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Benefit Plans: Does a VEBA Deserve a Look?

Due to ever-rising costs for health and life insurance benefits, more companies are considering alternatives to traditional insurance plans. One option is the Voluntary Employees' Beneficiary Association (VEBA).

Background: A VEBA is an entity, such as a corporation or trust, funded by the members or an employer. The contributions may be used to supplement the health and life insurance coverage already received by the employees. In general, the benefits received by employees are tax-free to the extent that they would be tax-free under a regular employer plan. Employer contributions made to a VEBA may be fully deductible as ordinary and necessary expenses of the business.

In addition, the VEBA itself may be exempt from federal income tax if the following specific requirements are met:

*Membership in the VEBA must be voluntary.

*The members must have a common interest that is employment-related. For instance, the members can belong to the same union or be employed by the same company. Another possibility is that the employees may work for one or more companies that are in the same line of business.

*The VEBA cannot provide benefits for only one employee. No part of the VEBA's earnings can be used to benefit any private shareholder or individual other than for the payment of a permissible benefit.

*At the very least, the VEBA must provide for the payment of life, sickness, accident or other benefits to members (or their dependents or designated beneficiaries).

Here is a closer look at several benefits that are permissible.

Life insurance benefits: These are benefits generally payable through insurance upon the death of a VEBA member or dependent. While a life insurance package must provide current protection, a conversion privilege may be included. Life insurance benefits do not include pensions, annuities or similar benefits (although the death benefit may be paid in the form of an annuity).

Sickness and accident benefits: These include reimbursements, payment of premiums to a medical or health insurance program, benefits designed to safeguard or improve health, and payments in lieu of salary when an employee is unable to work.

Other benefits: A VEBA also may provide similar benefits to safeguard or improve health and well-being or protect against an impairment of earning power. A few examples are vacation benefits and facilities, subsidized recreational activities and athletic leagues, and temporary living expenses.

Significantly, the tandem of a VEBA and a basic company life and health insurance plan may be used to reduce rates overall. Added incentive: The owner of the business also may be a member of the VEBA as long as 90% of the VEBA's members are employees.

A VEBA is subject to strict nondiscrimination rules regarding payment of benefits and eligibility for membership. Expert assistance in this area is strongly recommended.

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	[ return to list ] Benefit Plans: Does a VEBA Deserve a Look? Due to ever-rising costs for health and life insurance benefits, more companies are considering alternatives to traditional insurance plans. One option is the Voluntary Employees' Beneficiary Association (VEBA). Background: A VEBA is an entity, such as a corporation or trust, funded by the members or an employer. The contributions may be used to supplement the health and life insurance coverage already received by the employees. In general, the benefits received by employees are tax-free to the extent that they would be tax-free under a regular employer plan. Employer contributions made to a VEBA may be fully deductible as ordinary and necessary expenses of the business. In addition, the VEBA itself may be exempt from federal income tax if the following specific requirements are met: Membership in the VEBA must be voluntary. The members must have a common interest that is employment-related. For instance, the members can belong to the same union or be employed by the same company. Another possibility is that the employees may work for one or more companies that are in the same line of business. The VEBA cannot provide benefits for only one employee. No part of the VEBA's earnings can be used to benefit any private shareholder or individual other than for the payment of a permissible benefit. At the very least, the VEBA must provide for the payment of life, sickness, accident or other benefits to members (or their dependents or designated beneficiaries). Here is a closer look at several benefits that are permissible. Life insurance benefits: These are benefits generally payable through insurance upon the death of a VEBA member or dependent. While a life insurance package must provide current protection, a conversion privilege may be included. Life insurance benefits do not include pensions, annuities or similar benefits (although the death benefit may be paid in the form of an annuity). Sickness and accident benefits: These include reimbursements, payment of premiums to a medical or health insurance program, benefits designed to safeguard or improve health, and payments in lieu of salary when an employee is unable to work. Other benefits: A VEBA also may provide similar benefits to safeguard or improve health and well-being or protect against an impairment of earning power. A few examples are vacation benefits and facilities, subsidized recreational activities and athletic leagues, and temporary living expenses. Significantly, the tandem of a VEBA and a basic company life and health insurance plan may be used to reduce rates overall. Added incentive: The owner of the business also may be a member of the VEBA as long as 90% of the VEBA's members are employees. A VEBA is subject to strict nondiscrimination rules regarding payment of benefits and eligibility for membership. Expert assistance in this area is strongly recommended. [ return to list ]
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