Funding Benefits through VEBA

Dr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt)

Professor

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What is VEBA?Purpose:VEBA is Voluntary Employees’ Beneficiary AssociationA tax-exempt trust to fund life, health, accident or

other benefits to its membersGenerally employers make deposits into VEBA

trust to provide specified employee benefits in future

Both employers and employees can start VEBATax Status:Funds held and interests earned by trust are

generally not taxable though benefits paid may be sometimes taxable

Employers’ contributions can be tax deductible

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When VEBA is used?When employer wants :

To provide benefit security for all covered employees by placing funding amounts in a trust

To ensure benefits to employees, those are beyond reach of company creditors

To accelerate deductibility of employee benefit costs by pre-funding, where permissible

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Advantages of VEBA

Can use certain employer-funded whole life insurance policies to fund death benefit

Use of irrevocable trust enhances benefit security for individual employees

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Disadvantages of VEBA

Installation and administration of VEBA can be complex and costly

With multiple-employer plan, employer loses control over plan design, investments & tax consequences

Careful plan design needed to avoid overfunding & potential loss of funding intended for owner-employees

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Who Must be Covered?

Must cover more than one employeeBest to cover all employees

Each plan funded through VEBA may have its own coverage requirements

Plans providing disproportionate share of benefits to owner-employee will generally not be tax-exempt

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Kinds of Benefits Provided

Life insurance before and after retirementSurvivor benefitsSick and accident benefitsOther benefits- vacation- recreation - severance benefits - unemployment and job training benefits and - disaster benefits

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Kinds of Benefits Can Not Be Provided

Savings, retirement, or deferred compensation plans

Coverage of expenses not related to maintenance of employee’s earning power

- commuting expenses,- accident or homeowner’s insurance

covering property damage

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VEBA Must Comply

Nondiscrimination rules for that specific plan

Nondiscrimination rules limits VEBA benefit to $245,000

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Taxation of EmployeesGenerally same as without VEBA

Premium payments or funding deposits usually not taxable to employee

Benefits payable to employee or beneficiaries usually subject to same tax treatment as if they were paid directly by employer

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Taxation of Employees

If VEBA includes life insurance plan: Value of life insurance protection is

taxableFor group term plan, cost of first $50,000

of protection is tax free to employee Amounts above $50,000 are taxed Group term life proceeds income tax free

to beneficiariesLife insurance held by VEBA can be kept

out of participant’s estate11

Taxation of VEBA

Income from VEBA exempt from regular income tax if requirements of rules are met

Must notify IRS to obtain treatment as tax-exempt VEBA

VEBA income set aside for benefits & administration in excess of limits, is subject to taxation as “unrelated business taxable income” (UBTI)

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Taxation of VEBA

UBTI rules apply even if VEBA is part of a 10-or-more employer plan

Funding with life insurance or tax-free investment vehicles can eliminate or minimize UBTI exposure

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Employer’s DeductionEmployer can deduct reasonable

contributions to fund benefits through VEBA

Deductions typically subject to same limits as if provided directly

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ERISA and VEBA Benefits

• Employee Retirement Income Security Act (ERISA) treatment of benefits through VEBA is same as treatment of any individual benefit plan funded by other means

• Use of VEBA does not create or change requirements otherwise applicable to benefit plan

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