Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. Print
March 09, 1998 12:00 AM

IRS ALLOWS HEALTH CARE PRE-FUNDING

Jerry Geisel
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Crain News Service

    WASHINGTON -- The Internal Revenue Service is opening the door to a new, tax-favored way for employers to pre-fund retiree health care obligations.

    The IRS recently issued a favorable private-letter ruling involving an employer-established voluntary employee beneficiary association's purchase of medical stop-loss insurance from an offshore group captive.

    The ruling was obtained by Energy Insurance (Bermuda) Ltd., Hamilton, Bermuda, a separately capitalized subsidiary of Energy Insurance Mutual Ltd., Tampa, Fla. The company was set up in 1992 and designed as a rent-a-captive-style insurer to write a broad range of insurance coverages, reinsurance or nontraditional financial deals for utilities that belong to EIM.

    Before the ruling, at least one utility -- Oklahoma Gas & Electric of Oklahoma City -- had been using a VEBA to buy stop-loss coverage from Energy Insurance as a way to pre-fund future retiree health care liabilities.

    "This has proved to be a very cost-effective way to fund retiree health care benefits," said James Hatfield, vice president and treasurer at Oklahoma Gas & Electric, which began using the program in 1995.

    BROAD IMPLICATIONS

    While the IRS ruling applies to Energy Insurance and a particular set of facts, legal experts say it could have broad application.

    "This should be of interest to any large employer that is funding retiree medical liabilities. We expect lots of companies to be interested" in this approach, said Henry Lawrie, a partner with the Chicago law firm of Gardner, Carton & Douglas.

    In its ruling, the IRS said reserves established for stop-loss policies are eligible for the same favorable tax treatment as life insurance reserves to the captive insurer. That means the investment income supporting the reserves is not taxed.

    In addition, the IRS ruled the inside buildup in the value of the stop-loss insurance is exempt from the unrelated business income tax generally applied to investment returns of VEBAs used to fund retiree health benefits.

    The linkage of a VEBA, stop-loss insurance and an offshore captive insurer, experts said, avoids many of the problems employers face when they want to fund their retiree health care obligations in advance. Advance funding reduces liabilities employers have to report on their financial statements under Financial Accounting Standard 106 and also helps to ensure enough money is available to pay claims.

    While employers are looking to pre-fund retiree health care liabilities, there are significant obstacles to doing so in tax- or cost-effective ways.

    For example, a 1984 law limits the tax-effective use of a VEBA alone to fund in advance retiree health care benefits. Among other things, the law bars employers from taking into account anticipated increases in health costs in making tax-deductible contributions to VEBAs. Investment income earned on VEBA assets used to fund retiree health care liabilities is subject to the unrelated business income tax. This reduces the amount available to pay for benefits.

    To avoid these problems, VEBAs can purchase life insurance products -- known as trust-owned life insurance -- from commercial insurers. Under such policies, the inside buildup of value is not taxed. While the VEBA owns the policies, individual employees are named as the insured. When those employees die, the VEBA collects the insurance proceeds and uses them to pay for retiree health care costs.

    Alternatively, employers can purchase corporate-owned life insurance policies from commercial insurers. Similar to trust-owned policies, COLI policies, which name individual employees as the insured but are owned by the employer, allow the tax-free buildup of investment income earned on premiums paid by the employer. When employees die, the proceeds are used to pay for retiree health care claims. If certain rules are followed, money also can be borrowed tax-free from the policies.

    The Clinton administration, however, has proposed ending some tax advantages of COLI policies.

    In addition, in many states employers must disclose to employees that while they are named on life insurance policies, they will not receive the benefits. That can create an employee relations problem.

    The purchase of stop-loss coverage to fund future retiree health care costs by an employer-established VEBA from an offshore captive can be even more financially attractive and avoid the disclosure problem, said Chris George, a consultant in the Wellesley Hills, Mass., office of Watson Wyatt Worldwide, which has been working with Oklahoma Gas & Electric and other large employers to fund benefit obligations through offshore captives.

    "You get much greater cost efficiency. There are fewer frictional costs," Mr. George said.

    SIDESTEPPING COSTS

    For example, by buying coverage from offshore captives, companies can avoid state premium taxes, which commercial insurers must pay. In addition, offshore captives generally have lower overhead costs than commercial insurers. And, by buying medical stop-loss insurance from offshore captives, companies avoid employee disclosure requirements.

    In addition, an individual employer whose VEBA buys coverage from a group captive probably will have greater control in how premium contributions are invested than it would if it purchased policies from a commercial insurer.

    The design of a VEBA stop-loss insurance captive-linked program is simple. Employers make tax-deductible contributions to the VEBA. With those contributions, the VEBA buys stop-loss policies from the group captive. The policies provide coverage for claims that exceed a specified level. To maximize earnings potential of the premium contributions, the policies could cover active employees years away from retirement. That would allow a significant growth of investment income before claims are paid.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    Gender diversity is improving on FTSE 350 boards
    Gender diversity is improving on FTSE 350 boards
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    The Future of Infrastructure: Building a Better Tomorrow
    Fulcrum Issues: Equity Returns and Inflation — Choose Your Own Adventure
    What Matters Most in Considering a Private Debt Strategy
    Why pursue direct lending in the core middle market?
    Research for Institutional Money Management
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing