Welfare Benefit Funds

<div class="Section1"><br /> <br /> 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&rsquo;s spouse who is a minor or a student for income tax dependent exemption purposes, or any other minor child residing with the member.<a href="#_ftn1" name="_ftnref1">¹</a> Provision of an insubstantial or de minimis amount of impermissible benefits will not disqualify an arrangement from tax-exempt VEBA status.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> 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&nbsp;79 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="254">254</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="255">255</a>).<a href="#_ftn3" name="_ftnref3">³</a> 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&nbsp;79 if:<br /> <p style="padding-left: 40px;">(1)&nbsp;&nbsp; the policies are owned by a VEBA,</p><br /> <p style="padding-left: 40px;">(2)&nbsp;&nbsp; the policies are purchased through level premiums over the expected lives or working lives of the individual members, and</p><br /> <p style="padding-left: 40px;">(3)&nbsp;&nbsp; the accumulated cash reserves accrue to a VEBA.<a href="#_ftn4" name="_ftnref4">⁴</a></p><br /> The purchase of individual whole life insurance by VEBAs funding ERISA plans may violate ERISA.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> A reserve for future retirees&rsquo; 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).<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> Also, consider the conference report to TRA &rsquo;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.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> The payment of self-funded, paid-up life insurance constituted a qualifying benefit for purposes of IRC Section&nbsp;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&rsquo;s family or beneficiary against a contingency that interrupted or impaired the member&rsquo;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.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> 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.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> Home health care benefits provided under a VEBA qualified as medical care benefits and, thus, were excludable from gross income.<a href="#_ftn10" name="_ftnref10">¹⁰</a> Supplemental medical benefits qualified as sick and accident benefits.<a href="#_ftn11" name="_ftnref11">¹¹</a> Reimbursement of union members&rsquo; 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.<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> Paid sick days and short term disability wage replacement benefits have been considered sick and accident benefits.<a href="#_ftn13" name="_ftnref13">¹³</a> Health benefits provided by a VEBA to nondependent, nonspousal domestic partners of participants did not adversely affect the VEBA&rsquo;s tax-exempt status because the coverage and benefits would constitute no more than a de minimis amount of the VEBA&rsquo;s total benefits under Treasury Regulation Section&nbsp;1.501(c)(9)-3(a).<a href="#_ftn14" name="_ftnref14">¹⁴</a><br /> <br /> 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&rsquo;s dependents or if it protects against a contingency that interrupts or impairs a member&rsquo;s earning power.<a href="#_ftn15" name="_ftnref15">¹⁵</a> The IRS understands a contingency to be an unanticipated event beyond the control of the beneficiary.<a href="#_ftn16" name="_ftnref16">¹⁶</a><br /> <br /> Other benefits may include vacation benefits, child care facilities, supplemental unemployment compensation benefits, severance benefits (<em><em>but see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4119">4119</a>), and education benefits.<a href="#_ftn17" name="_ftnref17">¹⁷</a><br /> <br /> Holiday pay and paid personal days have been considered other benefits.<a href="#_ftn18" name="_ftnref18">¹⁸</a> 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.<a href="#_ftn19" name="_ftnref19">¹⁹</a><br /> <br /> 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.<a href="#_ftn20" name="_ftnref20">²⁰</a><br /> <br /> Plans that provide medical and death benefits, but that require participants to contribute a portion of the cost, may violate Treasury Regulation Section&nbsp;1.501(c)(9)-3(f).<a href="#_ftn21" name="_ftnref21">²¹</a><br /> <br /> A benefit payable by reason of death may be settled in the form of an annuity to the beneficiary.<a href="#_ftn22" name="_ftnref22">²²</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; Treas. Reg. &sect;&nbsp;1.501(c)(9)-3(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; <em><em>See, e.g.,</em></em> GCM 39817 (5-9-90); TAM 9139003.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.501(c)(9)-3(b).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; GCM 39440 (11-7-85).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; Compare <em>Reich v. Lancaster</em>, 55 F.3d 1034 (5th Cir. 1995), <em>aff&rsquo;g</em> 843 F. Supp.&nbsp;194 (N.D. Tex. 1993) (purchases of individual whole life insurance by self-funded welfare benefit plan violated various provisions of ERISA) with <em>Reich v. McDonough</em>, Civ. Action No.&nbsp;91-12025 H (D. Mass. Dec.&nbsp;10, 1993) (in part recognizing that individual whole life insurance can be an appropriate investment for ERISA plans).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; Let. Rul. dated May&nbsp;25, 1982.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; H.R. Conf. Rep.&nbsp;861, 98th Cong., 2d Sess. 1157, <em>reprinted</em> in 1984-3 CB (vol. 2) 411. But consider Let. Rul. 9151027 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4095">4095</a>).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; Let. Rul. 199930040.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.501(c)(9)-3(c).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; Let. Rul. 200028007.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp; Let. Rul. 200003053.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp;&nbsp; Let. Rul. 199902016.<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp;&nbsp; TAM 9126004.<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp;&nbsp; Let. Rul. 200108010.<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.501(c)(9)-3(d).<br /> <br /> <a href="#_ftnref16" name="_ftn16">16</a>.&nbsp;&nbsp; GCM 39879 (9-15-92).<br /> <br /> <a href="#_ftnref17" name="_ftn17">17</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.501(c)(9)-3(e).<br /> <br /> <a href="#_ftnref18" name="_ftn18">18</a>.&nbsp;&nbsp; TAM 9126004.<br /> <br /> <a href="#_ftnref19" name="_ftn19">19</a>.&nbsp;&nbsp; Let. Rul. 9802038.<br /> <br /> <a href="#_ftnref20" name="_ftn20">20</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.501(c)(9)-3(f). <em><em>See also</em> Lima Surgical Assoc., Inc. v. U.S.</em>, 20 Cl. Ct. 674, 90-1 USTC &para;&nbsp;50,329 (Ct. Cl. 1990)(severance benefits based on length of service and level of compensation and payable upon retirement were impermissible deferred compensation), <em>aff&rsquo;d</em>, 944 F.2d 885, 91-2 USTC &para;50,473 (Fed. Cir. 1991); Let. Rul. 9249027 (severance benefits payable upon any voluntary or involuntary termination, including retirement, are deferred compensation or retirement benefits and are not qualifying other benefits). Compare <em>Wellons v. Comm.</em>, 31 F.3d 569, 94-2 USTC &para;50,402 (7th Cir. 1994)(severance pay arrangement is more akin to deferred compensation plan than welfare benefit plan where five years of service must be given before benefits accrue, benefit amount is linked to level of compensation and length of service, and benefits can be paid at virtually any termination of employment), <em>aff&rsquo;g</em>, TC Memo 1992-704.<br /> <br /> <a href="#_ftnref21" name="_ftn21">21</a>.&nbsp;&nbsp; Internal Revenue Service Exempt Organizations Continuing Professional Education Text for Fiscal Year 1999, Chapter F, Voluntary Employees&rsquo; Beneficiary Associations.<br /> <br /> <a href="#_ftnref22" name="_ftn22">22</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.501(c)(9)-3(b).<br /> <br /> </div></div><br />

<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 /> 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 /> 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.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="8789">8789</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="334">334</a>) 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="343">343</a>) to the extent they are attributable to participant contributions.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Fully insured group term life insurance coverage provided by an employer through a VEBA has been privately ruled to be excludable from the employee&rsquo;s gross income to the extent permitted by IRC Section&nbsp;79 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="246">246</a>).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> 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&nbsp;79 where the insurance is not carried directly or indirectly by the employer.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> 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&rsquo;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.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> Fully insured group term life insurance death benefits payable by reason of an employee&rsquo;s death are excludable under IRC Section&nbsp;101(a), at least where the benefits are paid directly from the insurance company to the beneficiary.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> After &ldquo;extensive study,&rdquo; 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&nbsp;101(a).<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> 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&nbsp;101(a).<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> Reimbursement of health insurance premiums under a collectively bargained Retiree Premium Reimbursement Plan would be excludable from gross income of members under IRC Section&nbsp;106.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> 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.<a href="#_ftn10" name="_ftnref10">¹⁰</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; Treas. Reg. &sect;&nbsp;1.501(c)(9)-6.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; <em><em>See, e.g.,</em></em> Let. Ruls. 9340054, 9151017, 9046023, 8534048, 8507024, 8445019, 8352022, 8344069. See also Let. Rul. 199930015 (long-term disability coverage purchased under either of two options would be attributable to employee contributions for purposes of IRC Section&nbsp;104(a)(3); accordingly, if union employees could be treated as a separate class of employees, the long-term disability benefits received by participants in new plans created under two different options would be excludable from participants&rsquo; gross income under IRC Section&nbsp;104(a)(3)).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Let. Ruls. 8302034, 8248108, 8226062, 8225147.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; Let. Ruls. 9549029, 8906023.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; Let. Ruls. 9549029, 9151033.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; Let. Ruls. 8507024, 8352022, 8248108, 8226062, 8225147.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; Rev. Proc. 90-3, 1990-1 CB 402. <em><em>See, e.g.</em></em>, Let. Rul. 199921036 (general and accidental death benefits paid by a self-insured VEBA constituted amounts received under a life insurance contract and, therefore, were excludable from gross income under IRC Section&nbsp;101(a); the arrangement was found to possess the requisite risk-shifting and risk-distributing elements necessary to establish the existence of a life insurance arrangement under <em>Helvering v. LeGierse</em>, 312 U.S. 531 (1941)). <em><em>See also</em></em> Let. Rul. 200002030.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; Let. Rul. 9840040 (as corrected by Let. Rul. 199903026).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; Let. Rul. 199902016.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; <em><em>See, e.g.,</em></em> Let. Ruls. 200043007, 9340054, 8824030, 8534048.<br /> <br /> </div></div><br />

<p>IRC Section&nbsp;409A creates requirements governing whether and when employees are to be taxed on deferred compensation. Under the general rule, if a nonqualified deferred compensation plan fails to meet certain requirements regarding distributions, acceleration of benefits, and interest on tax liability payments (Q 3541) or is not operated in accordance with such requirements, all compensation deferred under the plan for the taxable year and all preceding taxable years is includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income.<a href="#_ftn1">¹</a></p><p>Plans providing for severance pay, or for separation pay, as it officially is labeled by the IRS, are not excluded from the definition of nonqualified deferred compensation plan (unlike bona fide vacation leave, sick leave, compensatory time, disability pay, or death benefits).²</p><p>Final 409A regulations state that a separation pay plan does not provide for a deferral of compensation to the extent the plan is:</p><p>(1)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; a collectively bargained separation pay plan;<br/>(2)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; separation pay due to an involuntary separation from service or participation in a window program;<br/>(3)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; a foreign separation pay plan; or<br/>(4) a reimbursement or certain other separation payments.³</p><p>A plan that provides separation pay only due to an involuntary separation does not provide for a deferral of compensation under 409A if the plan meets the following requirements:</p><p>(1)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The separation pay does not exceed two times the lesser of (x) the sum of the employee's annualized compensation based on the annual pay rate for services provided to the employer for the taxable year preceding the taxable year in which the employee had a separation from service, or (y) the maximum amount that may be taken into account under a qualified plan under IRC Section&nbsp;401(a)(17) ($360,000 in 2026) for the year in which the employee had a separation from service.⁴</p><p>(2)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The plan provides that the separation pay must be paid no later than the last day of the second taxable year following the taxable year in which the separation from service occurred.⁵</p><p>A window program is a program established by an employer, in connection with an impending separation from service, to provide separation pay where it is made available by the employer for a limited period of time (no longer than 12 months) to employees who separate from service during that period or to service providers who separate from service during the period under specified circumstances.⁶</p><p>Final regulations became effective April&nbsp;17, 2007, with transition relief extended to ­December&nbsp;31, 2008.⁷For further explanation of IRC Section&nbsp;409A, see Q 3541.</p><p>1. IRC § 409A(a)(1).</p><p>2. IRC § 409A(d). <i>See also</i> Treas. Reg. §§ 1.409A-1(a)(5), 1.409A-1(b)(9)(i).</p><p>3. Treas. Reg. §§ 1.409A-1(b)(9)(ii), 1.409A-1(b)(9)(iii), 1.409A-1(b)(9)(iv), 1.409A-1(b)(9)(v). <i>See also</i> Treas. Reg. §§ 1.409A-1(m), 1.409A-1(n).</p><p>4. Notice 2025-67.</p><p>5. Treas. Reg. § 1.409A-1(b)(9)(iii).</p><p>6. Treas. Reg. § 1.409A-1(b)(9)(vi).</p><p>7. Notice 2007-86, 2007-46 IRB 990.</p>

<div class="Section1"><br /> <br /> Except in payment of permissible benefits, no part of the earnings of a VEBA may inure to the benefit of any private shareholder or individual.<a href="#_ftn1" name="_ftnref1">¹</a> A return of excess insurance premiums to the payor, based on mortality or morbidity experience, is not prohibited.<a href="#_ftn2" name="_ftnref2">²</a> In addition, the refund of contributions to an employer, which had been paid after a collective bargaining agreement had ended but during the pendency of a labor dispute with a union, did not constitute inurement.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> On termination of a plan, there is no prohibited inurement if, after satisfaction of all liabilities to existing beneficiaries, remaining assets are applied to provide permitted benefits pursuant to criteria that do not provide for disproportionate benefits to officers, shareholders, or highly compensated employees.<br /> <br /> A distribution to members on dissolution of a VEBA made on an objective and reasonable basis not resulting in unequal payments to similarly situated employees or disproportionate distributions to officers, shareholders, or highly compensated employees will not be prohibited inurement.<br /> <br /> Assets of a VEBA may not be distributable to contributing employers on dissolution, either under the trust document or by operation of law, unless the distribution is applied to provide permissible benefits in a manner that does not result in disproportionate benefits for officers, shareholders, or highly compensated employees of the employers.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> A transfer of assets from a VEBA to a separate nonexempt trust resulting from the termination of a sick leave/severance plan component of the VEBA and then to a bank account to be distributed to employees who participated in the terminated trust was not considered prohibited inurement as funds apparently were used to pay qualifying Section&nbsp;501(c)(9) benefits.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> In terminating a VEBA, use of the assets in a postretirement medical reserve to pay health care claims of employees who had retired prior to the effective date of the VEBA did not constitute prohibited inurement or a reversion of plan assets to the employer because the use of the reserves for an additional class of retirees was consistent with the purpose of the reserve.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> The termination of the life insurance portion (the retiree life plan) of a welfare benefit plan that was a non-exempt trust and the subsequent transfer to a VEBA of the assets remaining after the purchase of individual paid-up policies to satisfy the obligation of the retiree life plan and the subsequent use of those remaining assets to provide payment of permitted benefits other than life insurance did not result in prohibited inurement to the employer.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> Where an employer intended to reactivate a previously inactive VEBA by using the remaining assets to purchase one or more insurance policies that would provide accidental death, disability, and long-term care benefits to current employees and then terminate the VEBA on exhaustion of such assets, the proposed use of the net assets would not affect the tax-exempt status, that is, there was no prohibited inurement, because the assets would be used to provide benefits contemplated by IRC Section&nbsp;501(c)(9).<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> A general counsel memorandum concluded that a transfer of assets from an employer&rsquo;s VEBA to a 401(h) arrangement under a qualified pension plan of the same employer, providing retiree health benefits, would result in inurement of earnings from the VEBA to the employer, inasmuch as a 401(h) arrangement is required to provide for return to the employer of assets remaining in the account after satisfaction of all liabilities under the plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3942">3942</a>).<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> The transfer of excess assets from a terminating VEBA to a successor VEBA to fund permissible VEBA benefits for the employer&rsquo;s employees generally should not result in prohibited inurement.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> The transfer of a terminated VEBA&rsquo;s remaining assets to an exempt educational trust fund did not result in prohibited inurement.<a href="#_ftn11" name="_ftnref11">¹¹</a> No inurement resulted from the termination of a VEBA and transfer of assets back to its original tax-exempt sponsor, which had operated as a charity hospital and was operating as a charity only, because the assets were to be distributed by the charity for charitable purposes, with the remaining assets to be distributed to the charity&rsquo;s former employees who were currently working for the new hospital.<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> The termination of a VEBA and distribution of remaining assets to a 501(c)(3) private foundation did not result in a reversion because the foundation was not an employer with respect to the trust, nor was it an organization that otherwise was merely an alter ego of the employer; instead, the foundation was a charitable organization whose assets were dedicated to charitable purposes and that could not be used for the private benefit of the employer.<a href="#_ftn13" name="_ftnref13">¹³</a><br /> <br /> The substitution of a successor company for the original company in a VEBA trust document did not constitute prohibited inurement.<a href="#_ftn14" name="_ftnref14">¹⁴</a><br /> <br /> The IRS has indicated tax-exempt status may be denied where principal shareholders receive a dominant share of aggregate benefits and effectively control the organization.<a href="#_ftn15" name="_ftnref15">¹⁵</a><br /> <br /> In administrative proceedings prior to litigation in the <em>Lima Surgical</em> case, the IRS found a violation of the inurement proscription because the owner-employees were entitled to a dominant share of severance benefits and controlled the corporation. The court found a violation of the prohibition against private inurement because the dominant benefits were based on both level of compensation and length of service but did not explicitly analyze whether owner-employees also effectively controlled the plan trust.<a href="#_ftn16" name="_ftnref16">¹⁶</a> On appeal, the circuit court did not address the lower court&rsquo;s inurement ruling, but the IRS conceded that the arrangement did not violate the prohibition against inurement.<a href="#_ftn17" name="_ftnref17">¹⁷</a><br /> <br /> The IRS disqualified a VEBA because it failed to satisfy the requirement of no prohibited inurement. The IRS concluded that the plan, in substance, was not adopted or operated as an employee benefit plan, but was merely a separate fund controlled by the controlling family for the primary benefit of two members of the controlling family, with the incidental coverage of other employees of the corporation being merely a cost of attempting to secure tax-exempt status.<a href="#_ftn18" name="_ftnref18">¹⁸</a><br /> <br /> In another disqualification due to prohibited inurement, the IRS privately ruled that the trust was established for the personal and private benefit of the company president and his wife, the universal life policies in the plan were not eligible for inclusion in a Section&nbsp;501(c) (9) trust because they allowed for periodic payments and loans, and the trust was disqualified because it was not controlled by an independent trustee as required in the Treasury regulations.<a href="#_ftn19" name="_ftnref19">¹⁹</a><br /> <br /> A loan from a VEBA to its members&rsquo; employer might violate the prohibition against private inurement.<a href="#_ftn20" name="_ftnref20">²⁰</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; Treas. Reg. &sect;&sect;&nbsp;1.501(c)(9)-1(d), 1.501(c)(9)-4(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.501(c)(9)-4(c); Let. Rul. 9006051. <em><em>See also</em></em> Let. Rul. 9214030 (the rebate of excess insurance premiums to professional associations whose members contributed premiums to the VEBA for disability protection and agreed that any excess funds in the VEBA could go to the professional associations was not prohibited inurement as long as the professional associations could use the money to provide VEBA benefits to their members).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Let. Rul. 199930040.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.501(c)(9)-4(d).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; TAM 9647001.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; Let. Rul. 9720034.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; Let. Rul. 9740024.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; Let. Rul. 9446036, Treas. Reg. &sect;&nbsp;1.501(c)(9)-4(d).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; GCM 39785 (3-24-89).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; <em><em>See, e.g.,</em></em> Let. Ruls. 200122051, 200122047 (assets transferred from a terminated VEBA to another VEBA would be used to provide permissible welfare benefits in a nondiscriminatory manner, a common employment-related bond was present, and the transfer was not being used to avoid any of the statutory VEBA requirements). In each situation, the IRS ruled that the transfer did not result in inurement or trigger excise tax. <em><em>See also</em></em> Let. Ruls. 200024054, 200009051, 9812035, 9551007, 9505019, 9438017, 9414011, 9322041, 9115035, and 9014065.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp; Let. Rul. 200136028.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp;&nbsp; Let. Rul. 200003054.<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp;&nbsp; Let. Rul. 199908054.<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp;&nbsp; Let. Rul. 200041035.<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.&nbsp;&nbsp; <em><em>See, e.g.,</em></em> GCMs 39818 (May&nbsp;10, 1990), 39801 (10-26-89), 39300 (May&nbsp;30, 1984).<br /> <br /> <a href="#_ftnref16" name="_ftn16">16</a>.&nbsp;&nbsp; <em>Lima Surgical Assoc., Inc. v. U.S.</em>, 20 Cl. Ct. 674, 90-1 USTC &para;&nbsp;50,329, at pp.&nbsp;84,145-84,146 (1990).<br /> <br /> <a href="#_ftnref17" name="_ftn17">17</a>.&nbsp;&nbsp; <em>Lima Surgical Associates, Inc. v. U.S.</em>, 944 F.2d 885, 91-2 USTC &para;&nbsp;50,473, at p.&nbsp;89,800 (Fed. Cir. 1991).<br /> <br /> <a href="#_ftnref18" name="_ftn18">18</a>.&nbsp;&nbsp; Let. Rul. 200836041.<br /> <br /> <a href="#_ftnref19" name="_ftn19">19</a>.&nbsp;&nbsp; Let. Rul. 200950049.<br /> <br /> <a href="#_ftnref20" name="_ftn20">20</a>.&nbsp;&nbsp; GCM 39884 (Oct.&nbsp;29, 1992) (whether loan violated prohibition was not an issue in the memorandum, but IRS noted that the loan might have been a sham transaction for employer&rsquo;s benefit and was &ldquo;tainted by the type of economic domination by a controlling person &hellip; that [has been] found to constitute private inurement&rdquo;).<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 /> The IRS has privately ruled that payments made by a company to its employees from its general assets to reimburse employees for excess pre-tax and after-tax contributions to a VEBA were wages for FICA, FUTA, and income tax withholding purposes. If the employer had made the payments on behalf of the VEBA and then received reimbursement from the VEBA, the portion of the rebate attributable to employee after-tax contributions would have escaped that treatment.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Participants in an employee pay-all VEBA who were receiving disability benefits were not required to recognize income when, on termination of the VEBA, they received disability insurance policies purchased with VEBA assets providing precisely the same benefits. Further, disability benefits under the policies were ruled excludable from income under IRC Section 104(a)(3) to the extent that disability benefits from the VEBA were excludable under that section.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> On the termination of employee pay-all VEBAs and the distribution of their assets in cash, all participants were considered to have received income to the extent the distributions exceeded their contributions; those who had taken deductions for their contributions were considered to have received additional income in the amount of any contributions for which they had taken a deduction that reduced their tax liability in earlier years.<a href="#_ftn3" name="_ftnref3">³</a> Where the distributions did not exceed the employees' contributions, the distributions were not wages for FICA or FUTA purposes.<a href="#_ftn4" name="_ftnref4">⁴</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>.   Let. Rul. 9203033.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   Let. Ruls. 9244035, 9219016, 9219014, 9219013.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.   Let. Ruls. 9147059, 9039009. <em><em>See also</em></em> Let. Rul. 200023052.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.   Let. Rul. 9039009. Compare <em>Sheet Metal Workers Local 141 Supplemental Unemployment Benefit Trust Fund v. U.S.</em>, 64 F.3d 245 (6th Cir. 1995) (distributions at termination of supplemental unemployment benefit fund of amounts representing earnings on contributions to the fund were wages for FICA and FUTA purposes where the distributions derived solely from employer contributions and where eligibility for distribution payments was based on satisfaction of work requirements or their equivalents).<br /> <br /> </div>

<div class="Section1"><br /> <br /> A 419(e) plan is a welfare benefit fund that is sponsored by an employer to provide welfare benefits to its employees. When a 419(e) plan meets all of the IRC&rsquo;s requirements, the employer&rsquo;s contributions are fully deductible with no taxation to the employee then or when benefits are provided. When these plans operate consistently with the IRC, they generally are unattractive to smaller employers.<a href="#_ftn1" name="_ftnref1">¹</a> These plans may involve a taxable welfare benefit fund or a tax-exempt VEBA ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4113">4113</a>). Different deduction limits apply to 10 or more employer plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4107">4107</a>) and collectively bargained plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4097">4097</a>).<br /> <p style="text-align: center;"><strong>Abusive Arrangements in Single Employer Plans</strong></p><br /> The IRS cautions taxpayers about participating in certain trust arrangements being sold to professional corporations and other small businesses as welfare benefit funds.<a href="#_ftn2" name="_ftnref2">²</a> Some of the arrangements have been identified as listed transactions (<em><em>see</em> </em>Notice 2007-83, IR 2007-170, below).<br /> <br /> Revenue Ruling 2007-65 addresses situations where an arrangement is considered a welfare benefit fund, but the employer&rsquo;s deduction for its contributions to the fund is denied in whole or part for premiums paid by the trust on cash value life insurance policies.<a href="#_ftn3" name="_ftnref3">³</a> For purposes of determining the limitations on an employer&rsquo;s deduction for contributions to a welfare benefit fund under Section&nbsp;419 and Section&nbsp;419A, the IRS concluded that regardless of whether the benefit provided through the fund is life insurance coverage, premiums paid on cash value life insurance policies by the fund are not included in the fund&rsquo;s qualified direct cost whenever the fund is directly or indirectly a beneficiary under the policy within the meaning of Section&nbsp;264(a). The fund&rsquo;s qualified direct cost includes amounts paid as welfare benefits by the fund during the taxable year for claims incurred during the year.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Some of the arrangements described above and substantially similar arrangements, as well as certain other arrangements using cash value life insurance policies for which an employer has deducted amounts as contributions to a welfare benefit fund, may be transactions that have been designated as listed transactions. If a transaction is designated as a listed transaction, affected persons may be subject to additional penalties and disclosure responsibilities ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4107">4107</a>).<br /> <br /> The IRS has identified certain trust arrangements involving cash value life insurance policies and substantially similar arrangements as listed transactions.<a href="#_ftn5" name="_ftnref5">⁵</a> If a transaction is designated as a listed transaction, affected persons have disclosure obligations and may be subject to applicable penalties.<br /> <br /> The IRS cautions taxpayers that the tax treatment of trusts that, in form, provide post-retirement medical and life insurance benefits to owners and other key employees may vary from the treatment claimed.<a href="#_ftn6" name="_ftnref6">⁶</a> The IRS may issue further guidance to address these arrangements, and taxpayers should not assume that the guidance will be applied prospectively only.<br /> <br /> The IRS and Treasury released a warning on certain trust arrangements being sold as welfare benefit plans to professional employers and small employers. The announcement discussed certain welfare plan arrangements using life insurance contracts that constitute listed transactions.<br /> <br /> In 2009, the IRS released a lengthy background document that outlines the issues and patterns its agents will look for during audits of welfare benefit plans with respect to uncovering disguised dividend arrangements, for example, as in the <em>Neonatology</em> and <em>DeAngelis</em> cases ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4107">4107</a>), as well as disguised deferred compensation arrangements.<a href="#_ftn7" name="_ftnref7">⁷</a> In the audit guidance, the IRS advises its agents to place a particularly sharp focus on arrangements using cash value life insurance policies and includes several questions that agents will use to identify abusive arrangements.<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(e).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRS News Release IR-2007-170 (Oct.&nbsp;17, 2007).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; Rev. Rul. 2007-65, 2007-45 IRB 949.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;264(a) provides that no deduction is allowable for premiums on any life insurance policy, or endowment or annuity contract, if the taxpayer is directly or indirectly a beneficiary under the policy or contract.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; Notice 2007-83, 2007-45 IRB 960.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; Notice 2007-84, 2007-45 IRB 963.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; Revised Background Document 200931049 (Release Date: July 31, 2009).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Membership in a VEBA generally must be limited to employees, including certain former employees.<a href="#_ftn1" name="_ftnref1">¹</a> 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.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> 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.<a href="#_ftn3" name="_ftnref3">³</a> 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.<a href="#_ftn4" name="_ftnref4">⁴</a> The IRS has maintained this position despite <em>Water Quality Association Employees' Benefit Corp. v. United States</em>,<a href="#_ftn5" name="_ftnref5">⁵</a> which held a geographic locale restriction invalid.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> 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.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> 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.<a href="#_ftn8" name="_ftnref8">⁸</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(a)(1), 1.501(c)(9)-2(b)(2), 1.501(c)(9)-2(b)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   Treas. Reg. § 1.501(c)(9)-2(a)(1); GCM 39834 (12-26-90). <em><em>See, e.g.</em></em>, Let. Rul. 200137066.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.   Treas. Reg. § 1.501(c)(9)-2(a)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.   <em><em>See, e.g.,</em></em> GCM 39817 (May 9, 1990).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.   795 F.2d 1303 (7th Cir. 1986).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.   <em><em>See, e.g.,</em></em> the preamble to Prop. Treas. Reg. §1.501(c)(9)-2(d), 57 Fed. Reg. 34886 (Aug. 7, 1992).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.   Treas. Reg. § 1.501(c)(9)-2(d).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.   Treas. Reg. § 1.501(c)(9)-2(a)(2).<br /> <br /> </div>