Welfare Benefit Funds

<div class="Section1"><br /> <br /> Yes.<br /> <br /> A VEBA or SUB must give notice to the IRS, in the manner required in the regulations that it is applying for tax-exempt status.<a href="#_ftn1" name="_ftnref1">¹</a> An organization that fails to provide the required notice will not be tax-exempt until it gives notice. Requirements for giving notice are set forth in Temporary Treasury Regulation Section 1.505(c)-1T.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 505(c).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Contributions paid or accrued by an employer to a welfare benefit fund generally will be deductible when paid to the fund, if they are otherwise deductible, subject to the limit discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4097">4097</a>.<a href="#_ftn1" name="_ftnref1">¹</a> If contributions paid by an employer during a taxable year exceed the deduction limit, the excess is treated as paid to the fund in the next taxable year.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;419(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;419(d).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The association must be controlled by (1) its membership, that is, by its participants, (2) independent trustees, or (3) trustees, some of whom are designated by or on behalf of members.<a href="#_ftn1" name="_ftnref1">¹</a> Requisite control was held lacking where trustees were appointed by a self-perpetuating board of directors, new members of which were appointed by current members from among a group only indirectly selected by employees.<a href="#_ftn2" name="_ftnref2">²</a> A bank may not necessarily be considered an independent trustee.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   Treas. Reg. § 1.501(c)(9)-2(c)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   <em>American Assn. of Christian Schools</em> v. U.S., 663 F. Supp. 275, 87-1 USTC ¶ 9328 (M.D. Ala. 1987), <em>aff’d</em>, 850 F.2d 1510, 88-2 USTC ¶ 9452 (11th Cir. 1988).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.   <em>Lima Surgical Assoc., Inc.</em> v. U.S., 20 Cl. Ct. 674, 90-1 USTC ¶ 50,329 (U.S. Claims Court 1990), <em>aff’d on other grounds</em>, 944 F.2d 885, 91-2 USTC ¶ 50,473 (Fed. Cir. 1991).<br /> <br /> </div>

<div class="Section1"><br /> <br /> As a general rule, contributions to an employer-funded VEBA are deductible to the extent contributions to an employee welfare benefit fund are deductible ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4095">4095</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4101">4101</a>).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; <em><em>See, e.g,</em></em> National Presto Indus., Inc. v. Comm., 104 TC 559 (1995); Let. Ruls. 9401033, 9351042, 9322041.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Where contributions are made to a fund to provide supplemental unemployment compensation (&ldquo;SUB&rdquo;) or severance pay benefits, the account limit for SUB or severance pay benefits is 75 percent of the average qualified direct costs for any two of the immediately preceding seven taxable years, as selected by the fund.<a href="#_ftn1" name="_ftnref1">¹</a> If the benefit to any individual is payable at an annual rate in excess of 150 percent of the IRC Section&nbsp;415 dollar limit on contributions to defined contribution plans, the excess cannot be taken into account in determining the account limit.<a href="#_ftn2" name="_ftnref2">²</a> In applying this latter limit, all welfare benefit funds of the employer are treated as one fund.<a href="#_ftn3" name="_ftnref3">³</a> Treasury regulations are to provide an interim limit for new SUB or severance pay plans that do not cover key employees.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The safe harbor limit for SUB or severance pay benefits is the amount as determined above.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> For an explanation of how certain severance benefits are treated in light of the deferred compensation rules set forth in IRC Section&nbsp;409(A), <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4118">4118</a>.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;419A(c)(3)(A).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;419A(c)(4)(B).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;419A(h)(1)(A).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;419A(c)(3)(B).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;419A(c)(5)(B)(iii).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> An employer will be subject to a tax equal to 100 percent of:<br /> <p style="padding-left: 40px;">(1)&nbsp;&nbsp; any postretirement medical or life insurance benefit including any other death benefit provided to a key employee other than from a separate account, if a separate account was required ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4103">4103</a>);</p><br /> <p style="padding-left: 40px;">(2)&nbsp;&nbsp; any postretirement medical or life insurance benefit including any other death benefit provided with respect to an individual in whose favor discrimination is prohibited unless the plan is nondiscriminatory ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4104">4104</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4113">4113</a>) with respect to this benefit, or</p><br /> <p style="padding-left: 40px;">(3)&nbsp;&nbsp; any portion of the fund reverting to the benefit of the employer that is attributable to contributions that were deductible in the current or any prior year.<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> One exception provides that postretirement medical or life insurance benefits charged against amounts in a reserve up to the greater of the amount in the reserve as of the close of the last plan year ending before July&nbsp;18, 1984, or on July&nbsp;18, 1984, or charged against the income on such amounts, are not subject to the tax referred to in (1) and (2) above.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Another exception provides that certain welfare benefit funds maintained pursuant to collective bargaining agreements are not subject to the tax described in (2) above.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> A loan by a VEBA to its members&rsquo; employer is not necessarily a prohibited reversion, but any such transaction will be carefully reviewed to determine whether it is a genuine, commercially viable loan.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;4976.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;4976(b)(4).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;4976(b)(2).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; GCM 39884 (Oct. 29, 1992).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> A Voluntary Employees&rsquo; Beneficiary Association (&ldquo;VEBA&rdquo;) is a tax-exempt entity created to fund life, sick, accident, or certain other benefits ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4118">4118</a>) for members, their dependents, or their designated beneficiaries. A VEBA may be established by an employer or through collective bargaining. A trust created to provide benefits to one employee does not qualify as an employees&rsquo; association for purposes of exemption from federal income tax under IRC Section&nbsp;501(c)(9).<a href="#_ftn1" name="_ftnref1">¹</a> Some of the requirements for tax-exempt VEBA status include:<br /> <p style="padding-left: 40px;">(1)&nbsp;&nbsp; Membership eligibility ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4114">4114</a>);</p><br /> <p style="padding-left: 40px;">(2)&nbsp;&nbsp; Nondiscrimination ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4115">4115</a>);</p><br /> <p style="padding-left: 40px;">(3)&nbsp;&nbsp; Entities and individuals entitled to maintain control over the VEBA ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4116">4116</a>);<br /> and</p><br /> <p style="padding-left: 40px;">(4)&nbsp;&nbsp; Prohibition on inurement of earnings for the benefit of private shareholders or individuals ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4117">4117</a>).</p><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Rev. Rul. 85-199, 1985-2 CB 163.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Whether an employer&rsquo;s contributions to a VEBA to provide particular benefits are taxable to participants would seem to be determined under generally applicable tax rules. The presence of the VEBA would not seem to require special treatment. For example, the IRS has privately ruled that employer contributions to trusts providing accident and health benefits are excludable from participants&rsquo; gross income as provided in IRC Section&nbsp;106.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Similarly, whether contributions to 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.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Rules governing the taxation of employer-owned life insurance (i.e., COLI) were enacted under PPA 2006.<a href="#_ftn3" name="_ftnref3">³</a> Whether these rules might apply to a VEBA, if the VEBA were considered to be engaged in a trade or business, is unclear.<br /> <br /> <hr><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; See, e.g., Let. Ruls. 9513007, 9340054, 9151017, 9046023, 8534048, 8507024, 8445019.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; <em><em>See, e.g.,</em></em> Let. Ruls. 9340054, 8824030, 8534048.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;101(j), as discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="276">276</a>.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> For tax years beginning after December 31, 2006, an applicable account limit for any taxable year may include a reserve in an amount not to exceed 35 percent of the sum of the qualified direct costs and the change in claims incurred but unpaid for such taxable year with respect to medical benefits other than post-retirement medical benefits. For this purpose, applicable account limit means an account limit for a qualified asset account with respect to medical benefits provided through a plan maintained by a bona fide association as defined in Section 2791(d)(3) of the Public Health Service Act.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> In determining an employer’s deduction, no item may be taken into account more than once.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   42 USC 300gg-91(d)(3). IRC § 419A(c)(6), as added by PPA 2006.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   IRC § 419(c)(5).<br /> <br /> </div>

<div class="Section1"><br /> <br /> An employer must treat all of its welfare benefit funds as one fund for certain purposes.<a href="#_ftn1" name="_ftnref1">¹</a> For other purposes, an employer may elect to treat two or more of its funds as one.<a href="#_ftn2" name="_ftnref2">²</a> An election to aggregate must be consistent for deduction and nondiscrimination purposes ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4104">4104</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4113">4113</a>).<a href="#_ftn3" name="_ftnref3">³</a> There are aggregation rules similar to those of IRC Section&nbsp;414 for controlled groups of corporations, employers under common control, and affiliated service groups and there are rules similar to the employee leasing rules.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;419A(h)(1)(A).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;419A(h)(1)(B).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; H.R. Conf. Rep.&nbsp;861, above, <em>reprinted in</em> 1984-3 CB (vol. 2) 413.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;419A(h)(2).<br /> <br /> </div></div><br />