We knew it was going to happen... HRA tax avoidence...

[Guest rubindj]

I'm just trying to gather options here, and this will be run through an attorney before being implemented....

Background: 501(c3), employee/president is NOT considered a Key Person or HCE. Even though she would normally be, her income has never been over 90k.

Employee (president) is retiring, and would like to essentially stop taking a paycheck at this point, and put all the income into an account (preferrably an HRA vs. a VEBA). She is owed deferred compensation (at the employer's option not the employee's since there was no money to pay her with) of several hundred thousand dollars. Currently, there is one other employee, who will retire at the same time at the first of the year. The corporation at that point will become a shell with no assets other than A/R (selling business via an asset purchase).

Survey says when its all said and done, there will be 100-150k cash left. She would like to adopt a HRA to push the money into to pay for retirement healthcare benefits, long term care, etc. Noting weird like life insurance, she intends to use it all up between she and her husband.

Ok, now my question... obviously she will have to include the second employee, who is also an officer, but only makes about 30k a year. She has no problem funding this to some level. The question is can you have two tiers in an HRA reimbursement, one for professional employees and one for staff, or I am completely barking up the wrong tree?

The other option would be to keep the corporation active and just fund assets directly from the coporation, but 990's aren't the easiest thing to do for a 2 person benefit.

[QDROphile]

Seems to me that your process is backwards. Your proposal is so fraught with issues involving compensation, tax emption for the entity and the HRA that you should be seeking legal advice up front, not as a formality at the end. A good lawyer will be able to deal with the multiple issues and help come up with an arrangement that best helps accomplish the goals of the organization within the restraints of the law. I don't think you can focus narrowly on a few HRA issues such as the discrimination rules.

However, a focus on a few issues might reveal that the HRA proposal is not feasible or at least not desirable. The contributors to this board will probably point out a few specific difficulties with the proposal, such as the discrimination rules and the funding issues. For example, section 105(h) applies and the definition of "highly compensated individual" is not the same as the definition of "highly compensated employee'' that you are contemplating. Also, where will the money live and who will administer? I doubt that a 501© (3) organization can continue to exist for the sole purpose of providing medical benefits to former employees.

[Ron Snyder]

I endorse the comments of QDROphile. Note: an HRA is a "plan" while a VEBA is a "trust" (funding vehicle); they are not mutually exclusive.

What reporting has been done with respect to the existing DC plan? The DC plan is not an "option", especially if she is now becoming vested by turning retirement age.

The second employee would only be included if he/she remained in the corporation after the sale. 990s are easier than 5500s.

My guess it that you have a DC plan that is not in compliance with the new laws (and must be so by the end of the year). Once you meet with your tax attorney to resolve that issue, it will be easier to determine what opportunities exist.