Ron Snyder

The arrangement you describe is probably a defined benefit pension plan covered by ERISA. However, whoever negotiated the plan for both sides were beyond their expertise. Had they negotiated a "health reimbursement arrangement" the amounts could be spent by employees for 213(d) medical expenses tax free. Time to reopen negotiations? We have been setting up HRAs for some time now and are relieved now that IRS has issued their approval of such arrangements, as well as the conditions that apply to them. See http://www.benefitslink.com/links/20020626...26-017319.shtml and http://www.ebia.com/misc/RR-2002-41.pdf

Teri H- A VEBA may either be a trust or a non-profit corporation as indicated by mbozek above. A trust document is required to set up a VEBA. The plan provisions may either be incorporated in the trust or separate. They may even be in the form of insurance contracts. Separate accounts for key employees are not required under VEBAs but may be required under welfare plans to which IRC sections 419 and 419A apply. In addition, amounts allocated to such separate acciounts may count as annual additions under IRC section 415. G Burns is correct that you would be foolish not to employ a professional to set up a VEBA. And mbozek is correct that it must be submitted to IRS in order to claim tax-exempt status. Finally, here is a link to the IRS' Exempt Organizations Handbook provisions relative to VEBAs: http://www.irs.gov/taxpros/display/0,,i1%3...3D22088,00.html

Does IRS hate all welfare benefit plans? No, but they apparently have a serious bias against those plans purporting to comply with IRC section 419A(f)(6). In a pair of moves recently IRS has acted to eliminate such arrangements. In Notice 2000-15 and Notice 2001-51, IRS published its view that such arrangements are “potentially abusive tax shelters”. As such, participation in such arrangements must be reported to IRS on an attachment to the tax return of the corporation participating in such an arrangement. Under new regulations, the disclosure requirements apply to individuals who participate in such arrangements, and the tax effect test of Notice 2000-15 has been eliminated, thus requiring all such arrangements to be disclosed. In addition, proposed regulations promulgated under IRC section 419A(f)(6) (finally!) have closed the door on variations between employers and products. The proposed regulations rehash the requirements of section 419A(f)(6) and add the following additional requirements: (1) plan document must require the Administrator to maintain records verifying compliance with section 419A(f)(6), and (2) the IRS and participating employers (or their representatives) must have the right to examine and copy all such records. In one new position the IRS claims that all life insurance premiums must be based on current age, thus eliminating both individual term and cash value life insurance policies. And in a laughable position, IRS, in one of the examples, claims that life insurance cash values are the reason that renewal premiums are lower than initial premiums. The examples demonstrate IRS’s view that the only benefits that comply with the proposed regulations are those that could be provided and tax-deducted without section 419A(f)(6). While Congress apparently meant to leave the door open for something under section 419A(f)(6), IRS means to close it to everything. Do the Committee Reports under 419A(f)(6) say anything about “tax shelters”? No, they speak about multiple-employer welfare benefits plans and the conditions under which Congress intended to authorize them. Apparently Congress forgot to check with IRS first. The irony is that as far as the new “blunderbuss” regulations and Notices go in attempting to curtain abusive arrangements, their efforts will have little effect in the marketplace. The Notices and regulations do not address abusive arrangements purporting to exist under IRC section 419A(f)(5), so those promoters of former 419A(f)(6) arrangements will simply change the Code section to 419A(f)(5) and enter into an agreement with (bribe?) a union to jointly sponsor such a plan. Although IRS may argue that such arrangement is “similar to” 419A(f)(6) plans, opinion letters are already being provided that assure the public that such arrangements are “substantially dissimilar to those” potentially abusive tax shelters existing under 419A(f)(6). The Bush administration’s IRS used all their ammo to eliminate a varmint once and for all, but like the elusive Osama bin Ladin, abusive welfare benefit arrangements will simply move and take another form.

IRS has finally issued Notice 2002-45 and Revenue Ruling 2002-41 that discuss the tax laws and regulations as applied to a “health reimburse-ment arrangement” (or “HRA”). In a nutshell, those rulings permit HRAs to be excluded from employees’ income under certain limited circumstances: (1) The HRA may be used to reimburse only IRC section 213(d) medical expenses; (2) No other related benefits may be provided directly or indi-rectly (such as paying a sev-erance bonus to the employee where the amount is related to the unused HRA); (3) Amounts in the HRA must be exhausted prior to amounts in an flexible spending account (or “FSA”) under an IRC sec-tion 125 plan; (4) Long-term care benefits may not be provided if the HRA is an FSA; (5) The arrangement may not permit employees to use salary reductions directly or in-directly to fund the HRA. A copy of the Notice is found at http://www.benefitslink.com/IRS/notice2002-45.pdf

NOTE TO ALL (AND THIS SHOULD MAYBE BE A NEW THREAD): IRS has finally issued its initial guidance with respect to appropriate tax treatment of "health reimbursement arrangements". Notice 2002-45 and RR 2002-41 give examples and clarification relative to such situations. They're already up on www.benefitslink.com. In a nutshell those rulings permit HRAs to be excluded from employees’ income under certain limited circum-stances: (1) The HRA may be used to reimburse only IRC section 213(d) medical expenses; (2) No other related benefits may be pro-vided directly or indirectly (such as paying a severance bonus to the employee where the amount is re-lated to the unused HRA); (3) Amounts in the HRA must be ex-hausted prior to amounts in an flexible spending account (or “FSA”) under an IRC section 125 plan; (4) Long-term care benefits may not be provided if the HRA is an FSA; (5) The arrangement may not permit employees to use salary reductions directly or indirectly to fund the HRA; (6) Any violation of the requirements will result in the entire HRA contribution’s be-coming taxable to the employee whether or not spent for medical expenses.

If the employer's check is made directly to an insurance company, there is no VEBA involved. If the employer's check is made to another entity, it may or may not be a VEBA. Here's how to tell: A VEBA will have filed with the IRS for a letter of determination. A VEBA is not a VEBA until IRS says so. Until then it is simply a trust or an association.

In addition to the comments by MBOZEK, I would like to point out that the VEBA may be used for funding a welfare benefit plan that is subject to ERISA. If so, the ERISA fiduciary standards (prudent man, diversification, prohibited transaction) would also apply. And of course, no participant loans.

Andy- I loved your description ("Hotel California"), but it's not entirely true. A 412(i) plan can be converted at any time by simple amendment to a regular defined benefit plan. Since benefits cannot exceed 415 anyway, the only potential penalties for getting out are: (1) that contributions might be lower (if the plan was being funded to the maximum), or (2) the insurance products may have tremendous surrender penalties (but that is true whether the plan is converted or not).

I agree with you that the maximum under a 412(i) will always be larger than under a DB plan, even a DB with life insurance, so long as contract guaranteed interest rates are lower than current actuarial assumptions. Watch out for those cooties!

Of course Merlin is correct in noting the many concerns, especially the 415 issue. Most of the 412(i) plans I have seen have ignored 415 limits and funded to the contract conversion amount, a clear violation of 415. Which brings us to amfam2: Adding an insurance policy is possible inside a traditional defined benefit pension plan. Funding a significant amount of premium (1/3 of total contributions) is also doable. And with new DB limits permitting huge contributions, 412(i) plans are pretty much dead, or they should be. One type of 412(i) plan I have seen proposed would use a gimmick life insurance policy with a low cash value for the first few years. The proposal actually acknowledges that their purpose is to maximum fund for 5 years, basing that funding on the 5th year cash value's being equal to the maximum accrued benefit (determined under the contract's assumptions not limited for 415). After 5 years the plan is terminated and the policy distributed for its then cash surrender value. Guess what? Voila, the cash surrender magically grows over the next 5 years and the participant can then retire. BEWARE! This is fraught with problems and has been reported to IRS. Ignoring 415 limits and springing cash values are issues IRS has already addressed and yet there are unscrupulous promoters out there selling these arrangements. I am working with an existing client who has maintained a defined benefit plan for over 10 years and, with the new limits, is able to make a contribution of more than $500,000 this year. And this is without insurance or 412(i).

For administration fees we use a couple of guidelines: Salary of Administrator = 33% of total invoice Fixed Overhead = 33% of amount invoiced Variable Overhead = 33% of amount invoiced Since the fixed OH is constant and the variable is approximately the same for all clients, if you track the administrator's time the fee from the fee schedule should be at least 3 times that amount. [Note: the Administrator's salary is a higher percentage (as much as 50%) for 401(k) plans.] The ratios will change proportionately for the additional services you provide. Trustee fees should be approximately = to plan administration fees for the smaller plans. They will diminish on larger plans, but you have an opportunity for more investment income on the larger plans. The only way to lose money in this business is by not correlating the revenues with the expenses. And yet I watched a trust company lose a couple of million per year on their administration because their trust services were so profitable. While I don't disagree with your decision to treat certain extras as a part of your service, I do recommend that you track at least the professional and para-professional time spent for each client.

What would the PBGCs role be for a 412(i), to step in if both the insurer and sponsor went under? Or just the insurer? The PBGC guarantees covered benefits for participants when a plan becomes unable to pay benefits. In that regard it has recourse against the employer up to 25% of the employer's net worth. The insurance company under a 412(i) plan can only guarantee such benefits as they have received funding for. Therefore if participants have been promised unfunded benefits the employer is liable and if unable to pay the PBGC is liable to the extent the benefits are covered.

Alan: What are the recordkeeping requirements for a 412(i) plan? VG: I believe that the recordkeeping and administration requirements are identical for a 412(i) plan as they are for any other type of defined benefit pensions plan, except that: (1) The plan is not subject to the minimum funding standards under IRC 412, and (2) Consequently, the plan is not required to file Schedule B with form 5500.

Fredman- Perhaps I misunderstand what you are getting at. Do you bill based on the job or on time and charges? If T&C, do you bill at different rates? We use a fee schedule, but track time and charges also. Certain additional services are not included in the fee schedule anyway. We also invoice extra for rush processing. A few years ago we found that our 401(k) plans were not profitable to us when we used a fee schedule comparable to that of competitors. We faced 3 choices: (1) Dump the unprofitable clients; (2) Raise our fees so that they would have the same profit margin as our other plans, or (3) Find ways to reduce the time we spent on those clients. We used a combination of (1) and (3), so I understand "weeding the garden". I don't understand what a "profit calculator" is.

SLuskin: As an aside, I thought the self-funded plans did have discrimination testing, and that if the plan is tilted in favor of the HCEs, then the contributions made on their behalf become taxable income to them. VG: You are correct. KMaldonado: As somewhat of an aside, if the employee contributions are run through a cafeteria plan, then the cafeteria plan ends up discriminating against highly compensated employees! VG: Following up on your thought, could the employer then make cafeteria plan contributions on behalf of HCEs to bring them up to the level of contributions for non-HCEs?

GB: A VEBA could be set up to provide the desired benefits. The employee funds pay for the benefits that the VEBA is set up to provide. The VEBA is not set up for the purpose of the employee contribution/funds. VG: Are you trying to say that an employer cannot establish a VEBA for the purpose of holding employee contributions/funds in trust? Because if you are, I strongly disagree. The "desired benefits" can be any permitted benefit for which the employees funds are available. The employees funds could be used to purchase health insurance, dental insurance, vision care coverage, prescription plan, disability insurance, etc. In other words a VEBA is an ideal vehicle for providing consumer-driven health plans, wheter or not it is an employee pay all VEBA.

mbozek: I think you misunderstand the eligibilityissue. * * * However, there is no similar provision in IRC 501© (9) to allow payment of benefits to be made some one who is not a spouse or dependent of the the employee who are the only eligible members. VG: The regulations under IRC 501©(9) specifically permit surviving spouses to receive benefits. And ERISA specifically permits "the former spouse of a participant shall be treated as a surviving spouse of such participant for purposes of section 1055 of this title (and any spouse of the participant shall not be treated as a spouse of the participant for such purposes) * * *. This is comparable to IRC 417(p)(5) which applies to retirement plans. mbozek: Therefore a DRO cannot order that benefits from a VEBA be paid to an ex spouse since they are not benefits which can be paid under the VEBA plan as required under ERISA for a valid QDRO. Since the awarding of a benefit to an ex spouse under a QDRO would disqualify the VEBA it is not a permissible benefit. VG: Your conclusion is in error because you rely on the Code and ignore the provisions of ERISA as explained above.

pjk: * * *Your assertion to the contrary would be the "flawed premise" in your argument. VG: I stand by what I said. I have yet to see a family court judge in a divorce court proceeding choose to apply ERISA over conflicting state law. I did not say that a state court judge won't pretend to interpret or hold under applicable Federal standards. pjk: Now it's obvious from such a statement that you are not the beneficiary of a law school education * * * VG: It is specifically because I have been a practicing attorney for 20 years that I posted what I did. My specialty is ERISA and I get to review DROs for clients regularly. pkj: * * * unless Congress has made special provision for the exclusive jurisdiction of federal courts, a state court may be the appropriate forum even if the disposition of the issue requires application of Federal law. VG: No one is going to sue for divorce in Federal court because one issue involves ERISA. So what? pkj: In ERISA litigation planning, it's common for the plaintiff to run to state court in the hope of getting a judge with less experience in interpreting ERISA and for the defendant to make a motion for removal for fear of the same thing. But, if both parties agree, ERISA does not prevent a state court from making a determination that the a DRO is a QDRO, if that court is a court of "competent jurisdiction." VG: But the state court cannot make that determination until the parties have gone through the motions of having the Plan Administrator make a determination first. Cases arise as follows: (1) Divorce is granted and DRO is issued. (2) Plan Administrator is served. (3) Plan Administrator makes QDRO (or non-QDRO) determination. (4) One party or the other disagrees with Administrator's determination. or (4) Somebody dies before the Administrator makes determination (as in case you posted), or (4) One party wishes to have the DRO modified. (5) Either party sues the other (order to show cause). or (5) Either party sues the Administrator to stop a payout to the former spouse or other beneficiary. (6) Administrator either invokes interpleader or steps out of case. (7) Court is left to make a determination on the facts as to whether the Administrator's determination was appropriate and correct as applied to the facts. The cases never(?) arise under the original divorce action, except perhaps under a supplemental order.

pjk: It's difficult to argue with someone who maintains that his position is supported by an assertion that it's based on a flawed premise ... but let's try anyway. VG: Huh? "position is supported by an assertion that it's based on a flawed premise"? Do you mean "that is"? And if so, what is the flawed premise? I made several points in my post. With which one are you arguing? pjk, citing: "Whether a state court's order meets the statutory require-ments to be a QDRO, and therefore is enforceable against the pension plan, is a matter determined in the first instance by the pension plan administrator * * *. VG: I believe that's what I said. ERISA 1056(d): "(3)(A) Paragraph (1) shall apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a participant pursuant to a domestic relations order, except that paragraph (1) shall not apply if the order is determined to be a qualified domestic relations order. Each pension plan shall provide for the payment of benefits in accordance with the applicable requirements of any qualified domestic relations order. (B) For purposes of this paragraph-- (i) the term "qualified domestic relations order'' means a domestic relations order-- (I) which creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan, and (II) with respect to which the requirements of subparagraphs © and (D) are met, and * * * © A domestic relations order meets the requirements of this subparagraph only if such order clearly specifies-- (i) the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order, (ii) the amount or percentage of the participant's benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined, (iii) the number of payments or period to which such order applies, and (iv) each plan to which such order applies. (D) A domestic relations order meets the requirements of this subparagraph only if such order-- (i) does not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan, (ii) does not require the plan to provide increased benefits (determined on the basis of actuarial value), and (iii) does not require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a qualified domestic relations order. (E)(i) A domestic relations order shall not be treated as failing to meet the requirements of clause (i) of subparagraph (D) solely because such order requires that payment of benefits be made to an alternate payee-- (I) in the case of any payment before a participant has separated from service, on or after the date on which the participant attains (or would have attained) the earliest retirement age, (II) as if the participant had retired on the date on which such payment is to begin under such order (but taking into account only the present value of benefits actually accrued and not taking into account the present value of any employer subsidy for early retirement), and (III) in any form in which such benefits may be paid under the plan to the participant (other than in the form of a joint and survivor annuity with respect to the alternate payee and his or her subsequent spouse). * * * (F) To the extent provided in any qualified domestic relations order-- (i) the former spouse of a participant shall be treated as a surviving spouse of such participant for purposes of section 1055 of this title (and any spouse of the participant shall not be treated as a spouse of the participant for such purposes), and (ii) if married for at least 1 year, the surviving former spouse shall be treated as meeting the requirements of section 1055(f) of this title. So to answer mbozek, section 152 "dependent" status is not required for a former spouse. Check out http://www.benefitslink.com/links/20020322...22-015661.shtml

mjb: I dont know how you can say the er has no risk in setting up the VEBA * * * VG: What I said that the employer didn't have risk if it was structured properly. mjb: The ER could be sued on the grounds that the plan was never established on an actuarially sound basis. VG: As I stated earlier, you seem to be operating on the assumption of a self-funded health plan. VEBAs exist for many other purposes. mjb: * * * the trustee of the veba ( e.g,. employer or employee of employer acting as the fiduciary) will have to decide whose insurance gets funds and whose does not and then defend such actions. VG: What are you talking about? If an employee pays his premiums under the employee pay all, the trustee will forward those funds to the insurance company. This is not a decision-making process. mjb: And who will pay for all of the legal advice to be given to the trustee, the adiministration expenses and annual reporting? The employees of course because their contributions will be the only source of funds. VG: No more than under a 401(k) plan without a match. Employers can pay those fees or not, depending on how the arrangement is structured. mjb: You allso seem to be ignoring the effect on employee morale that would result from the increase in annual premiums/cancellation/reduction of benefits. VG: For the third time: you are assuming a self-funded health plan with negative experience. This is what we call a straw man. No such arrangement was given. mjb: If a VEBA was such a great idea it woud be adopted by the major F500 cos that want to get out of paying for health ins. It is simplier for ers to lower benefits /raise ee premiums under an unfunded plan than engage in an emplyee pay all veba that will be distraction and legal headache. VG: VEBAs have been utilized by many Fortune 500 companies for various programs: self-funded health plans, funding retiree medical benefits, providing life insurance, disabilty coverage, severance benefits, education benefits, etc. for their employees. While I am no fan of employee pay all plans, I do believe in VEBAs and their uses. Your arguments are similar to those of someone selling nonqualified deferred compensation as an alternative to a qualified retirement plan. The "distractions and headaches" (merely some extra accounting and tax returns similar to a 401(k) plan) are offset by advantages to employer and employees.

I believe so, but a simple search did not turn it up. The new HIPAA requirements take effect in October of 2003. Your answer might be found at: http://www.aha.org/hipaa/hipaa_home.asp

Nothing in the Code or regs would be violated as long as the basis for doing so was legal, ie, in the plan document or in some rating schedule permitted under the plan. Papogi talks about trying to explain the practice to the rank and file: it may actually have to be included in the SPD. Monty is right as far as he/she goes. The regs. specifically preclude employer contributions as a percentage of salary, for example. But then, ironically, in describing how to perform the non-discrimination test they describe comparing the BHCE/SHCE to the BNHCE/SNHCE (where B=Benefits or Employer premiums and S=Compensation or salaries). The penalty for disciminating under these provisions: the excess for the HCEs is imputed to them as current income and included on their W-2s! My recommendation: Go for it!

Under a QDRO, no benefits are conferred on an ex-spouse. The DRO is generally issued simultaneous with the divorce itself or prior thereto. Your argument might hold water if it pertained to an order issued after a divorce was granted, although even then I cannot think of any DRO I have seen purporting to split benefits earned subsequent to a divorce, only up to the date of divorce. So the benefits are for a "spouse" not for an "ex-spouse". Please note that the portion of ERISA which deals with QDROs is not under IRS's (sole) supervision, but the DOL's. Regs under 501©(9) will not supercede a QDRO which meets DOL's requirements. The portion of the Regs you refer to has to do with the definition of employee for membership purposes, not who can receive benefits under a VEBA. Sec. 1.501©(9)-3 of the Regs. provides that "* * * The life, sick, accident, or other benefits provided by a voluntary employees' beneficiary association must be payable to its members, their dependents, or their designated beneficiaries. For purposes of section 501©(9), dependent means the member's spouse; any child of the member or the member's spouse * * * " Ex-spouses are not excluded, as they may in fact continue to be dependents under IRC 152(a).

Thank you. We had already downloaded the table manager several months ago, but could not get the numbers to match.

mjb: * * * the PA may have a reason to oppose the QDRO because of the prohibited inurement rule that VEBA assets cannot benefit non eligible persons * * * Me: VEBAs are for the benefit of employees, their dependents and beneficiaries. A spouse qualifies. mjb: Also the terms of providing coverage to the ex spouse under the DRO may violate the terms of the plan or the VEBA * * * the PA should retain counsel. Me: I agree with you. MB: Even if the dro is binding on the parties it is not binding on the PA who is not a party to the divorce. Me: There are jurisdictions (notably California) which purport to make the PA a party to the divorce through service. While I consider the state's procedure to violate Federal pre-emption which should be accorded under ERISA, it still exists. pjk: Federal courts do not have exclusive jurisdiction with respect to adjudicating ERISA claims * * * Me: Agreed pjk: Family law courts are frequently asked to determine whether its DRO, or the DRO of any other family law court in the state, is a QDRO. Me: You have just proven the point you were trying to disprove. If they were applying ERISA, no court would make the determination: ERISA requires that the Plan Administrator evaluate the DRO and determine whether it's a QDRO. pjk: In California there is a process by which the plan is joined to the family law proceeding as a party to the domestic relations proceeding. Barring removal to the Federal court, that court will adjudicate the claims. Me: The procedure is defective and does not comply with ERISA which pre-empts state laws on this issue. The PA cannot be joined legally under this procedure. Again you are proving my point: that state courts, esp. California, ignore Federal laws when evaluating participants' rights under ERISA. pjk: An alternative occaisionally used by plan trustee where the parties decline to stipulate, is to file a motion for interpleader in federal court to determine the issue of who get's what? The amount is dispute is deposited with the clerk of the court and the plan makes a motion to be discharged from liability (not always granted). Me: That is the federal remedy available to a plan administrator when an attempt has been made to railroad the plan into violating its provisions or Federal law. It turns out that your assertion of "actually quite incorrect" actually supports my argument: state courts almost never will rule in reliance on Federal law. If I am so incorrect, give me an example of a case which has been review by a Federal Discrict Court, Court of Appeal or US Sup Ct in which the defective method of handing under state procedures has been upheld under ERISA.