4122 / How are benefits payable under 501(c)(9) trusts (“VEBAs”) taxed to participants?

Both cash and noncash benefits provided through the association are included in or excluded from income under general tax rules. They are not given special tax treatment simply because they are provided by a 501(c)(9) association.¹

Medical expense benefits and dismemberment and disability benefits appear to be tax-free or taxable to the participant under rules applicable to employer-provided health insurance ( Q 8789, Q 334) to the extent such benefits are attributable to employer contributions. These benefits appear to be excludable from gross income to the extent allowed under the rules applicable to personal health insurance ( Q 343) to the extent they are attributable to participant contributions.²

Fully insured group term life insurance coverage provided by an employer through a VEBA has been privately ruled to be excludable from the employee’s gross income to the extent permitted by IRC Section 79 ( Q 246).³

Fully insured group term life insurance coverage provided by employees to themselves through a VEBA has been considered not to be subject to the inclusion rules of IRC Section 79 where the insurance is not carried directly or indirectly by the employer.⁴

Employees who purchased fully insured group term life insurance for their dependents through a VEBA were not required to include the cost of that coverage in their income as a fringe benefit where the employer’s involvement with the arrangement was limited to providing reimbursed administrative services and the insurance was arranged and financed on an after-tax basis entirely by the employees.⁵

Fully insured group term life insurance death benefits payable by reason of an employee’s death are excludable under IRC Section 101(a), at least where the benefits are paid directly from the insurance company to the beneficiary.⁶

After “extensive study,” the IRS announced it would issue rulings on whether a death benefit under self-insured life insurance provided through a 501(c)(9) trust will be tax-exempt under IRC Section 101(a).⁷

Uninsured death benefits payable under a private plan created under federal law constituted amounts received under a life insurance contract and were excludable from gross income under IRC Section 101(a).⁸

Reimbursement of health insurance premiums under a collectively bargained Retiree Premium Reimbursement Plan would be excludable from gross income of members under IRC Section 106.⁹

Whether benefits provided through a VEBA are wages for FICA, FUTA, and federal income tax withholding purposes generally is determined under the FICA, FUTA, and withholding rules applicable to the kind of benefit or kinds of benefits at issue.¹⁰