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The Consolidated Omnibus Budget Reconciliation Act COBRA
The Consolidated Omnibus Budget Reconciliation Act (COBRA), which is effective for plan years beginning after June 30, 1986, requires many group health plans to offer benefits to certain terminated employees or their beneficiaries. However, the coverage is limited in duration and is an elective since the employee or the beneficiary must agree to pay for it. Continuation of Health Coverage (COBRA)
In general, employers with 20 or more employees during the previous year must comply with COBRA. Failure to comply will result in the loss of the tax deductions to the employer and the highest-paid 25% of the employee will be currently taxed on the premiums paid on their behalf.
VEBAs – §501(c)(9) Trusts
Voluntary employees’ beneficiary associations were significantly impacted by TRA ‘84. The main thrust of the law was to curtail certain Congressionally perceived abuses, in four major areas. First, specific limits are imposed on deductible corporate contributions for corporate tax years ending in 1986. Second, earnings on assets in a PAYSTUB MAKERVEBA trust will be taxable if the reserves are excessive. Third, nondiscrimination rules came into effect in 1985. Finally, substantial excise taxes are imposed on employers who are VEBAs’ provide disqualified post-retirement life inspection 419.
Section 419 supersedes §162 and §212 to the extent that employers are prevented from taking premature deductions for expenses not incurred by the end of the corporate tax year. This limitation overrides any actuarial opinions on prefunding contributions in order to accumulate reserves. The net effect is to put all employers on a cash basis accounting method as far as VEBA contributions are concerned. Section 419 limits an employer’s deduction to the fund’s “qualified 6-22cost” which will preclude a deduction for any contributions in excess of what is required to pay current welfare benefit costs. The VEBAs after-tax earnings must be used to further limit the employer’s deductible contributions. Separate “qualified asset accounts” are permitted for disability, medical, severance pay, and life insurance or other death benefits. Insurance or medical benefits.
One of the major consequences of these changes is the virtual elimination of self-insured plans for small closely held corporations and a significant curtailment in their use by larger corporations as well. The reason for this is that employers can no longer establish reserves in advance of claims. Although there is no limit on the amount of pre-retirement life insurance that can be provided on a non-discriminatory basis, post-retirement insurance is limited to $50,000 per participant. A major unanswered question is whether or not cash-value type policies can be used to fund pre-retirement death benefits.
Severance pay plans are also significantly restricted in that the account limit is 75% of the average annual qualified direct costs for any two of the seven years immediately preceding the taxable year for which the account is maintained. However, any benefit shall not be taken into account to the extent it exceeds 150% of the current qualified defined contribution plan annual additions limit.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a health insurance program that allows eligible employees and their dependents the continued benefits of health insurance coverage when an employee loses their job or experiences a reduction of work hours. Below, we’ll explore the basic details of COBRA, how it works, its eligibility criteria, pros and cons, and other features.
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