4114 / What are the membership eligibility restrictions that apply to a 501(c)(9) trust (“VEBA”)?

Membership in a VEBA generally must be limited to employees, including certain former employees.¹ Membership may include some non-employees, as long as they share an employment-related bond with the employee-members and as long as at least 90 percent of the members are employees.²

Eligibility for membership must be defined by reference to objective standards that constitute an employment-related common bond. A common bond could be a common employer or common coverage under a collective bargaining agreement.³ The IRS has ruled that employees whose only connection is that their employers are engaged in the same line of business will have the requisite common bond only if their employers are in the same geographic locale.⁴ The IRS has maintained this position despite Water Quality Association Employees’ Benefit Corp. v. United States,⁵ which held a geographic locale restriction invalid.⁶

Currently, the IRS holds that an area is a single geographic locale if it does not exceed the boundaries of three contiguous states. The IRS also has found that larger areas can be considered a single geographic locale under appropriate facts and circumstances.⁷

Membership may be limited by objective criteria reasonably related to employment, such as a limitation based on a reasonable minimum period of service or a requirement that members be full time employees. Any criteria used to restrict membership may not be used to limit membership to officers, shareholders, or highly compensated employees.⁸