Communities: Brokers, Advisors & Consultants
Renewed Interest in Tax Exempt Benefit Trusts
By John Hickman, Alston & Bird, and Mark O'Leary, TSYS Healthcare
Recent changes in financial accounting reporting obligations have caused many employers, both public and private, to re-examine the overall economics of pre-funding retiree medical benefits. These changes, mandated by Financial Accounting Standards Board (“FASB”) Statement No. 106 for the private sector and Government Accounting Standards Board (“GASB”) Statement No. 45 for the public sector, require employers to report the unfunded cost of future retiree medical obligations on their balance sheets. In an effort to counter this potential adverse balance sheet impact, many employers, both public and private, are re-examining their health plan design – often considering a tax-favored trust for benefi t funding.
Another significant catalyst is the recent trend to create standalone VEBAs as the sole source of funding for certain collectively bargained benefi ts. One recent study indicates that at least four such VEBAs exist with assets in excess of $500 million each, and at least two of these have over 100,000 participants1. These developments, combined with the rise of defined contribution health care arrangements (e.g., health reimbursement arrangements or “HRAs”) and access to benefits through health care debit cards have given rise to a resurgence in VEBA (and Section 115 for governmental employer) trust adoption.
This article provides a high-level overview of VEBA compliance requirements and how these requirements may fit within a defined contribution health care approach.
Background on Retiree Medical Benefit Funding
The Employee Income Retirement Security Act (“ERISA”), the federal law that governs employer funding for qualified retirement plans such as 401(k)s, does not require employers to pre-fund retiree medical plans; moreover, certain tax advantages that were previously available for pre-funding such plans are no longer as beneficial for most employers. Consequently, many employers fund retiree medical plans on a pay-as-you-go (“PAYGO”) basis. Where benefits are provided on an unfunded, PAYGO basis, the balance sheet recognition of retiree medical costs, as is now required by FASB and GASB, can have a potentially severe negative impact on financial statements.
*The opinions expressed in this white paper in no way reflect the opinions of FieldMedia LLC, its advertisers, its affiliates, or its sponsors.
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