PS Plan- medical benefits

[Guest Lex]

We are considering the following for a client- feedback or more information is welcome.

The company wants to give more to employees to enable them to pay medical costs upon retirement. The company does not want the expense of setting up a defined benefit plan and using 401(h).

The company already has a 401(k)/PS Plan. The current thinking is to:

1) make an additional employer PS contribution- age-weighted

2) designate that as a "retiree medical contribution"

However, insurance would not be purchased with this contribution- it would be invested per participant elections in mutual funds. Upon distribution, a participant would be free to spend the money as they choose.

Any thoughts on restricting distribution from that source until NRA for those that terminate prior to NRA- but allow them to take the 401(k) and other ER contributions upon termination?

[mbozek]

I dont understand the economics of such a decision since the amounts distributed will be taxed as ordinary income for st and fed tax purposes. Why not establish a VEBA for retirement health care benefits to maximize 100% of contribitions, accumulate tax free income and not pay income taxes or provide for employer payments to reimburse employees for payment of health insurance on a non taxable basis. Accumulating funds in a retirement acount to pay health care benefits is a very inefficient way to pay for retiree health care.

[david rigby]

Limit under IRC 415© might also be a problem, in combination with other contributions,

[Mike Preston]

Change the 401(k)/ps to a pure 401(k). Change the PS to a MP. Now you can put in 401(h) contributions, withiin the appropriate limits, to the MP plan.

[Guest Lex]

Can you refer me to a source with more information on 401(h) as part of a MP plan?

[Mike Preston]

There isn't much other than the Code. The only thing that doesn't appear in the code, that I'm remembering from the last time I delved into these (which was before the change in law that made them an annual addition, which was a long time ago), was that the determination of incidental was generally considered to be consistent with the insurance rules regarding anything other than whole life contracts. That is, 25%. Hence if the contribution under the MP plan was $20,000, you could put in $5,000 into the 401(h) portion and not be in violation of the incidental part of the rule. That may have been just what grew up in practice, rather than being based on anythng in particular, however.

[mbozek]

see reg. 1.401-14

[Mike Preston]

Ooooh, it matches my recollection. That's a good thing.