Voluntary Employees' Beneficiary Association (VEBA)
A VEBA is an organization that is an ERISA welfare plan funded by a trust that is tax-exempt under Code Section 501(c)(9).
Requirements Under Code Section 501(c)(9)
Generally, a VEBA must meet six requirements in Code Section 501(c)(9). It must:
- Be an employees’ association;
- to which membership is voluntary;
- that is controlled by its members;
- that provides for the payment of life, sick, accident, or other benefits to its members or their dependents or designated beneficiaries.
- Conduct substantially all of its operations in furtherance of providing such benefits; and
- prohibit any part of the net earnings of the organization from inuring, other than by payment of benefits, to the benefit of any private shareholder or individual.
The membership of an organization described in section 501(c)(9) must consist of individuals who become entitled to participate by reason of their being employees and whose eligibility for membership is defined by reference to objective standards that constitute an employment-related common bond among such individuals. Typically, those eligible for membership in an organization described in section 501(c)(9) are defined by reference to a common employer (or affiliated employers), to coverage under one or more collective bargaining agreements (with respect to benefits provided by reason of such agreement(s)), to membership in a labor union, or to membership in one or more locals of a national or international labor union.
Any objective criteria used to restrict eligibility for membership or benefits may not be selected or administered in a manner that limits membership or benefits to officers, shareholders, or highly compensated employees of an employer contributing to the association.
Generally, membership in an association is voluntary if an affirmative act is required on the part of an employee to become a member rather than the designation as a member due to employee status. However, an association shall be considered voluntary although membership is required of all employees, provided that the employees do not incur a detriment (for example, in the form of deductions from pay) as the result of membership in the association. An employer is not deemed to have imposed involuntary membership on the employee if membership is required as the result of a collective bargaining agreement or as an incident of membership in a labor organization.
Control by Members
A VEBA must be controlled by: (i) By its membership, (ii) By independent trustee(s) (such as a bank), or (iii) By trustees or other fiduciaries at least some of whom are designated by, or on behalf of, the membership.
Provision of Acceptable Benefits
VEBAs must provide life, sickness, or accident benefits, or other benefits that are similar to those benefits.
A benefit is similar to a life, sickness, or accident benefit if: (1) It is intended to safeguard or improve the health of a member or a member’s dependents, or (2) It protects against a contingency that interrupts or impairs a member’s earning power.
According to IRS materials:
"All VEBAs may provide the following benefits: term life insurance; group whole life insurance (as defined in section 79); accidental death and dismemberment insurance; medical and dental insurance; disability insurance; vacation pay; vacation facilities; recreational expenses; child care; job readjustment allowances; income maintenance payments in time of economic dislocation; temporary living expense loans and grants in times of disaster; supplemental unemployment compensation benefits; severance pay (if provided in accordance with 29 CFR 2510.3-2(b)); and education or training benefits or courses for members. Reg. 1.501(c)(9)-3(b), (c), and (e).
"Collectively bargained VEBAs may provide the following additional qualifying benefits: educational or training benefits for dependents of members; and worker's compensation benefits."
Substantially All Operations
A voluntary employees’ beneficiary association is not operated for the purpose of providing life, sick, accident, or other benefits unless substantially all of its operations are in furtherance of the provision of such benefits. A VEBA cannot systematically and knowingly provide impermissible types of benefits.
Unacceptable benefits include:
- commuting expenses
- accident or homeowner’s insurance;
- malpractice insurance;
- loans to members except in times of distress (as permitted by § 1.501(c)(9)–3(e)); and
- any savings program.
No Private Inurement
No part of the net earnings of a VEBA may inure to the benefit of any private shareholder or individual other than through the payment of permitted benefits. The disposition of property to, or the performance of services for, a person for less than the greater of fair market value or cost (including indirect costs) to the association, other than as a life, sick, accident or other permissible benefit, constitutes prohibited inurement. Generally, the payment of unreasonable compensation to the trustees or employees of the association, or the purchase of insurance or services for amounts in excess of their fair market value from a company in which one or more of the association’s trustees, officers or fiduciaries has an interest, will constitute prohibited inurement.
Discrimination of favor of highly compensated employees, or an discrimination in type or form of benefits that cannot be justified by objective and reasonable standards is prohibited inurement.
Requirements Under Code Section 505 and Other Nondiscrimination Rules
Section 505 mandates that any classification of employees for benefit purposes must be nondiscriminatory as to HCEs. Generally, this means benefits cannot vary depending on whether a member is an HCE or an NHCE, although life insurance and other income replacement benefits may bear a uniform relationship to compensation.
Certain employees may be excluded when considering whether benefits discriminate in favor of highly compensated individuals. Such employees include those who (i) have not completed three years of service, (ii) are less than half-time employees, (iii) are seasonal employees, or (iv) have not attained age 21. Section 505(b)(2).
The rules of Code Section 505 do not apply to plans that are subject to other nondiscrimination rules in the Code, such as self-insured medical benefits under section 105(h); supplemental unemployment compensation benefits described in section 501(c)(17); group term life benefits (which are generally subject to section 79); dependent care assistance described in section 129; and educational assistance described in section 127.
Tax Treatment of Benefits
VEBA benefits are afforded no special tax treatment, but many common VEBA benefits are not included in income because of other Code provisions.
The unrelated business taxable income of a VEBA for a taxable year of generally will equal the lesser of two amounts:
- the income of the VEBA for the taxable year (excluding member contributions); or,
- the excess of the total amount set aside as of the close of the taxable year (including member contributions, and excluding certain assets with a useful life extending substantially beyond the end of the taxable year to the extent they are used in the provision of welfare benefits) over the qualified asset account limit (calculated without regard to the otherwise permitted reserve for post-retirement medical benefits) for the taxable year.
Pursuant to 26 U.S.C. § 419A, a VEBA's account limit is generally the amount necessary to pay for incurred but unpaid benefit claims as of the end of the year as well as certain related administrative costs. Accordingly, a VEBA's income is exempt from tax only to the extent that it does not result in a year-end account balance in excess of the amount necessary to satisfy incurred but unpaid member claims.
Uses of VEBAs
VEBAs are often used in situations that require benefits to be partially separated from employers.
ERISA welfare plans generally can be terminated at any time because welfare benefits do not normally vest. However, the governance of a VEBA and the terms of its trust agreement can make termination difficult. Moreover, VEBA assets cannot revert to the employer or inure to any private benefit.
Nonetheless, the regulations provide that it will not constitute prohibited inurement if, on termination of a VEBA, any assets remaining, after satisfaction of all liabilities to existing beneficiaries of the plan, are applied to provide, either directly or through the purchase of insurance, life, sick, accident or other benefits within the meaning of § 1.501(c)(9)–3 pursuant to criteria that do not provide for disproportionate benefits to officers, shareholders, or highly compensated employees of the employer. See § 1.501(c)(9)–2(a)(2).
In addition, a transfer of assets from one VEBA to another, even if economically beneficial to an employer, is generally not a prohibited reversion.
See the regulations below (attached).
1.501(c)(9)-1 Voluntary employees' beneficiary associations, in general. 1.501(c)(9)-2 Membership in a voluntary employees' beneficiary association; employees; voluntary association of employees. 1.501(c)(9)-3 Voluntary employees' beneficiary associations; life, sick, accident, or other benefits. 1.501(c)(9)-4 Voluntary employees' beneficiary associations; inurement. 1.501(c)(9)-5 Voluntary employees' beneficiary associations; recordkeeping requirements. 1.501(c)(9)-6 Voluntary employees' beneficiary associations; benefits includible in gross income. 1.501(c)(9)-7 Voluntary employees' beneficiary associations; section 3(4) of ERISA. 1.501(c)(9)-8 Voluntary employees' beneficiary associations; effective date.