept less than the 90th percentile. Networks also vary widely. In my state almost all providers are on one or both of the 2 major networks: UCR is relatively meaningless since contracted rates are generally lower. There are other areas where a significant number of providers are not on a network or where network fees are higher than the 75th percentile. Your plan should conform to local practice. If a network is available at a reasonable rental price (such as Beech Street or MultiPlan) and if those rates are less than the 90th percentile your plan has been utilizing, you should rent a network. In my area no major insurers reimburse at the 90th percentile (except Principal with a very small presence). Most are at 75th or 80th percentile. Do not misunderstand: the 80th percentile is not the same as 80%. It is the highest rate charged by all providers after eliminating the highest 20%.

1) What is latest date that the PSP contribution, for year 2001, can be made by employer? 10-15-2002 2) What is latest date that the MPPP contribution, for year 2001, cab be made by employer? 9-15-2002 for MFSA 10-15-2002 for deductibility

VEBAs are simply tax-exempt trusts or associations and as such are not inherently subject to ERISA. However, the welfare benefit plan that is funded through the VEBA is likely subject to ERISA, at least to those portions of ERISA that apply to welfare benefit plans and health plans. The VEBAs I administer have arranged to be held in "sweep accounts" so that excess funds are placed overnight into interest bearing accounts. This is an automatic (no-charge) function with most banks. UBIT applies for accumulation accounts for future medical benefits. (UBIT does not apply to the 25% reserve for delayed claims permitted under IRC section 419.)

beau- I responded to you on the other thread that you should consider modifying the arrangement to a "health reimbursement arrangement".