ADVANTAGES OF A VEBA TRUST 
VEBA trusts have been around since 1928 and have been widely used by unions and large corporations. In 1986, the tax code was amended so that smaller businesses could also take advantage of VEBA tax planning opportunities. Closely held businesses are now allowed to join an existing multiple-employer VEBA as long as it has already received a favorable letter of determination from the Internal Revenue Service (verifying the trust's tax-exempt status) and has an independent trustee (usually a bank). An administrator usually handles all the appropriate compliance filings.
Solidarity Health Network can assist your organization with the following in addition to several others:
- Prepare documentations for VEBA Implementation
- Design Benefits on behalf of Plan Sponsor
- Assist Plan Sponsor with all communications to eligible members and distribute all plan documents
- Complete Application and perform Administration of Prescription Drug Benefit Subsidy through Retiree Drug Subsidy. This will save your VEBA approximately 28% on retiree prescriptions alone.
- Set-up and operate a call center to assist retirees and employees with questions
- Handle invoicing and reconciliation for participants
- Complete and update Summary Plan Description and distribute to all plan participants
- Complete and distribute Certificates of Coverage to plan participants
- Distribution of Summary Annual Report to all plan participants
A VEBA trust provides a number of significant business planning opportunities:
- The program allows for large, flexible and fully deductible contributions.
- Assets accumulate and compound on a tax-deferred basis.
- Assets are protected from all personal and corporate creditors.
Although the plan can provide life, sickness, accident, severance, long-term care and educational benefits to its members, there is no vesting of benefits unless an event occurs that triggers the payment while an employee is a participant. In other words, employees do not receive death benefits; those benefits are paid to the employee's estate only after he or she dies. Similarly, employees do not receive long-term care benefits until those resources are needed. All the funds are in an unallocated account for the benefit of the plan participants and their beneficiaries. There is no separate account in an employee's name. No cash leaves the trust when an employee leaves the firm prematurely.
A VEBA has a number of very specific design characteristics. There must be at least two participants in a plan (a spouse can be an employee). Benefits are based on annual compensation and age. When constructing a death benefit, for example, each employee will usually receive a benefit equal to a multiple of his or her compensation. Thus, if the corporate sponsor's program is determined to be a five-times-compensation package, then an employee who earns $30,000 will have a death benefit of $150,000.
At all times the rank-and-file employees should receive a level of benefits that is equal to or greater than the equivalent multiple used for the owner-employee. For example, let's say the employee in the above example works for a boss who earns $100,000 a year; the boss, then, is not entitled to a death benefit that is greater than $500,000 ($100,000 x 5 = $500,000). The benefit could be less, however. When deciding the level of benefits for a firm, the cost of obtaining those benefits must be considered. (Obviously, the cost of any death benefit will increase with the age, health and compensation of the individual.)
All full-time employees who have completed up to three years of service and are at least 21 years old are eligible to participate. In addition to the IRS letter of determination and an independent trustee, the assets are not held in any one participant's name. Instead, each employer's plan assets are held in an unallocated reserve for the exclusive benefit of the participants, their dependents and their beneficiaries. The plan prohibits any reversion of assets to the employer sponsor; however, the plan can be amended or terminated by the employer at any time. In addition, a VEBA must comply with some Employee Retirement Income Security Act rules, including the 505(b) non-discrimination requirements.
Survivor benefits can be designed so that they will not be subject to income or estate taxes. This is because participants have no "incidents of ownership" in the assets, including the life insurance contracts held by the VEBA trustee. The VEBA trustee is the owner and beneficiary of all contracts. The participant has no vested interest in any insurance contract other than the right to receive and convert the bare contract (no cash value) to individual ownership upon termination of employment. The employer sponsor has no ownership rights, and no assets can revert to the sponsor. To avoid the estate tax inclusion, a participant should make an irrevocable designation of beneficiary, like a trust for the benefit of one's family.
Who Should Consider A VEBA?
Because of the substantial benefits of a 501(c)(9) Tax Exempt Trust, the following types of businesses and business owners should consider implementing a VEBA Plan.
- Profitable businesses that want to reduce their tax liabilities.
- Labor Organizations negotiating new contracts for large employer groups.
- Businesses looking to supplement or enhance their business-succession plans (for example, by using the death benefit in the VEBA as a more tax-efficient method of providing cash to beneficiaries and avoiding the disruption of the corporation's cash flow).
As with any business planning tool, there are several steps to take before recommending a plan for a client. First, get acquainted with 501(c)(9) legislation and examine the various sponsors of multiple-employer VEBAs. Specifically, make sure the following questions are answered to satisfaction:
- Does the sponsor provide a comprehensive due diligence package?
- Does the sponsor have a credible legal opinion on the program, one that addresses the important aspects of the plan?
- Is there a recent letter of determination from the IRS?
- Does the plan meet applicable standards of the Employee Retirement Income Security Act, such as the $150,000 salary limitation, when constructing a benefit?
- Does the organization have the legal and financial professionals on staff to handle the myriad of compliance requirements?
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