Whether an employer-funded plan and trust for retiree health is a deferred compensation plan

[Everett Moreland]

I would appreciate any thoughts or authority on whether an employer-funded plan and trust for retiree health benefits is a deferred compensation plan for purposes of IRC Section 457(e)(11) and (f) or the rules in Section 885 of the American Jobs Creation Act of 2004 for nonqualified deferred compensation. Assume that under the plan document the employer contributes a percentage of each participating employee's compensation for the plan year, to be allocated to an account for the employee to be used for health benefits after retirement.

[mbozek]

I thought that Sections 885 and 457 were limited to plans of deferred compensation, e.g., plans that paid taxable compensation. A health plan that only pays amounts excluded under IRC 105/106 is not a deferred comp plan because the payments are excluded from gross income.

[GBurns]

For what other purposes, other than health benefits, can the accumulated funds be used?

Who determines or verifies that the funds are used for health benefits?

[Everett Moreland]

mbozek: Thank you.

GBurns: The accumulated funds can be used only to reimburse expenses for medical care as defined in IRC § 213(d)(1). The plan administrator determines whether expenses are reimbursable.

[GBurns]

The plans you outlined would not be a deferred compensation plan.

The reason I asked the questions was because, unless the PD and operation specifies and restricts the money to reimbursing the expenses of medical care only, it might be disallowed as serving to defer compensation, which while still not a deferred compensation plan (as noted by mbozek), is a reason for care in design, implementation and operation.

If there is any other option such as a cash out or transfer to pension, the plan would be disallowed etc.

[Kirk Maldonado]

Everett Moreland:

If you want definitive guidance on this point, I recommend that you contact the IRS on this point. The IRS will open up a regulations project that will list the attorneys at the IRS and at the Treasury Department who are assigned to work on it. (That information is publicly available.) You can contact one of them and bring up this point, either in a phone call or in a letter.

As somebody who used to write regulations for the IRS, I can tell you that they are glad to find out about these types of issues. They sincerely want the guidance to be as comprehensive as possible, and this would not be an obvious issue to many people. In fact, I would bet that unless you contact them, your point won't be addressed.

The earlier in the project that you contact them, the more likely that your issue will be addressed by the regulations. Even if you talk with the contact at the IRS and/or Treasury, I recommend that you follow it up with a letter.

[Everett Moreland]

Kirk:

Do you know of an internet site or other available resource that lists the attorneys at the IRS and Treasury who are assigned to work on regulation projects?

I suppose I should ask that the § 885 regulations clarify that § 885 does not apply to any nontaxable benefit, whether paid to a current employee or a retiree, and whether paid from the employer's assets or a trust.

[GBurns]

Huh??

Why not just ask the question in the original post?

[Everett Moreland]

GBurns:

My reason for not limiting the request for IRS guidance to my original post is I would like guidance from the IRS that goes well beyond my original post. In my last post I stated the possible request for guidance broadly, to see what reactions would be posted.

[Kirk Maldonado]

Everett Moreland:

I don't know of a free website, but I've never searched for one. The time I needed it, I think I got it from BNA (through my firm's subscription).

[Ron Snyder]

Contact any of the IRS people who wrote the HRA guidance. See Revenue Procedure 2002-41 and Notice 2002-45. In fact, I'd suggest going one step further and simply complying with those (and related subsequent) rulings.

[E as in ERISA]

I believe that Treasury has indicated that retiree health related benefits would be included in the definition of deferred compensation....but only those that would be includable in income.

[Kirk Maldonado]

vebaguru:

The people at the IRS that write the Revenue Procedures are not the same people that write the regulations.

However, they would probably know who has been assigned to work on the regulations project.

[Ron Snyder]

They did not write the old Regs, and they may not write the upcoming Regs (if there are any). But when I met with them I was impressed with their mastery of the issues. And they can refer to others as well.