Health and Welfare Plan Deductions

[Gary]

A one person C corporation has a H&W plan.

The deductible limit under 419A for additions to accounts is computed to be $20,000.

The owner contributes $10,000 to the plan, thus it would be fully deductible.

The plan has income of $5,000 for the plan year.

So at the end of the plan year the plan has total assets of $15,000.

Is the $5,000 of investment income taxable to the corporation? Or since the total contributions and investment return is less than the 20k deductible limit, is none of the income taxable?

Thank you.

[vebaguru]

Answered on other thread. Please don't post the same question on multiple threads, as it causes confusion and a waste of time.

[Gary]

I have not found the answer to the precise question I post in this thread in any other thread, thus the reason why I am posting it in this thread.

Thank you.

[vebaguru]

The deduction permitted is $0. The earnings are not taxable to the corporation, but to the trust that files form 1041.

[Gary]

I realize that I am out of my league here posting on an H&W site, being that I am a pension actuary.

If anyone knows of some useful and practical resource for a basic understanding of H&W plans, please advise.

The resources that I have had, simply include IRC 419, which as I understand it, sets forth (in part) deduction limits to single employer H&W plans.

Unfortunately, I was thrown into a little bit of H&W work at the small firm I work at.

With that said, I am not sure why the contribution by said C Corporation to a H&W plan trust would not be deductible if it is for a reserve for post retirement medical expenses and the amount contributed is less than the limit under 419?

Thanks.

[vebaguru]

The Employee Benefits Answer Book (a sister to the Pension Answer Book and the 401(k) Answer Book) is a good reference work. I also like Tax Facts.

[Don Levit]

vebaguru:

What specifically in those 2 publications support your theory?

Don Levit

[vebaguru]

Gary posted: "If anyone knows of some useful and practical resource for a basic understanding of H&W plans, please advise."

I responded: "The Employee Benefits Answer Book (a sister to the Pension Answer Book and the 401(k) Answer Book) is a good reference work. I also like Tax Facts."

No theory was referenced.

[Don Levit]

vebaguru:

Are you saying you can be more specific, but it will cost us?

Don Levit

[GBurns]

Don

The cost is simply the time and effort to go back and read the posts.

It was a simple response to a simple question. Those are the 2 resources that he advises to be used for a basic understanding of H&W plans.

[Don Levit]

George:

You are partially correct.

In addition, Gary asked "I am not sure why the contribution to a H&W plan trust would not be deductible if it is for a resrerve for post retirement medical expenses and the amount contributed is less than the amount under 419?

Vebaguru did not address that question.

I assumed he wanted Gary to look through those 2 sources for an answer.

By the way, I can't remember one time in which you and vebaguru did not support each other's answers.

How do you know what vebaguru meant... unless...

No, that can't be true.

Don Levit

[GBurns]

There is an old adage that states that great minds often think alike ..... etc. I will leave it to others to decide which is applicable.

I really do not know what vebaguru meant but I am able to read the posts in the thread and decide what it is he was responding to initially. He then confirmed and clarified in his subsequent post making it unnecessary for me to make assumptions.

Gary separated the items in his post with "With that said ..." clearly separating the question to which vebaguru answered. The 419 question has nothing to do with the resources question.

I was not trying to speak for vebaguru as much as I was trying to avoid you creating more confusion.

I look at a Forum as a group of people sitting around a large table discussing an issue. If one person tries to dominate, mislead, or change the topic, it is allowed that any other participant can ntervene, raise an objection or point out the "error"/variance/transgression.

[Gary]

I do have the remaining questions below:

I am not sure why the contribution by said C Corporation to a H&W plan trust would not be deductible if it is for a reserve for post retirement medical expenses and the amount contributed is less than the limit under 419?

I am also interested in knowing if the contribution plus investment income add up to be less than the deduction limit, could the investment income not be taxable? Or is the investment income still taxable?

Thank you.

[GBurns]

Gary

In post #1 you said that the owner contributed $10,000 to the plan, now you talk about contribution by the corporation. Which is it ?

[Don Levit]

Gary:

The contribution is dedictible and the earnings are non taxable, as long as used for the post-retirement benefits.

Do not set up a VEBA, though.

A one-person VEBA does not qualify for exemption.

Revenue Ruling 85-199

Don Levit

[Gary]

It's a one person C corporation. The one person owns the C corporation. He is the owner and the only employee.

Don, I am a little surprised that the investment income is income tax free. That is, people say that they use insurance contracts to avoid taxation on income build up and others suggested the creation of a VEBA (though as you say that doesn't work for a one person plan) to avoid taxation on investment income. That is, people say that the income in a H&W trust that is not invested in insurance and is not a VEBA is taxable.

I thought that maybe if the contribution plus income were still less than the deduction limit than the income in that case would not be taxed. And if the contribution were equal to the deduction limit, than additional income would be taxable.

Perhaps you can clarify what you said as compared to my alleged perception of how it might work in the paragraph immediately above.

Thanks.

[Don Levit]

Gary:

If the deductible limit was properly calculated under 419A, then any growth in the amounts set aside is tax-free if used to pay post-retirement medical benefits.

Any amounts remaining at the owner's death, as well as his dependents, must be forfeited, however.

Don Levit

[Gary]

Thanks Don, then I wonder why anyone would set up a VEBA trust if the income is already tax-free? Even if more than a 1 participant plan.

[vebaguru]

I missed this earlier:

By the way, I can't remember one time in which you and vebaguru did not support each other's answers.

I hadn't noticed it before, but GBurns must be a genius. He is in Pembroke Pines, FL. I am in UT and have never heard of Pembroke Pines, FL.

[vebaguru]

Gary:

If the deductible limit was properly calculated under 419A, then any growth in the amounts set aside is tax-free if used to pay post-retirement medical benefits.

Any amounts remaining at the owner's death, as well as his dependents, must be forfeited, however.

Don Levit

The deductible limit is defined in 419. 419A defines qualified additions to a qualified asset account. Deductibility under 419 in no way assures that growth on medical set asides are tax-free. In fact a simple review of form 1041 and the instructions thereunder shows that the trust is taxed on realized income.

Amounts remaining on the death of a participant may be used by the participant's dependents during their lifetimes but will be forfeited if not utilized before the death of the last of the participant's dependents.

Other than those differences, I agree with Don Levit's assertions. Sometimes I wonder if Don posts outrageous stuff just to get a reaction from me.

[Don Levit]

vebaguru:

I could not find in form 1041 where interest on the medical income from a proper set aside is taxable.

Can you provide the specific parts of the form and the instructions which discuss this?

Do you agree that exempt function income of a VEBA is not taxable, either through income taxes or UBTI?

Referring to TAM 199932050 it states regarding the taxation of income from a set aside which abides by the 419 limit ""Section 1.512(a)-5T, Q&A-4(a) states that Code section 512(a)(3)(E)(ii)(I) provides that income that is either directly or indirectly attributable to the reserve in section 512 will not be treated as UBTI. Because earnings of the existing reserve are directly attributable to the existing reserve, such earnings shall not be treated as UBTI. Furthermore, earnings on such earnings are indirectly attributable to the existing reserve and also should not be treated as UBTI."

So, where is the taxation of the earnings of a properly set aside reserve, either through income taxes or UBTI?

Don Levit

[vebaguru]

Yes, I agree that exempt function income is not taxable. That was the exact issue in the Sherwin Williams, where IRS won, was reversed on appeal and has announced their intention not to accept the Court of Appeals decision as binding on them in the other 10 circuits.

[Don Levit]

If exempt function income is not taxable, then why is interest on a properly set aside reserve for medical expenses, taxable, as you previously asserted?

Don Levit