VEBA FAQS

What is a Voluntary Employees' Beneficiary Association (VEBA)?

A VEBA is a multiple employer welfare benefit plan described in ¤1.162-10 of the Income Tax Regulations, and a tax-exempt organization formed under sections 419A(f)(6) and 501(c)(9) of the Internal Revenue Code. It's purpose is to provide benefits to employees and their beneficiaries. As such, all contributions to it are deductible and there is no limit to the amount of the deduction the employer can take for contributions to the plan. The earnings grow tax free and funds contributed grow tax deferred and enjoy almost complete asset protection under the Employee Retirement Income Security Act (ERISA). VEBAs have been in existence since 1928.

Why should a business adopt a VEBA?

A VEBA may be one of the last, best, legal tax shelters available. A business is allowed a current deduction for its contributions to the plan equivalent to the reasonable cost of funding VEBA benefits; in most cases, the employee pays no tax on money contributed for his or her benefit until benefits are received; cash value within insurance policies used to fund benefits accumulates tax deferred and are protected from creditors' claims; and distributions from the plan may be afforded favorable tax treatment.

VEBA life benefits distributed by a VEBA can escape both income and estate taxation. Distributions can be taken without from the plan before age 59 1/2 or after 70 1/2 with no penalties.

Contributions are flexible and often depend on the amount of available income the employer wants to shelter in a given year. This allows large contributions in peak years and possibly none in others. Pension/profit sharing plan limitations do not apply.

NOTE: A VEBA is not a retirement or deferred compensation plan. A VEBA, coupled with a qualified plan, is very attractive if you wish to legally shelter large amounts of income.

A VEBA is especially attractive to working owners of closely held corporations and self-employed persons. Their long-term service with their companies gives them the best opportunity to accumulate large benefits through tax-deferred build-up of capital. Although benefits must be provided to other employees as well, the owner usually receives a much larger benefit than other employees, often as much as 90% or more.

Non-tax reasons for enacting a VEBA include the following:

1. attracting employees or reducing employee turnover
2. increasing employee incentive
3. rewarding loyalty
4. VEBAs can provide tax-deductible benefits: severance, education, sickness, accident, disability, life insurance, vacation, supplemental unemployment compensation and dependent care. and other benefits.
5. Businesses can integrate VEBAs into buy-sell agreements, solve retained earnings problems or relieve the taxes associated with over-funded pension plans.
6. the assets of the trust are beyond the reach of lawsuits and creditors.

Who can benefit from a VEBA?

Those who wish to:

1. Reduce or eliminate income and estate taxes
2. Increase their estate
3. Reduce or eliminate capital gains on the sale of a business, real estate, or stock
4. Establish a fully tax deductible benefits package that legally weigh plan benefits in favor of owners and key employees by 80-90%
5. Buy truly tax-deductible insurance (key man, estate, buy/sell, etc.)
6. Protect assets from lawsuits and creditor attacks under the Employees Retirement Income and Securities Act (ERISA)
7. Prevent losing up to 80% on their retirement money (IRAs or other qualified plans) when they die
8. Establish a tax efficient business succession plan
9. Reduce or eliminate retained earnings problems
10. Have flexibility in selecting the amount of annual contribution to a plan

How do VEBA plans work?

Generally, VEBA plans work as follows:

1. The employer joins a sponsoring association of 10 or more other employers.
2. The employer adopts the association's welfare benefit plan.
3. The employer makes annual contributions to the plan's trust to buy benefits.
4. The employer takes an income tax deduction each year equal to its annual contributions.
5. All trust assets are held in a pool. There are no segregated employer accounts. Employer contributions create trust assets, which the trust may use to provide benefits, even after a sponsoring employer is no longer able to make contributions.
6. The trust accumulates funds and buys insurance coverage (i.e., life, health, and disability insurance) on each employee-participant. Trust cash accumulations and/or insurance benefits are used to meet the trust's obligations to the participants and their beneficiaries.
7. Each employer participating in the plan may select to offer any or all other plan's benefits to its employees. The employer can choose the level of participation by determining the level of "salary multiple" that will be contributed for each employee. The only difference is the multiple of salary benefit, which may vary from one employer to another.
8. The trustee is an independent third party that holds all trust assets and provides periodic reports to the Administrator.

What are the distinguishing characteristics of VEBA plans?

The distinguishing characteristics of VEBA plans are as follows:

1. Ten or more employers must participate in the association sponsoring the plan and each employer must adopt the plan.
2. VEBA plans that qualify are not subject to IRC §§419 and 419A deduction imitations.
3. No one employer may make contributions of more than 10 percent of the total amount contributed to the plan by all employers.
4. Each plan is subject to the fiduciary and reporting requirements of the Employee Retirement Income Security Act of 1974 (ERISA).

What types of benefits can VEBA plans provide?

Generally, VEBA plans may be used to provide life insurance, medical, disability, and education benefits. The plans may also provide supplemental unemployment, post-retirement medical and post-retirement death, and severance benefits.

Is a VEBA a retirement plan?

No. VEBA plans are not considered retirement plans although they may do everything a retirement plan does and more.

Can an employer maintain a tax-qualified plan and a VEBA plan concurrently?

Yes. VEBA plans are not tax-qualified plans. Thus, employers may maintain pension and profit-sharing plans as well as VEBA plans concurrently.

Can a VEBA help if my qualified plan is over-funded?

Yes. A plan can be implemented to minimize or eliminate severe excise taxes on over-funded retirement plans.

Is a VEBA a non_qualified plan?

No, not as that term is generally used. A non-qualified plan is usually a pension or deferred compensation plan which is set up for key individuals only. Under a non-qualified plan, employers are generally not entitled to deductions for contributions until an employee receiving benefits has to take them into income. Under a qualified plan, contributions are currently deductible, and the employee does not have a tax consequence until the benefits are received. The guidelines for VEBA contributions and benefits are similar to the rules governing qualified plans.

A VEBA is "non-qualified" only to the extent it does not have to comply with rules governing "qualified plans" as defined in the Internal Revenue Code. It is more precise to say that a VEBA is "exempt" when it qualifies as a trust described in Section 501(c)(9) of the Code.

Are there limits on the contribution amount employers may deduct?

No. Qualifying VEBA plans are exempt from provisions of IRC §§419 and 419A, which limit the amount that an employer may contribute to a welfare benefit fund for a particular period. Consequently, there are NO limits on the contribution amount that employers may deduct.

Are account balances subject to loss due to investment risks or market fluctuations?

Account values are guaranteed by a life insurance company, to the extent life insurance policies are used in the plan. However, if interest sensitive or mutual fund based products are used, investment risk and market fluctuations may affect the fund balances.

What is a multi-employer VEBA?

It is a VEBA trust which covers more than one employer. To qualify for the most favorable tax benefits, no more than 10% of the annual contributions made to the VEBA trust can be made by a single employer. In other words, the VEBA should have 10 or more employers contributing roughly equal amounts to a common plan.

Must the employer contribute each year once it initiates the VEBA?

No. However, depending on the type of funding vehicle(s) used in the plan, there may be a loss of benefits unless arrangements are made to continue support of the funding vehicle(s) at a minimum level. Employers will want to continue funding the plan in order to take advantage of the tax benefits. The minimal annual administration fees must be paid whether or not a contribution is made in the plan year.

Must a VEBA include all employees?

No. The Internal Revenue Code permits a company to exclude certain categories of employees from participation (part-time employees, under three years of service, under age 21, union employees, non-resident aliens, etc.). These exclusions are optional.

When must a VEBA be adopted? Is a contribution to a VEBA adopted on the last day of the taxable year fully deductible?

Yes. If you have executed the VEBA Adoption Agreement, appointed a Plan Committee, and followed other procedural requirements mandated by the IRS before year end, then contributions are fully deductible.

How is the death benefit level determined?

Each employer chooses its own level of death benefits, ranging from one to several times the annual compensation. This multiple must be the same for all employees. The cost of the benefit for an employee is not a consideration, only the amount of the benefit.

Why is a third-party trustee necessary?

Regulations require that a VEBA be controlled by employees. Having an independent trustee satisfies the "employee control" requirement, because the trustee acts on behalf of the employees. The existence of an independent trustee also mitigates the employer's fiduciary duty and reduces liability exposure. When a bank or other corporate fiduciary acts as trustee, they assume the fiduciary duty. Use of an independent trustee deters any IRS argument that the VEBA is not a true multi-employer plan.

When you join a VEBA, can you still use your own attorney, CPA or other advisors?

Yes. The VEBA does not interfere with any function that is normally performed by your professional advisors. We can confer with your CPA or legal counsel on any technical questions they may have about VEBAs.

Is a VEBA subject to rules against discrimination?

Yes. Section 505, which contains general nondiscrimination requirements, applies to VEBAs. Amount and type of benefits must be provided uniformly to all employees, based upon a fixed multiple of compensation, which eliminates discrimination in favor of highly compensated employees. Tax courts have established that it is the use of a consistent multiple of salary and not the cost of the benefit that satisfies the non discrimination requirements.

What is the Employee Retirement Income Security Act (ERISA)?

The Employee Retirement Income Security Act of 1974 ("ERISA") is a law designed to protect participants in pension and employee welfare benefit plans. ERISA regulations set standards for mandatory benefit vesting schedules, fixed minimum funding, conduct of plan administration and handling of plan assets, required disclosure of plan information, and a system for payment of pension benefits. VEBA benefits are protected by ERISA. Essentially, that means that they cannot be touched by creditors, lawsuits, bankruptcy, IRS liens, EPA claims, etc.

How does ERISA apply to VEBAs?

A VEBA is considered an employee welfare benefit plan. Therefore, it is subject to the Fiduciary Responsibility, Disclosure and Reporting, and Administration and Enforcement sections of Title 1, Part B of ERISA. The fiduciary is subject to ERISA fiduciary standards and enforcement provisions. If the plan provides a health and welfare benefit, it will have to file annual 5500 series forms (Return/Report of Employee Benefit Plan). A summary plan description must also be provided to plan participants and the United States Department of Labor.

Are there any federal gift or generation-skipping tax consequences associated with VEBA benefits?

A properly structured VEBA can avoid both gift and generation-skipping taxes.

How are death benefits treated for estate tax purposes?

Generally, the proceeds are included in the deceased's estate. However, the proceeds can be effectively removed if an irrevocable life insurance trust is established which surrenders all incidents of ownership to the life insurance policy. Additionally, the three-year rule under IRC §2035 would apply.

What are the income tax consequences to plan participants?

VEBA plan participants must include in their gross income the annual reportable economic benefit, i.e., the value of life insurance which is measured by P.S. 58 or U.S. Table 38. The value may be measured by the current published premium rates for one-year term life insurance available to all standard risk insureds of the insurance company issuing the policy.

Are there any tax risks associated with VEBA plans?

Provided you have sought legal and accounting advice and made a good faith effort to follow the law, the IRS would be unlikely to disallow the deduction or impose any penalties. Referring to IRS Training Manual 4213-018 (Rev.5/98) p. 17-18: "If employer contributions paid to the fund during the employer's taxable year would be otherwise deductible except that they exceed the allowable Section 419 deduction limits, then the employer is allowed a carryover of the "excess" contributions to the employer's succeeding year. The carryover amount will be treated as an actual contribution made in the succeeding year. The carry forward is cumulative--i.e., it represents the cumulative total of any disallowed contributions. The total is reduced as the carry forwards are allowed as employer deductions up to the qualified cost in subsequent years. In this case, the employer is allowed a deduction in excess of its actual contribution to the fund for such years. . . . The carryover provisions are very significant from an examination standpoint since the taxpayer will eventually be allowed a deduction for its VEBA contributions. The only question is in what tax period does Section 419 permit the deduction."

If the deduction is disallowed, you would be responsible for payment of the tax owed plus interest. The IRS interest rate is extremely low compared to normal investment returns.

Can I access my VEBA money in case of an emergency?

Yes. The plan can be amended or terminated at any time

May an employer terminate a VEBA plan?

Yes. A well designed plan will allow employers to terminate their participation if there is a well defined, necessary business purpose for plan termination. (For example, the business is being liquidated, being sold, or can no longer fund the benefits, etc.)

What happens when an employer terminates its participation in a VEBA plan?

Value in the plan is distributed pro rata among the current plan participants. The benefits based upon each participant's cumulative salary during his or her plan participation when weighted against total salaries paid to current plan participants during the plan's life. The benefits are taxable, as ordinary income, in the year they are received.

What happens to the cash value in the life insurance policies upon plan termination?

Cash value in the plan is distributed pro rata among the current plan participants. Obviously, the participating employees who have earned a higher percentage of income would receive a higher percentage of plan assets upon termination. Upon plan termination, benefits distributed are taxable to the participants at ordinary rates.