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This page is dedicated to employers of IAFF MERP Participating Locals, or Locals interested in participating in the Trust.
What is IAFF MERP?
IAFF MERP is a Retiree Medical Trust that takes advantage of the power of pooled financing to help defray the costs of medical expenses in retirement by providing regular monthly benefit payments to eligible members. It is especially attuned to the circumstances of firefighters of public employers, who regularly experience a longer period of high-cost health coverage between termination and commencement of coverage under Medicare.
This type of program enjoys significant tax benefits. It is structured to enable financing with regular pre-tax contributions during active employment (monthly or per pay period), which are in turn used to reimburse eligible claims for medical expenditures after retirement. No taxes are due on these reimbursements. Also, investment earnings of the Trust are tax-exempt. The Trust assets are protected in perpetuity by federal law, to be spent only on permissible medical expense reimburse benefits.
Legal Foundation
IAFF MERP is a multi-employer Trust established under IRC 501(c)(9) (a “Voluntary Employee Beneficiary Association” or “VEBA”) and essentially has the same tax implications for public sector employers as an IRC Section 115 trust. A VEBA, however, is an independent pass-through entity rather than an extension of a governmental employer’s essential duties.
IAFF MERP must meet the requirements stated in IRC Sections IRC 501(c)(9)-1 through IRC 501(c)(9)-8, including the requirement that virtually all the VEBA’s operations take place to provide benefits to members.
Employer Considerations
All contributions to IAFF MERP must come directly from the employer. The employer may not transfer any contributions to the Local for payment to the Trust. The employer must agree to provide identifying employee demographics, withhold, transfer, and report contributions to the IAFF MERP Trust Office. For most employers, this will likely be a similar administrative process to group insurance programs.
Limitations of Liability
As stated above, VEBAs are not a component of an employer benefit program. Therefore, employers are not party to the Trust. Except for the obligation to make and report contributions to the Trust per the collective bargaining agreement, a participating employer shall have no obligation to provide benefits to which its employees may be entitled to from the VEBA. A participating employer shall not be a fiduciary of the Trust, or any employee benefit plan funded through the Trust, and shall have no responsibility or liability for Trust investments, the income tax treatment of Trust earnings or benefits provided under the employee benefit plans of the Trust.
Joinder Agreement
Local and employer representatives will be asked to execute a Joinder Agreement for participation in IAFF MERP. The employer signs acknowledging the Local’s terms of participation in the Trust and agrees to withhold, transfer, and report contributions.
Employer Obligation
The employer’s sole obligation is to transfer and report contributions in compliance with the collective bargaining agreement with the Local. As benefit levels from the Trust are not vested, the Trust will adjust benefit levels based upon the bargained contributions, investment returns, and demographics of the Trust. Unlike a defined benefit pension plan, the Trust has no right to request a change in contributions. The level of contributions to fund the Trust benefits is purely subject to negotiation with the Local in collective bargaining.
Tax Advantages
TAX ADVANTAGE TO THE RETIREE. Benefits received from the Trust are non-taxable income to the retiree (and his/her dependents). When the retiree eventually takes benefits from the plan to reimburse for premiums or miscellaneous medical expenses, the Trust Office will verify that reimbursements are tax-deductible IRS medical expenses in accordance with IRS regulations and guidance, including IRS Publication 502.
TAX ADVANTAGE TO THE EMPLOYER. Employers avoid payroll taxes on the contributions, which they generally would be required to pay if the amount were paid in salary.
TAX ADVANTAGE TO THE EMPLOYEE. Contributions are generally deposited pre-tax and earnings on the contributions are tax-exempt. The contributions can be negotiated by the Local so that they can reduce the taxable income of the employee (e.g., pre-tax contributions). Also, the contributed funds in the pool realize significant earnings over time, none of which are taxed.
NO CONSTRUCTIVE RECEIPT. To allow pre-tax treatment and avoid constructive receipt of Trust contributions, contributions are mandatory for the entire bargaining unit or designated class of the bargaining unit. These contributions are made mandatory through collective bargaining agreements that prohibit the employee from electing whether to participate and at what level. Bargaining agreements must prohibit any election to receive the contribution in cash. For tax purposes, income is not constructively received if the taxpayer’s control of receipt is subject to substantial limitations or restrictions. The IRS has determined on multiple occasions that mandatory collectively bargained contributions to this type of plan without a cash option for the employee are not constructively received and are excludable from the taxable income of the employer.