Funding Employee Benefits through VEBA

1. Funding Benefits through VEBA
Dr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt)
Professor
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2. What is VEBA?
Purpose:
VEBA is Voluntary Employees’ Beneficiary Association
A tax-exempt trust to fund life, health, accident or other
benefits to its members
Generally employers make deposits into VEBA trust
to provide specified employee benefits in future
Both employers and employees can start VEBA
Tax 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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3. 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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4. 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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5. 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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6. Who Must be Covered?
Must cover more than one employee
Best 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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7. Kinds of Benefits Provided
Life insurance before and after retirement
Survivor benefits
Sick and accident benefits
Other benefits
- vacation
- recreation
- severance benefits
- unemployment and job training benefits and
- disaster benefits
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8. 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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9. VEBA Must Comply
Nondiscrimination rules for that specific plan
Nondiscrimination rules limits VEBA benefit to
$245,000
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10. Taxation of Employees
Generally 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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11. Taxation of Employees
If VEBA includes life insurance plan:
Value of life insurance protection is taxable
For 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
beneficiaries
Life insurance held by VEBA can be kept out of
participant’s estate
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12. 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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13. 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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14. Employer’s Deduction
Employer can deduct reasonable contributions
to fund benefits through VEBA
Deductions typically subject to same limits as
if provided directly
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15. 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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