What Is a Voluntary Employees’ Beneficiary Association (VEBA) Plan?
A Voluntary Employees’ Beneficiary Association (VEBA) plan is a tax-exempt trust established by employers or a group of employees to cover eligible medical expenses for members, their dependents, or designated beneficiaries. Typically funded by the employer, these plans operate under the governance of Internal Revenue Code Section 501(c)(9).
As per the company plan, employee contributions may or may not be mandatory, but individual elections are not allowed. Eligibility for VEBA membership requires employees to be covered by an employer-sponsored health plan. Companies must adhere to IRS regulations for the creation and management of a VEBA.
Key Takeaways:
- A VEBA plan is a tax-exempt trust predominantly funded by the employer to assist employees in paying for qualified medical expenses.
- While popularity has decreased, some employers still offer these plans.
- To be recognized as a VEBA for federal income tax purposes, employers must secure a determination letter from the IRS.
- VEBAs are subject to aspects of ERISA but are not classified as qualified retirement plans.
How a VEBA Plan Works
VEBAs enable employers to provide benefits to employees under specific requirements:
- Being a voluntary association of employees
- Providing life, sick, accident, or other similar benefits to members, dependents, or beneficiaries
- Utilizing earnings solely for administration and payment of participant benefits
VEBAs can cover a wide range of benefits, with eligible medical expenses determined by the IRS. Each plan varies in coverage and payout timing.
While subject to ERISA to some extent, VEBAs are not considered qualified retirement plans. Participants must be employees, their dependents, or designated beneficiaries, and benefits typically cease when the employee departs from the associated company or labor union.
VEBA plans differ in coverage, with some available for current expenses and others specifically for vision, dental, or post-employment medical costs.
Taxation of VEBA Plans
For federal income tax purposes, employers must obtain an IRS determination letter for their VEBA plan. These plans are classified as tax-exempt welfare benefit plans under Section 501(c)(9) of the Internal Revenue Code.
Employer contributions to a VEBA plan are tax deductible without limit. The taxability of benefits paid to employees depends on the benefit type.
VEBA withdrawals are not taxed before age 59½, and there is no mandatory withdrawal age at 72.
Cashing Out of a VEBA
Funds in a VEBA grow tax-free, allowing distributions for qualified medical expenses like co-pays, deductible, and vision or dental costs. These expenses are outlined in Section 213(d) of the Internal Revenue Code. VEBA funds can also cover post-retirement health insurance premiums.
VEBAs are not “use-it-or-lose-it” accounts, enabling carryover of balances to the next year. Unlike Flexible Spending Accounts (FSAs), VEBA balances persist.
Types of VEBA Plans
VEBA plans can function as health reimbursement arrangements (HRAs).
Various types of VEBA plans exist, such as post-deductible VEBA, limited VEBA, and post-employment VEBA, each designed for specific benefit coverage scenarios.
Pairing a VEBA plan with a Health Savings Account (HSA) can limit VEBA funds for certain expenses until the health plan deductible is met.
Who Is Eligible for a VEBA?
To qualify for a VEBA plan, your employer must offer one, and you must be an active employee covered by the employer’s health insurance.
Is a VEBA an HRA?
A VEBA can be considered a type of HRA, as both assist in reimbursing medical expenses.
What Is the Difference Between a VEBA and an HSA?
While both serve to cover medical expenses, VEBAs are mainly funded by employers, while Health Savings Accounts (HSAs) can also be funded by employees. HSAs are linked to high-deductible health plans.
Can I Have a VEBA and an HSA?
Subject to your employer’s offerings, having both a VEBA and an HSA is feasible. Understanding the rules governing contributions, withdrawals, and taxation is vital to maximizing these benefits.
The Bottom Line
A VEBA plan, governed by Section 501(c)(9) of the Internal Revenue Code, aids in covering medical expenses and insurance costs. Despite a decline in popularity, these plans offer tax advantages and financial security for employees, with some companies continuing to provide them.