What is a Voluntary Employees Beneficiary Association?
A Voluntary Employees Beneficiary Association (VEBA) is an organization that provides life insurance, illness, accident, medical and other benefits to members and their dependents/beneficiaries. The association can be established by employees or by an employer, but must consist of employees of the same company or same labor union. A VEBA cannot provide commuter benefits, miscellaneous fringe benefits, or retiree income.
VEBA provides payment for life insurance, sick, accident, or other benefits to their members (or their dependents or designated beneficiaries) if no part of the net earnings inures (other than through such payments) to the benefit of any private shareholder or individual. There are no tax penalties for early distributions from the VEBA, and assets are protected from creditors. VEBA benefits typically end when the employee leaves the company or labor union with which the VEBA is associated.
IRC 501(c)(9) exempts from Federal income tax voluntary employees and beneficiary associations
Who can participate in a VEBA?
Usually, only employees are entitled to become members of VEBA. In addition, eligibility for membership must be defined by reference to objective standards that constitute an employment-related common bond among individuals. This may be a common employer, coverage under a collective bargaining agreement, or a labor union affiliation. Employees of the VEBA and employees of the union who are members of VEBA can also be considered to share an employment-related common bond.
Want are the rules governing contributions to a VEBA?
Funds may be contributed to a VEBA either by the members or their employer. Employer contributions are often tax-deductible to the employer. VEBAs themselves are authorized by Internal Revenue Code section 501(c)(9) as tax-exempt organizations as long as their earnings are only used for providing benefits. However, benefits paid out to employees are not necessarily tax exempt to the employee.
Can a VEBA be considered a retirement plan?
No, it is not a retirement plan.
What benefits can VEBA plans provide?
VEBA plans may be used to provide life insurance, medical, disability, and education benefits. The plans also provide supplemental unemployment, post-retirement medical and death, and severance benefits.
What are the distinguishing characteristics of VEBA plans?
The distinguishing characteristics of VEBA plans are:
- More than ten employers are required to participate in the association sponsoring the plan and each employer must adopt the plan.
- VEBA plans that qualify are not subjected to IRC 419 and 419A deduction limitations.
- No employer may make contributions of more than 10 percent of the total amount contributed to the plan by employers.
- Each plan is subject to fiduciary and reporting requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
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 an employer may contribute to a welfare benefit fund for a particular period. However, there are no limits on the contribution amount employers are able to 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, should interest sensitive or mutual fund based products be used, investment risk and market fluctuations may affect the fund balances.
What is a multi-employer VEBA?
A multi-employer VEBA is a trust which covers more than one employer. To qualify for the most favorable tax benefits, no more than 10% of annual contributions made to the VEBA trust can be made by a single employer. This means that the VEBA should have 10 or more employers contributing roughly equal amounts to a common plan.