Welfare PLan

[Gary]

Forgive my simplicity, but I am not trained in welfare plans so I just want to run a couple of novice level points by the link.

Say a small company with five employees (all in the same family), thus all HCEs and no other employees. So company only has HCEs.

The plan sponsor wants to funud for post retirement medical expenses and they want a simple formula.

1. Can a post retirement medical benefit be simply a target amount say 100k or 300k to be accumulated at normal retirement to pay post retirement health benefits for a participant?

2. And as a deduction to the plan (where plan assets are in a VEBA trust), the amount is the actuarial level funding to reach the targeted amount using an interest rate of 5% per annum to determine level funding.

Is the above fairly straight forward and acceptable or are there much more complex rules that need to be evaluated and accounted for?

The calculations are intneded to comply with the 419 annual addition limits requirement.

Thank you.

[vebaguru]

Good understanding as far as it goes. Watch out for the following:

The funding target may not exceed the expected cost of retiree medical benefits for the participant at current benefit and cost levels (no cost of living increase).

The statute states that the reserve must be "actuarially determined". If no actuarial certification is provided, the contributions are limited to the safe harbor amounts provided in the statute, basically 35% of current medical costs (other than current insurance premiums) paid for the year.

The accumulation will be subject to UBIT inside a VEBA, thereby obviating the need for a VEBA.

Since all participants are HCEs, individual accounts must be kept and their benefits paid from those accounts.

Read 419A carefully and hire an actuary to certify the calculations. He/she will keep you on the straight and narrow.

[Don Levit]

vebaguru:

While you are correct that the accumulation would be subject to UBIT, would there be an actual tax owed, if the funding target is satisfied and the reserve is actuarially determined?

Don Levit

[GBurns]

Don

Any income that is taxable income is subject to tax. Whether actual tax is owed depends on deductions, exemptions, offsets etc etc. That is the nature of tax liability calculation. It does not matter whether individual corporate, VEBA etc etc.

Aside from that your post seems self explanatory in its self-contradiction, and I wonder if and moreso how vebaguru will phrase a response. "self-contradiction" might be a poor choice of words to describe confusion, but i could not think of anything else.

[vebaguru]

To put it succinctly: UBTI -> UBIT (-> = implies).

If there is (net) taxable income, there is income tax.

It is clear from the cases is that medical accumulations, even within the limitations permitted under 419A, are not "exempt function income".

[Don Levit]

vebaguru:

What cases are you referring to?

How would you define exempt function income in a VEBA?

What tax-free income is not subject to UBIT?

Don Levit

[GBurns]

A littlle old and somewhat simplistic, but still quite adequate:

http://www.unclefed.com/TaxHelpArchives/20...L/p5980406.html

http://edocket.access.gpo.gov/cfr_2004/apr...1.512(a)-5T.htm

Also see IRS Pub 598 (I think).

[Don Levit]

George:

Thanks for those 2 links.

They were very helpful.

TAM 199932050 has a couple of statements which reiterate what your links provided.

"Exempt function income includes all income which is set aside for the payment of life, sick, accident, or other benefits including reasonable costs of administration directly connected with such purposes."

"A set aside for the payment of life, sick, accident, or other benefits may be taken into account only to the extent that such set-aside does not result in an amount of assets set aside in excess of the account limit determined under section 419A."

"The UBIT of a VEBA will equal the lesser of the income of the VEBA or the excess of the total amount

set aside over the qualified asset account limit.'

Thus, if the excess of the total amount set aside is zero, the UBIT is zero.

Don Levit

[Don Levit]

One other source which succinctly describes UBIT for VEBAs can be found at:

http://www.irs.gov/irm/part7/ch10s12.html.

Scroll down to 7.25.9.10 Unrelated Business Taxable Income of VEBAs.

Don Levit

[vebaguru]

You might wish to read the Sherwin-Williams case: Sherwin-Williams

[Don Levit]

vebaguru:

Can you provide another link to that case.

I could not access it on my laptop.

Even better, can you cite the pertinent excerpts?

And, why don't you respond to my previous citations?

Don Levit

[Don Levit]

vebaguru:

I was able to acess the case through your link.

Thanks for providing it.

I don't see where any material would contradict what I have written.

Which excerpts, specifically, are you referring to?

Of course, I still would like for you to address what I have cited through the IRS, as well as what George Burns provided.

Don Levit

[GBurns]

Don

Just so that I can follow along, in case vebaguru finds the time to respond, What are these 'excerpts" that you mention and where was the reference made by vebaguru ?

I thought that the sole purpose of the Sherwin-Williams link was to provide you with simplified definitions and explanations of the terms and issues that seem to be confusing you.

Also, What did you cite that needs to be addressed ?