What Is A Medicare Set Aside?
A Medicare set aside is any arrangement that allows a plan to set aside some amount of assets in trust to pay the cost of health care and/or prescription drug benefits for plan participants and their beneficiaries.
Does a Medicare set aside have to be a trust?
No. Medicare set aside arrangements may be any form of arrangement that is specifically designated to pay for future health-care benefits.
Does a Medicare set aside have to be irrevocable?
No. An irrevocable Medicare set aside arrangement is one that cannot be amended or revoked by the plan sponsor. This is the only type of set aside arrangement that is exempt from the prohibited transaction rules.
Can a Medicare set aside arrangement be revoked?
Yes. A Medicare set aside arrangement can be revoked by the plan sponsor. Once the arrangement has been revoked, the funds can be used for any purpose of the plan sponsor.
Can a Medicare set aside be used for other purposes?
Yes. A Medicare set aside arrangement can be used for other purposes. However, if a plan sponsor wants to use the assets in a set aside for purposes other than paying the cost of health care and/or prescription drug benefits for plan participants and their beneficiaries, the funds must be transferred to a trust that is irrevocable. Generally, the trust must be subject to the same restrictions as a Medicare set aside arrangement.
What is a self-insured plan?
A self-insured plan is a plan that provides health and/or prescription drug coverage by setting aside assets in trust to pay for the cost of coverage for participants and beneficiaries. The plan sponsor makes contributions to the trust on behalf of the plan participants. The plan sponsor's contributions may be made in the form of cash, property, or services.
Is a self-insured plan a type of Medicare set aside arrangement?
No. A self-insured plan is not a Medicare set aside. The difference is that the assets in a self-insured plan are held in trust to pay for the cost of health care and/or prescription drug coverage. In contrast, a Medicare set aside arrangement is held in trust to pay for the cost of future health benefits.
Do the prohibited transaction rules apply to self-insured plans?
Yes. The prohibited transaction rules apply to any type of Medicare set aside arrangement, including a self-insured plan. Therefore, a self-insured plan would be subject to the prohibited transaction rules if the assets in the trust are commingled with other types of plan assets. In addition, the prohibited transaction rules apply if the self-insured plan is not an irrevocable trust.
What transactions are prohibited under the prohibited transaction rules?
The prohibited transaction rules generally prohibit transactions between a plan and a disqualified person. This includes one who is directly or indirectly:
in the line of succession,
a fiduciary, or
has the ability to control the management of the plan.
Prohibited transactions include:
Fiduciary prohibited transactions;
Disqualified person transactions;
Actual or deemed personal self-dealing; and
What are fiduciary prohibited transactions?
Fiduciary prohibited transactions occur when a disqualified person:
Engages in a transaction involving the plan with a party in interest; or
Imposes a transaction on the plan involving a party in interest.
What are disqualified person transactions?
Disqualified person transactions occur when a disqualified person engages in a transaction with the plan that involves the assets of the plan.
What are actual or deemed personal self-dealing?
Actual or deemed personal self-dealing occurs when a disqualified person engages in a transaction with the plan that involves the assets of the plan.
What are certain loans?
Certain loans are loans made by plan assets to an individual or entity in which a disqualified person has a direct or indirect interest.
How do the prohibited transaction rules impact our plan?
To ensure compliance with the prohibited transaction rules, the plan sponsor must adopt a written conflict of interest policy. The policy should address each type of prohibited transaction and contain the following:
Who is a party in interest?
How are transactions involving the plan to be reviewed for compliance with the prohibited transaction rules?
What is the plan sponsor's responsibility for a prohibited transaction?
The plan sponsor has an affirmative duty to monitor the plan for prohibited transactions and to take corrective action to prevent prohibited transactions. If a prohibited transaction occurs, the plan sponsor has a duty to correct the transaction in a timely manner.
The plan sponsor also has an affirmative duty to ensure that any prohibited transaction by the plan is corrected. If the plan sponsor does not do so, he or she may be subject to a retroactive excise tax equal to 25 percent of the amount involved in the prohibited transaction. In addition, the plan sponsor may be subject to other taxes and penalties.
What are the consequences of a prohibited transaction?
In addition to the excise tax, the plan sponsor may be liable for other taxes and penalties.
How can a prohibited transaction be corrected?
To correct a prohibited transaction, the contractor must return, restore, or reimburse the plan for the amount of the prohibited transaction involved.
In addition to the return of the prohibited transaction amount, the plan sponsor is subject to an excise tax, unless the prohibited transaction is corrected in the same year it occurred. The excise tax is 25 percent of the amount involved in the prohibited transaction, unless the amount involved is less than $500,000. If the amount involved is less than $500,000, the excise tax is $10,000.
In addition to the excise tax, the plan sponsor may be also subject to other taxes and penalties.
Are prohibited transaction corrections reported to the IRS?
Yes. If a prohibited transaction is corrected, the plan sponsor must file Form 5330, Return