The Marketing of MEWAs and VEBAs: 

Notes from Nov 11 meeting of NYSSCPA-Nassau Chapter Employee Benefits Committee meeting , John Cheek, chairman.  

Presented by Jules Levine, Esq, of Meyer Suozzi, English & Klein.

MEWAs: multiple-employer welfare arrangements

For many years, promoters and others have established and operated multiple employer welfare arrangements (MEWAs) as vehicles for marketing health and welfare benefits to employers.

Promoters typically represent these plans as subject to ERISA and therefore exempt from state insurance regulation. To add substance to the ERISA claim, promoters sometimes establish a "union" to house the plan participants, and sometimes move large blocks of "members" from one union to another.

Many plans are characterized by "associate members", many of whom have not idea that they are "union members".

DOL seems more likely than IRS to attempt regulation of MEWAs, but politically both agencies are reluctant to get involved. In general, if a plan is adequately funded and members are receiving the benefits promised under the plan, DOL is likely to leave it alone.

Greatest danger of MEWAs: promoters who generate large fees/commissions to themselves in the early periods, plans that are underpriced, and therefore can not meet claims when they start to accumulate, difficulty of state insurance regulators to establish authority. Plans collapse when they run out of funds, participants' claims are left unpaid, and promoters set up a new union and start over.

Some MEWAs serve a legitimate purpose often this is the best selling tool a union can offer in trying to organize new members. A legitimate plan must be actuarially sound.

Questions to ask if someone is selling you a MEWA:

1. If a union is involved, is it a legitimate union? How long has it been around, and what groups does it represent? Do "union members" receive any benefit form their membership other than eligibility for the health plan? Is the union involved in genuine collective bargaining?

2. Where does your money go? Who is making a profit from your participation, and how much? Look at the plan's financial statements and Form 5500; generally, no more than 15% of employer contributions should be paid out in administrative expenses, commissions, etc.

3. Is the plan actuarially sound? If prices are too low, the plan can't survive. (If it sounds too good to be true, it probably is.)

4. If the plan includes stop loss coverage, who is underwriting the policy; are they licensed for stop loss in your state?

VEBAs

VEBAs can be a legitimate tool to provide benefits inexpensively, to accumulate wealth for the owners, to address liquidity and estate concerns, and to provide insurance benefits on an after-tax basis.

Problems arise due to aggressive selling. Some plans advertise "98% of benefits to the owner".

Some promoters are selling VEBAs as deferred compensation plans that permit dramatic discrimination in favor of owner. Use of universal life and variable annuities within VEBA should raise questions about whether the plan is a deferred compensation plan. Enough of a deferred comp element will disqualify VEBA.

Shared risk is essential: if a promoter provides separate accounting to each participating employer, the plan won't qualify.

You can not rely on a determination letter: it only applies to the plan as formed and on paper, but gives you no assurance that the plan, in operation, is a tax exempt trust.

IRS is showing some stepped up enforcement of VEBAs, but DOL is going to be the agency to watch out for.

Case law: thus far, VEBAs have won most cases, but IRS is not acquiescing, so clients should be aware of the risk of litigation.

Questions to ask if someone is selling you a VEBA:

1. Review plan's financial statements; administrative costs and commissions should not be excessive

2. Review actuary's report

3. Review plan's determination letter

4. Inquire about fees paid to brokers, promoters, etc

5. Determine who is insurer of the plan, and if they are licensed in this state.

6. Consider if life insurance is used in the plan appropriately, or if it represents a disguised form of deferred compensation.

7. Request a legal opinion, addressed to your client, as to the deductibility of contributions to the plan.

8. Ask if the promoter provides individual accounting to each employer, and how (to what extent) plan assets are at risk to claims experience of other participating employers. Individual accounting, and lack of risk, tend to indicate a plan that will fail to qualify as a VEBA.

9. Watch for plans where each employer is experience rated; experience rating causes the IRC 419A(f)(6) exception to fail.

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