The vehicle is a tax-exempt trust fund under Section 501 (c) (9) of item 501 (c) (9), commonly referred to as the Voluntary Association of Workers` Beneficiaries (VEBA). A VEBA is a performance plan in which sponsorship employers can bring certain benefits to workers, including owner-employees. The discussion here focuses on VEBAs which, in accordance with Section 419A (f) (6) of the IRC, are considered to be 10 health and wellness plans with several employers. Unfortunately, some plans in the market look like VEBAs, or they say, are, but do not comply with VEBA rules. These plans (known as 419 plans) are health and benefit plans that use a taxable trust fund as a funding instrument and the provisions of Section 419A (f) (6) of the IRC that set contribution limits. These look alike plans do not have a favorable IRS destination letter, do not follow section 505`s non-discrimination rules and do not meet all ERISA requirements. Their holders believe that they can avoid ERISA and non-discrimination rules by not applying for a tax exemption from the IRS. Such plans are not VEBAs, and CPAs should advise their clients to approach them with caution. The 1984 and 1986 tax laws added sections 419 and 419A (f) (6) of the IRCs. In Section 419, contributions and deductibility were limited. Several exceptions were made for plans that followed certain rules. A plan established in accordance with Section 419A (f) (6) is excluded from the strict limits. The essence of a 10 or higher trust and exempt from employer tax is: why should a company consider a VEBA? With rising revenues and the IRS reducing or eliminating traditional planning strategies, the need for this complex but useful program has increased.
The VEBA Trust provides businesses and their owners with a number of important tax, business and personal planning opportunities; it can provide a large number of benefits, including benefits paid in the event of a worker`s death, illness or accident. The payment of benefits is not determined by time, but is caused by an event such as death or disability. In Joel A. Schneider M.D., S.C , 63 TCM 1787, TC Memo 1992-24 (1992), Dr. Schneider was the sole practitioner and sole shareholder with a collaborator. It provided more than $1.1 million to three separate VEBAs over three years to fund $4.5 million in life, disability, severance pay and education. More than 98% of the benefits paid to him. In a pioneering decision, the court allowed the deductions, despite the IRS`s challenges in terms of control, private benefit, deferred compensation, improper compensation and discrimination in favour of highly compensated staff. The decision confirmed that large deductible contributions could be made to a duly designed, well-documented and managed VEBA. The tribunal also stated that, unless there is potential for return to the sponsorship unit and an independent agent, assets and controlled investments, VEBAs could be used to provide benefits to participants and beneficiaries if they do not discriminate in favour of highly compensated employees (meaning that benefits are available consistently and proportionately to all participants). The VEBA agent is the insurance agent and each participating staff member signs a beneficiary name held by the agent.
When an employee dies, the agent receives the death benefits from the insurance company and pays the beneficiary in question. In order to prevent the proceeds of the VEBA living allowance from being included in their estate, the program participant may make an irrevocable beneficiary designation, usually an irrevocable trust that benefits family members. Such a designation may also have the effect of excluding funds from the surviving spouse`s estate. Under what circumstances are revenues no longer viable? Under the usual death review rule, death income is tax-exempt after three years. However, this rule cannot apply when the veba sponsor deducts