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IRS Warns Taxpayers About Certain Trust Arrangements Sold As Welfare Benefit Funds


Guest Ric Joyner

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Don

I am paid at a very high rate for explanations and advice etc. But even then, I cannot read documents for people.

You will have to understand the basic subject matter, then read the documents to determine applicability and relevance to each particular issue. I think that someone else recently made a similar suggestion to you also.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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George:

Without either of us reading any documents, maybe you could comment on the specific excerpts I have provided, and tell us how they are outdated.

What specific provisions or regulations supersede the excerpts?

If you are unable to provide the documentation, then a rational conclusion is you feel the excerpts are outdated, but you don't know exactly why.

The same conclusion is extended to vebaguru.

Don Levit

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  • 2 weeks later...

None of the materials you refer to in connection with your obsession with "commercial vs. non-commercial insurers" relates to VEBAs. IRS was concerned about 501©(3) & (4) orgs which were competing directly with commercial insurance cos. Coverage under a VEBA is limited to employees of a single employer, a controlled group or geographically limited group of employers who share an employment-related common bond. That is why the issue doesn't arise: they are no competing with commercial insurers because they don't and can't offer policies to the general public.

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vebaguru:

You are correct that the discussion about 501©(3), 501©(4), and 501(m) do not deal with VEBAs directly.

But they do deal with the differences between commercial and non commercial insurers.

Because VEBAs do not sell to the public, they are non commercial insurers.

One characteristic of a non commercial insurer is not selling to the public.

Another characteristic is selling products which the commercial insurers do not make available to the public.

Thus, VEBAs have the opportunity of offering innovative plan designs.

Don Levit

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Don

That discussion does not deal with VEBAs even indirectly.

You keep going in circles and never answering the questions:

When and where did the IRS ever say that VEBAs are non-commercial insurers?

Aside from that Which VEBAs do you know of that sell anything and To whom?

And once again you are back talking about VEBAs and "innovative plan designs". So once again, Which VEBAs offer or have these innovative plan designs?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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I have already addressed the questions you posed.

VEBAs are mentioned indirectly, for they are non commercial insurers.

I already gave you the GCM material attesting to that fact.

How can one think out of the box, if he is always going in circles?

Don Levit

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Hi, Don,

I'm a bit confused. Is there something other than paying health premiums out of the VEBAs assets or paying plan-promised health benefits out of the VEBA assets that you are referring to as "innovative plan designs"?

Is it purchasing life insurance on the lives of VEBA members, with the owner and the beneficiary of the policy being the VEBA, as a method of increasing the VEBAs assets with which to pay other, promised health benefits to other VEBA members?

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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John:

I am saying that one of the distinguishing characteristics between a commercial insurer and a non commercial insurer, according to the IRS, is that a non commercial insurer offers products which are not provided by commercial insurers.

Don Levit

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Hi, Don,

I think you also explained in this thread that because a VEBA is a like a non-commercial insurer, the VEBA can offer products that commercial insurers do not and "Thus, VEBAs have the opportunity of offering innovative plan designs."

I'm just wondering what specifically you might have in mind.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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John:

Thanks for asking.

The type of plan I envision is one in which benefits build over time.

The idea is to accumulate between $25,000 and $50,000 of benefits in 2-5 years.

Benefits would vary in direct proportion to contributions made, less claims incurred.

The reason I am thinking of $25,000-$50,000 of benefits is that the price break seems to be the largest in that area.

For with $25,000-$50,000 of coverage, and the VEBA plan as primary, the traditional group plan's deductible would be raised to start where the VEBA benefits end.

Using one's individual savings account and the VEBA as insurer for all the particpants, there are many innovative ways to maximize benefits.

Don Levit

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This is not new or particularly innovative. Defined contribution health plans have been around for years now in their various forms. Although most don't use a funded model, those done for governmental employers and union groups frequently use VEBAs for such arrangements. I have established several of these plans for government and union groups. cf, Illinois, Burbank, etc.

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vebaguru:

Thanks for providing these links.

Can you tell us more specifically how these plans are unique from what we see in the marketplace?

Also, are you aware of any organizations that are working in the small employer market, specifically, those small employers in the same line of business across 3 contiguous states?

Don Levit

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There are groups that offer plans similar to what you describe, including our own. However, because of the additional limitations on VEBAs and the fact that we don't get a tax exemption on the medical accumulations, it made more sense to us to use taxable trusts and tax-favored investments. That way the 3-state limitation doesn't come into play.

I know of no one who presently offers such plans through a VEBA structure.

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vebaguru:

Thanks for your reply.

This discussion is really not about my particular plan design, and how creative or innovative it may be.

Rather, it is about non commercial insurers having the ability to offer innovative plans.

I believe the VEBA is one example of a non conmercial insurer.

I also think the small employer market (those small employers in the same line of business across 3-contiguous states) has a real need for this type of non commercial insurer.

If the VEBA was to be properly licensed, and monitored, we could provide some real competition for the commercial insurers.

Don Levit

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Okay, I'll bite. Why would a 3-state VEBA that is "properly licensed, and monitored" be better than a national welfare benefit plan that is not limited to 3 contiguous states?

Properly licensed and monitored means licensed as an insurance carrier in each state in which it operates. So the VEBA could purchase an insurance company charter that is already licensed in 3 or 50 or some other number of states. How do you get enough funds into a VEBA to fund this venture?

Casualty companies are already potentially tax-exempt under 501©(15 ) and life and health companies already receive favorable tax treatment under IRC section 801 et seq. What possible reason could anyone with the millions required to fund such a venture choose to comply with the additional VEBA requirements?

I'm really sick of your cluttering up these boards with irrelevant arguments about a non-issue.

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vebaguru:

I am interested in small employers in the same line of business combining to self-fund health benefits.

I don't think it is necessary for 50 states to be involved to get the law of large numbers working for small employers.

Three contiguous states would seem to suffice.

In addition, the three state area (at the most) gives a bit more intimacy to the arrangement, such that participants may not feel they are one small piece of a big conglomerate.

I envision the trustees and the participants to have more rapport than an insurance company home office and its policyholders.

The licensing of the VEBA would require state departments of insurance to use their discretion in applying the laws on the books.

By that I mean this would be a non commercial insurer, which is not selling to the public, and would have lower liabilities than a commercial insurer.

In addition, the plan I envision would max out at $50,000 per family.

Don Levit

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Don

At $50,000 per family (and presumably less per individuals) it does not seem to make any sense. Aside from statutory caputal requirements, set up costs, and ongoing administrative costs etc, it does not seem to be worth the effort for a small group. Mini-med or limited benefits plans should be a much more feasible way to go.

I doubt that you will find any regulatory body who would exercise the "discretion" that you allude to, and not properly apply the statutory capital, reserves and other laws and requirements that apply. The capital requirements alone should be enough to kill your idea. If not the MEWA prohibitions should.

There are probably a number of Association plans that have already been estalished and which have already overcome other obstacles. It does not seem worthwhile to "re-invent the wheel" in this manner, just to have a VEBA/MEWA.

An insurer (aside from capital and reserve requirements etc) does not have lower liabilities based on whether it is a commercial or a non-commercial insurer. Liabilities are a function of amount at risk. Also, as a general rule the larger the risk pool, the lower the risk, so a larger insurer gets to spread the risk or have better experience simply because of volume. Volume also carries the possibility of better operating margins and free cash flow etc.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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George:

I don't want to reinvent the wheel either.

But, apparently, there are not enough wheels out there to serve the small employers.

If a state applied the mandatory surplus and reserve requirements, without considering the actual amount at risk, they could very well exceed the set asides for VEBAs allowed by federal law.

This may not only give departments of insurance pause from doing so, but also provide them a legitimate opportunity to use the laws as guidelines, rather than as commandments.

Don Levit

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