Ron Snyder

What you have given is a reason not to do an employee pay all health plan without a VEBA. The Employer has no risk with the VEBA is the plan and trust are drafted properly: the Employer's obligation is limited to its requirement to withhold funds from the employees' paychecks and deposit them to the fund on a timely basis. The "shortfall" would be the VEBA's liability. You seem to be assuming some form of self-funded plan or group rating arrangement for the employer, but most employee pay alll plans are in lieu of self funded or employer provided plans. They frequently consist of employees' purchasing individual health policies. But they could also consist of employees depositing funds into individual accounts for which the employer would bear no responsibility.

Kim: Thanks. Do you have a specific regulation reference or other reading that I can refer to on this topic? The problem is that there is a lot of information about this topic. The Code and regulations under 501©(9) are good places to start. Also Code and regs under 505, 419, 419A, 101, 105, 106, 125, 79, 83, 61, 162, 264, 414, 4976, also contain information about VEBAs and welfare benefit plans. Since I don't know what type(s) of benefits are provided, I can't really narrow the list. IRS issued a VEBA Manual many years ago which has been recently updated. I have access to it through my tax service (from Tax Analysts). I found it on IRS's website in the Tax Professional's Corner, "Handbook 7.8.1, Exempt Organizations Handbook, Chapter 9, Voluntary Employees' Beneficiary Associations-- IRC 501©(9)". IRS has issued rulings such as TAM 9141003 and 9141004, RRs 79-406, 79-221, 81-16, 85-199, 91-26, Notice 95-34, numerous private letter rulings (too many to mention), In addition to IRS pronouncements the Treasury Department has issues some guidance. Take note of GCMs 39785, 39817, 39818, 39834, 39884. There have also been many court cases: Water Quality, Wellons, Sherwin Williams, Schneider, Parker, LIMA Surgical, Neonatology, Canton Police, Booth, American Bar Endowment, etc. These are not everything, but they are a good start.

We have used the lx values from the SOA table manager but have not been able to duplicate the prior administrator's annuity rates.

There have been no specific law changes which would have necessitated amending VEBA trusts over the past 15 years, although the VEBA regulations have been amended and IRS has issued considerable guidance over that period, along with a couple of important court cases. The larger problem is that each benefit to be provided under the VEBA trust is subject to other sections of the IRC. Many of those have been amended in the past 15 years. So, although the trust itself may not need amended, the plan provisions may need to be amended to comply with current laws. Moreover, many VEBAs use combined plan and trust documents, so the plan and trust, after being brought into conformity with the law, would need to be resubmitted to IRS for a determination.

Although it appears that QDROs would not apply to welfare benefit plans or health plans under ERISA, there has been a line of cases in Federal District Court, primarily out of New York, New Jersey and Connecticut, holding that certain types of benefits can indeed be divided up pursuant to a QDRO. This is not a black and white issue, but a developing area of the law: stay tuned for further developments. We advise clients thatif they establish a health or welfare benefit plan which includes cash or equivalent benefits, they must be prepared to be served with DROs. And when they are they have the choice of fighting the DROs on the basis that they are barred by ERISA, or they can simply honor them anyway and save the plan thousands of dollars of legal expenses. Such state court orders, although not technically binding on the Administrator under ERISA (in my view), are binding on the parties to the action, normally the participant and the ex-spouse. Therefore, the Administrator has no incentive to go through a protracted and expensive litigation to assert its position. No state family court will make a decision based on ERISA.

Employee pay all VEBAs make a lot of sense in several contexts. The most recent one is the case of defined contribution health plans. In that scenario an employer would annouce to its employees that it was no longer providing health insurance for its employees, and that the employees' compensation would be increased immediately by the amount of premiums paid by the employer until now. The employees could then either purchase coverage on their own (which could still be on a pre-tax basis using a premium reduction plan under IRC 125), or they could purchase after tax. The employee pay all VEBA would permit employees to direct all such funds into a VEBA trust and to have a choice between high-deductible and low-deductible health plans. The amount of employee contributions going for premiums would be pre-tax; the other employee contributions would either be after-tax or would be subject to the "use-it-or-lose-it" requirements of the proposed 125 regulations. The advantages of employee pay all arrangements are simply: the income inside the VEBA for retiree medical benefits would not be subject to UBIT. And, an improvement over some current unfunded or unprotected DC health plans, funds would actually be guaranteed to be there for employees when needed. The comment by Burns above, "* * * you cannot set up a VEBA for the purpose of employees paying anything * * * is simply incorrect. And the comments by mjb that "Most small employers join multi employer vebas that offer benefits to 10 or more employers to avoid the limitation on employer deductions for single employer vebas but these multiemployer vebas are subject to state insurance regulation" is misleading and irrelevant to the thread. His additional assertion that "Most of the VEBA products are offerred through insurance companies and promoters of deferred compensation schemes for small business and some are considered tax shelters required to disclose information to the IRS" is incorrect. He is confusing apples and oranges.

We have taken over administration of a defined benefit plan for which the documents provide 411 actuarial equivalence using the 1983 Individual Annuity Mortality Female Table Projected to 2000 using Scale G. Does anyone have access to that table, preferably the Lx values? Is it available on the internet anywhere? It doesn't seem to be one of the SOA tables.

They are another name for employee medical accounts. There are articles at http://www.bsgbenefits.com/cgi-bin/docs.cgi?artnum=1 and http://www.bsgbenefits.com/cgi-bin/docs.cgi?artnum=4. The employer receives a deduction. The employees may also make tax-deductible contribution. No amount is subject to "use-it-or-lose-it" since only employer money carries over from year to year. This is a very effective model for "defined contribution" or "consumer-driven" health plans. It also works for funding retiree medical benefits on a defined contribution basis, thus avoiding the open ended liability of most retiree health plans as well as the FAS 106 disclosure problems. It isn't deferred compensation because it is a welfare plan which may only be used to purchase or provide welfare benefits. On death the proceeds of any life insurance policies are distributed to beneficiaries. Any amount left in the employee medical account is available for use by dependents during their lifetime. Deminimis benefits are cashed out.

1. Sponsor adopts termination. 2. Assets are allocated in accorance with plan/trust documents to participants. 3. Benefits are purchased or assets are distributed to participants on nondiscriminatory basis. 4. Final 5500 form is filed.

Remember this is a choice of benefits within a VEBA trust, not of benefits provided by an employer. Vacation benefits are not generally funded through VEBAs (and the ones that are are collectively bargained), the mere fact that there is a finite amount of dollars available for benefits and using them for one purpose makes them unavailable for another (and vice versa).

vebaguru: Your impression is correct. Is it the employer or the VEBA that offers the choice? For example: 1. If the employer offers paid vacations and automatically converts unused vacations into a VEBA contribution, that might not become taxable. 2. If a defined contribution VEBA offers a choice of welfare benefits including a vacation benefit, the fact that the account is not used for a vacation and is still available for other benefits does not cause it to become taxable. 3. If an employer allows employees to choose between a paid vacation and a VEBA contribution, that would make the contribution taxable. It would also fall under the "use it or lose it" requirement under IRC section 125 as a choice between taxable and nontaxable benefits. The question to answer in determining whether the benefit is subject to "use it or lose it" is: Does the employee have a choice between taxable and nontaxable benefits? If so it is an election under IRC section 125. The question to answer in determining whether the benefit has been constructively received is: Does the employee have a vested current right to receive the benefit? If so it is taxable.

Thank you for some excellent suggestions. Although I was the contract administrator at the time, I no longer have any recollection of whether the participant would have been on an SSA or not. Of course I recall the rules and would have put him on an SSA if the required period had elapsed after the participant left, but here we're considering a terminated plan. Certainly we would have done 1099s, and I didn't know IRS kept them that long (presumably on microfilm or microfiche). Since all payouts were made by check out of the trust account, I believe our best bet is in the bank records. Now, if we can just remember which bank the trust account was at . . . Note: You and I read ERISA as establishing exclusive Federal jurisdiction over claims by participants and beneficiaries. Many state courts do not. They believe themselves entitled to review and decide any matter which is placed before them. The cost of removal in this case would be more than the participant's claim. My guess is that he will go to Small Claims Court where the judge hasn't even heard of ERISA!

We terminated a profit sharing plan in 1985 or 1986. To the best of our knowledge and recollection, all participants were paid out then. We destroyed the records relative to the terminated plan in 1996. Now a former employee has presented a formal demand for a distribution he claims never to have received. How do we prove we paid him out? How does he prove we didn't? We are within the 30-day response period and will deny that he is due any benefits under the plan. Any experience on this?

Now that the Neolatology case was decided, did the promoters of such arrangement back off? No, they put their heads together and concocted a new scheme to get around the tax laws. Why don't they read the opinion. Judge Laro, who respectfully and impartially reviewed the Prime Benefit Plan in the Booth case (although correctly finding that the Plan was experience-rated), trashed the Southern California Medical (or "SCAM") VEBA, the insurance company (Interamerican, which is now defunct), the financial planners who misrepresented the information to clients and the clients who didn't even bother to do a check with their own CPAs or attorneys before they got involved. It is obvious that Judge Laro's primary concern (and reason for throwing out deductions without even getting to an IRC section 419 analysis) was the intent of the parties. The VEBA promoters sold the plan on the basis that they had found a tricky way to use welfare benefit plan laws to get money out of a closely-held business. There was never any welfare intent, only the greed of the owners. The Judge imputed their intent and actions to categorize the payments (in excess of the current group-term life insurance premiums) as dividends. Did they get the message? No. The group who brought you the "speciously designed" continuous group product, now called CJA and Associates, has "found" a new "loophole." They propose to modify their "Group Plus" product to provide a paid-up term insurance policy at retirement. The new product would still be a very expensive product (which Judge Laro correctly described as a combination of two policies in one), but now there would be no conversion privilege. However, since the policy is guaranteed to stay in force for life, it could be "sold" (a viatical sale) for cash. Now the owner of the business is being encouraged to buy very expensive "group-term life" insurance policy which can be converted to a cash lump sum at retirement. Still doesn't sound like a welfare purpose to me. Will the IRS will be able to see through this? In about 30 seconds.

The cases referred to either apply the rules of IRC sections 419 or 419A to limit tax deductions of employers. They generally follow the IRS regulations under those sections. There are reasons why limits other than (or in addition to) those under IRC sections 419 or 419A may apply: 1. If the plan is fully insured under IRC section 79; 2. Because the amount is determined under IRC sections 79 (death benefit only plan) or 162 (non-death benefit welfare plan which is exempt from 419 and 419A due to 419A(f)(5) or (6). 3. Because the plan is a plan of life insurance policies under IRC section 264. 4. Because the plan is unfunded (not part of a "welfare benefit fund"). In your post you requested "a thorough discussion on the rules governing contribution limitations to VEBAs - particularly as they apply to pre-funding post-retirement medical and life insurance benefits". These cases provide that. You state that your client, a utility, is "being required" to provide such benefits. As you will note from the laws and regulations, if the reason they are being required to fund such benefits is as required pursuant to a collective bargaining agreement, the limitations of 419 and 419A do not apply. You also asked for filing requirements. An employer is required to file form 5500 for each welfare benefit plan each year. In addition, a VEBA trust is required to file form 990-P each year for the trust. In order to operate as a VEBA the trust must secure a letter of determination from the IRS. Although they may take more than 2 years to process such an application. To apply for such an approval, use IRS form 1024 (part of a 1024 booklet), including form 8718.

On the thread entitled "Purchasing Medical Benefits from a PEO" I suggested that they "carefully weigh all of the advantages and disadvantages of employee leasing prior to getting involved with a PEO." You responded, "On the contrary." Now you state, "you should be very cautious about enetering into any plan with any PEO." Is there a material difference between "carefully weigh[ing] all the advantages and disadvantages" and being "very cautious"? If so, what is it?

A transfer to 401(h) accounts doesn't make sense. Anything that can be done with a 401(h) account can already be done by a VEBA. Moreover, distributions for payment of medical expenses from a VEBA are excluded from taxable income, while 401(h) distributions are taxable and the taxpayer is allowed a deduction only for the portion which exceeds 7.5% of FAGI.

Go and read IRC Section 72(p) and its requirements and effective dates. Beware of the following: 1. Failure to foreclose on a loan may become a breach of fiduciary duty under ERISA. 2. Going into default on a loan causes the amount not repaid to be treated as taxable to the participant in the current year (although the funds, after repayment of the loan, may be distributed tax-free later). 3. Defaulting on payments causes the failure to foreclose to become a new extension of credit which would be subject to the newer rules. 4. The requirement of level amortization means that a failure to make such payments causes the loan balance to be taxable to the participant. Read the Q&As under Regs. 1.402©-2, especially Example 6.

I have been actively working with a group in Michigan on a project which will permit their clients to drop retiree medical guarantees, while offering employees some protection. Obviously, FAS106 shocked a lot of companies when they ascertained the amount of liabilities they had to recognize. Most employers began to raise the employees' share of retiree premiums in order to reduce the liability. However, with medical costs going up as much as they have been since FAS106 came into being, companies are still faced with formidable liabilities. The solution we propose to companies is to convert their post-retirement medical plans to a defined contribution type of plan, which we call VEMAs (for "Variable Employee Medical Accounts") Rather than explain the approach in detail, you may read an article I posted on my website, at http://www.bsgbenefits.com/cgi-bin/articles/0006. We believe the solution to be for the employer to fund whatever amount it can reasonably afford, and to turn the responsibility for worrying about whether coverages will be sufficient over to the employees. I don't believe that in most cases it is politically feasable to eliminate retiree medical for employees already retired. However, for all other employees, we propose to give them an election of health plans: the traditional retiree health plan (typically with increased employee contributions), or coverage under the VEMA with a lump sum transferred over from the prior health plan. The lump sum would be actuarially determined using the same methods, factors and assumptions as the FAS 106 liability (since those were "reasonable").

Remember that welfare plans do not have a requirement which corresponds to the "exclusive benefit rule" under IRC Section 401(a). Therefore, they do not need specific statutory permission to establish a multiple-employer 125 plan. Historically, many group life plans and group health plans, especially for small groups (1 or 2 to 50 employees) were provided by similar multiple-employer welfare plans. These are less common since ERISA, and are regulated by state insurance departments.

You might make sure that you review relevant cases, including: General Signal Corp. v. Commissioner, Docket No. 97-4018, 2nd Cir. 1998 Square D Company v. Commissioner, 109 T.C. 200, U.S.T.C. 1997 Parker-Hannifin Corporation v. Commissioner, T.C. Memo. 1996-337, U.S.T.C. 1996 Connecticut Mutual Life v. Commissioner, 106 T.C. 445, U.S.T.C. 1996 In each of these the taxpayers lost tax deductions because of IRC Sections 419 and 419A.

I learned about this gift from DOL on May 15th, already too late to file. We contacted them, however, and they were already aware that word had not gotten out. Since this is the first year of this filing requirement, they are adopting a liberal policy (or so they say) toward the forgiveness of late filing charges. (But not, apparently for non-filings.) When is a health plan a health plan? The purpose of the form seems to be to ascertain compliance with COBRA, HIPAA, MHPA, etc. However, if a plan provides any medical benefit it must file the form, whether the benefit is subject to those rights or not. Examples of non-standard health plans include: standalone vision plans, retiree health account plans, long-term care plans, etc. We went ahead and filed even though we did not believe that some plans were subject to the M-1 requirement. However, we attached an explanation of our analysis of the situation, in hopes that they get the form and instructions corrected for next year (if there is a form next year).

As noted above, a VEBA is a possible structure for holding cafeteria plan contributions. However, the better question is: should a trust formed for the purpose of holding cafeteria (flex) plan contributions be a VEBA? I would answer, "no". With the "use it or lose it" rule widely accepted, the chance of a 125 plan needing to be exempt from income tax is almost nil. Moreover the restrictions imposed on VEBAs (extra nondiscrimination rules, geographical limitations, etc.) and the cost of filing with the IRS (who won't rule on the 125 plan anyway) make it undesirable to utilize a VEBA. A simple grantor trust (taxable) is sufficient.

There is nothing inherently more risky or less risky about a PEO's health plan vs. one of a private company. You should carefully compare the provisions and coverages of all health plans you are considering. For example, some self-insured plans of PEOs are limiting certain coverages much more than insurance companies (like organ transplants, for example. Making a decision to lease your employees from a PEO is a much more comprehensive decision than where to purchase health insurance. It affects many aspects of your business. For example, when we switched to a PEO for our payroll, benefits, etc., it also made us subject to Federal labor laws and requirements, which we were previously exempt from (under the Contract Clause of the Constitution). Another funny thing happened: after a month of being covered under the PEO's health plan, we were summarily terminated from coverage under their health plan (although we remain clients for payroll purposes). We were terminated because of health problems of a spouse of a part-time employee who will never become eligible to participate in our health insurance plan. We also are unable to participate in the PEO's 401(k) plan because we have a pension plan of our own. I suggest that you carefully weigh all of the advantages and disadvantages of employee leasing prior to getting involved with a PEO.

A summary and analysis of the Neonatology decision and its implications is contained at http://www.bsgbenefits.com/cgi-bin/articles/0035. Judge Laro did get it right. However, even after this decision, there are several issues which have not been discussed in this forum: 1. If the plan wasn't a welfare benefit plan, why did the Judge allow a deduction for life insurance premiums (for employees)? 2. If a plan complies with IRC 419A(f)(6), can it fund a paid-up policy for a post-retirement death benefit? 3. Judge L. points out in footnotes 17 and 18 that the proper table for determining the amount of current income imputed to the employee is Table I under the Section 79 regs., not the PS58 Table. Will promoters of death benefit 419 plans and VEBAs continue to pretend that the PS58 rates are the correct ones to use? 4. It seems important to Judge Laro that multiple-employer plans make all funds available to pay all claims (liabilities) under the plans. It also seems that if an employer elects a certain benefit level, there is a cost of maintaining such a level of benefits. Yet all VEBA and 419 promoters still tell employers that making the annual contribution is optional. If the plan is a defined benefit type of plan, is the contribution really optional? Or is it an amount determined using generally accepted actuarial principles over the participants remaining years of service? 5. I'm tired of promoters of VEBAs and 419 plans making the unwarranted assertion (at least by implication) that an employer might be able to terminate its adoption of a plan and the assets will become distributable to the employees. This is not correct, for two reasons: (i) the withdrawal of an employer will not cause the termination of a multiple-employer plan or trust; (ii) nothing the employer can do can cause an employees welfare benefits to become payable; they are only payable upon unpredictable contingent events such as death, disability, involuntary termination of employment (a controlling shareholder cannot be involuntarily terminated) or incurring medical expenses.