4118 / What benefits can a 501(c)(9) trust (“VEBA”) provide?

A VEBA trust may provide for the payment of life, sick, accident, or other benefits to members, their dependents or their designated beneficiaries. A dependent can be, among others, a spouse, a child of the member or the member’s spouse who is a minor or a student for income tax dependent exemption purposes, or any other minor child residing with the member.¹ Provision of an insubstantial or de minimis amount of impermissible benefits will not disqualify an arrangement from tax-exempt VEBA status.²

A life benefit is one payable by reason of the death of a member or dependent; it may be provided directly or through insurance. It generally must consist of current protection, but it may include a permanent benefit as defined in, and subject to the conditions in, regulations under Section 79 ( Q 254, Q 255).³ In addition, the IRS has indicated that life benefits may be provided through employer-funded whole-life policies that are not group-permanent policies under IRC Section 79 if:

(1)   the policies are owned by a VEBA,

(2)   the policies are purchased through level premiums over the expected lives or working lives of the individual members, and

(3)   the accumulated cash reserves accrue to a VEBA.⁴

The purchase of individual whole life insurance by VEBAs funding ERISA plans may violate ERISA.⁵

A reserve for future retirees’ life insurance held by a postretirement trust was found to provide an impermissible benefit similar to deferred compensation and the trust was not tax-exempt under 501(c)(9).⁶

Also, consider the conference report to TRA ’84, which admonishes that a plan providing medical or life insurance benefits exclusively for retirees would be considered a deferred compensation plan rather than a welfare benefit plan.⁷

The payment of self-funded, paid-up life insurance constituted a qualifying benefit for purposes of IRC Section 501(c)(9) regardless of how self-funded, paid-up life insurance was characterized under state law where (1) payment of the benefit only came due on the occurrence of an unanticipated event (i.e., the death of the insured) and protected a member and the member’s family or beneficiary against a contingency that interrupted or impaired the member’s earning power, and (2) it was clear that unlike an annuity or retirement benefit, the self-funded, paid-up life insurance benefit was not payable merely by reason of passage of time.⁸

Sick and accident benefits may be reimbursement for medical expenses. They may be amounts paid in lieu of income during a period a member is unable to work because of sickness or injury. Sick benefits include benefits designed to safeguard or improve the health of members and their dependents. They may be provided directly, through payment of premiums to an insurance company, or to another program providing medical services.⁹

Home health care benefits provided under a VEBA qualified as medical care benefits and, thus, were excludable from gross income.¹⁰ Supplemental medical benefits qualified as sick and accident benefits.¹¹ Reimbursement of union members’ health insurance premiums constituted a permitted benefit where benefits would be paid only as reimbursement for health premiums, and under no circumstances could employees take the contributions as unrestricted cash.¹²

Paid sick days and short term disability wage replacement benefits have been considered sick and accident benefits.¹³ Health benefits provided by a VEBA to nondependent, nonspousal domestic partners of participants did not adversely affect the VEBA’s tax-exempt status because the coverage and benefits would constitute no more than a de minimis amount of the VEBA’s total benefits under Treasury Regulation Section 1.501(c)(9)-3(a).¹⁴

Other benefits are limited to those similar to life, sick or accident benefits. A benefit is similar if it is intended to safeguard or improve the health of a member or a member’s dependents or if it protects against a contingency that interrupts or impairs a member’s earning power.¹⁵ The IRS understands a contingency to be an unanticipated event beyond the control of the beneficiary.¹⁶

Other benefits may include vacation benefits, child care facilities, supplemental unemployment compensation benefits, severance benefits (but see Q 4119), and education benefits.¹⁷

Holiday pay and paid personal days have been considered other benefits.¹⁸ Social, recreational, and cultural benefits provided to retirees, designed to promote their physical, mental or emotional well-being or to provide them with information relating to retirement and asset management, constituted permissible benefits.¹⁹

Other benefits do not include, among other things, any benefit that is similar to a pension or annuity payable at the time of mandatory or voluntary retirement, or a benefit that is similar to a benefit provided under a stock bonus or profit-sharing plan. In other words, other benefits do not include deferred compensation payable by reason of the passage of time rather than because of an unanticipated event.²⁰

Plans that provide medical and death benefits, but that require participants to contribute a portion of the cost, may violate Treasury Regulation Section 1.501(c)(9)-3(f).²¹

A benefit payable by reason of death may be settled in the form of an annuity to the beneficiary.²²