Funded Section 105 Benefit?

[Guest JimD-EBR]

We have a non-profit client with an unfunded Section 105 MERP. Because of budget issues and their grant funding being a bit unstable, they would like to convert this as a funded benefit - EmployER funding only. They do not want to establish individual accounts like an HRA. They have less than 100 employees.

As a small plan, I expect that they would need to file Form 5500 and a Schedule I (but not an accountant's opinion). Is this correct? Would they need an audit of any sorts? Would expect that a trust would be needed too.

Right now they allocate a portion of the grant monies for the plan. Can they keep the current specific benefit under the MERP (a portion of their fully insured health plan's deductible) and have the flexibility to use the fund balance for other health benefit items? For example, if over the years they have low utilization and the balance grows, could the fund dollars be used to say offset a significant premium increase in a subsequent year?

They are ok with incurring additional costs and administrative requirements to gain comfort that the funds will be available even if grant money dries up.

Of course cites would be helpful - other solutions are welcome too.

[sloble@crowleyfleck.com]

Yes, you need to file Form 5500 and Schedule I. No accountant's opinion required. Trust is required.

I think you could have the flexibility with the plan assets that you describe (within the perimeters of the exclusive benefit, prohibited transaction rules of course). I would suggest providing for this flexibility in the plan document and SPD. The key would be keeping participants informed and making sure the plan assets do not inure to the benefit of the employer. (e.g., if surplus is used for a future premium subsidy, make sure the premium subsidy is for the employee share, not the employer's.)

BTW, this is off the topic... but you are dealing with a small 105 MERP like I'm dealing with for a client. Mine also only reimburses for deductible. How do you approach COBRA and HIPAA for this arrangement? (Assuming there are over 20/50 employees)

[GBurns]

From the post, it seems that the Fund and the MERP are a single account. Why?

AshleyL seems to have read it the same way, hence the suggestion of "providing for this flexibility in the plan document and SPD" and mention of plan assets and flexibility etc.

It serves no purpose, but creates many problems if they are one and the same.

It is more pragmatic to have a Reserve Fund separate and apart from the MERP, but from which funds are drawn to reimburse the medical expenses, under the MERP, as they are submitted.

The MERP is unfunded at all times, but money is available as needed. If it runs out so does the MERP. If it has a surplus, there are no reversion or inurement considerations or other problems.

This is no different from a Slush Fund, a Research & Development Fund, a Building Fund or a Retained Earnings Fund. Fund being synonymous to Account.

[Guest JimD-EBR]

AshleyL and GBurns thank you both.

GBurns - was asking if Fund and MERP could be a single account; just looking to see if we could stay within the MERP. My understanding from your post is that you recommend setting up two separate vehicles - the MERP and the Reserve Fund. Can you provide further info on setting up a Reserve Fund, along with filing and administrative requirements. Does it need to be a separate bank account? Does there need to be a document/spd to be shared with employees?

AshleyL - Not sure of specifics you're looking for, but...Re HIPAA and COBRA, if applicable we include appropriate language in the plan document; and get a BAA in place if we administer (HIPAA). For COBRA, the eligibility is usally for those who enroll in the employer's health plan, so it is offered as a bundled benefit for COBRA beneficiaries. We usually base COBRA premium on the prior period utilization. MERP benefit is often related to the deductible or maximum out of pocket for the health plan, but others are specific to the type of care - dental, vision, outpatient surgery, or overnight hospital stay.

[GBurns]

The Reserve Account or Fund is a bookeeping entry, unless for some reason you think it should be set aside in case the employer runs out of money or will renege. If that is the case then you should use either a Trust or a separate bank account.

The Trust will have a cost and an administrative burden and quite likely might also have reporting (this is off the top of my head, so do not hold me to it yet). Additionally, once the money is in the Trust it most likely cannot ever revert to the employer.

However, a separate bank account would still be the employer's general asset but will be more visible to those who might want some feeling of security.

Both the bookkeeping and the separate bank account methods are on the employer's General Ledger and still employer funds and if not used remain employer money. They are both the same so choose the one that feels better.

It is an item that needs both the PD and SPD.

[Guest JimD-EBR]

Have tried to suggest a separate account or fund as an accounting entry and being part of the general assets. The employer states that they need to incur an expense and "use" the grant money allocated to benefits, so the funded option is preferable - even with the additional expense and administrative requriements.

Could this plan be a separate funded Section 105 plan? Maybe not as part of the current unfunded MERP, but as a separate funded 105 plan?

[GBurns]

Yes, a separate MERP. However, funded versus unfunded seems to be where the problem is.

If you look at the books of that NP and also the funding calculation parameters set by the funding source, such as Medicaid, I bet that you will not see any support for the position that there needs to be an "expense".

I have only looked at 2 NPs this year in response to exactly the same statement made by a fair size NP client. The other 2 NPs did not interpret the same way as my client NP. When the matter was reviewed and referred to their CPA it was agreed that they had misunderstood. In the past I have seen a number have greatly reduced funding and program eligibility based on similar misunderstandings. While the same might not be true for your NP, the track record suggests that the matter be reviewed.

By the way, are you sure that there is a separate unfunded MERP or is it the section 125 FSA to which you are referring?

If they already have an unfunded MERP, Has it caused any problem with their funding?

Since you stated in your original post that "They are ok with incurring additional costs and administrative requirements to gain comfort that the funds will be available even if grant money dries up" , it probably is best to use either a trust or a bank account set up in the name of the New MERP. I would use the bank account method.

The Bank Account should create the necessary "expense" that they think they need.

I do not think that a Trust is needed since this is all employer money, but that thought needs some review.

[GBurns]

This might shed some light on the issue, especially the references in the footnotes:

http://www.benefits.net/pwecfcmo/flexreporter/v0302.htm#5

I omitted Part 1:

http://www.benefits.net/pwecfcmo/flexreporter/v0301.htm#5