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Voluntary Employee Beneficiary Association (VEBA)

Q: What is a Voluntary Employee Beneficiary Association (VEBA)?

A: A voluntary employees' beneficiary association under Internal Revenue Code section 501(c)(9) is an organization organized to pay life, sick, accident, and similar benefits to members or their dependents, or designated beneficiaries if no part of the net earnings of the association inures to the benefit of any private shareholder or individual. The organization must meet the following requirements:
  1. It must be a voluntary association of employees;
  2. The organization must provide for payment of life, sick, accident, or other similar benefits to members or their dependents or designated beneficiaries and substantially all of its operations are for this purpose; and
  3. Its earnings may not inure to the benefit of any private individual or shareholder other than through the payment of benefits described in (2) above.
Membership of a section 501(c)(9) organization must consist of individuals who are employees who have an employment-related common bond. This common bond may be a common employer (or affiliated employers), coverage under one or more collective bargaining agreements, membership in a labor union, or membership in one or more locals of a national or international labor union. An organization that is part of a plan will not be exempt unless the plan meets certain nondiscrimination requirements. However, if the organization is part of a plan maintained under a collective bargaining agreement between employee representatives and employers, and such plan was the subject of good faith bargaining between such employee representatives and employers, the plan need not meet such nondiscrimination requirements for the organization to qualify as tax exempt.
Source: www.irs.gov

Q: What are "Traditional" vs. "Stand Alone" VEBAs

Traditional or "Defined Benefit" or "Company Run"
  • Been around for many decades and are tax favored vehicles for pre-funding health benefits for the employer sponsored plan for active or retirees
  • Under the traditional or "company run" arrangement, employer makes a tax deductible contribution to the VEBA and the VEBA earns tax free interest.
  • Funds are withdrawn from the VEBA to pay for claims or other benefit related expenses
  • Employer ultimately remains liable for any promised benefits and retains control over the funding and administration
"New" or "Stand Alone" VEBAs
  • Interesting approach in the evolution of retiree medical benefits.
  • Use Stand alone, tax favored trusts as a mechanism to transition responsibility for paying the ongoing benefits from employer sponsored retiree benefit plans to independent private sector tax-exempt entities
  • Designed to operate somewhat or fully independently of the employer
  • Employer transfers its entire future retiree health obligation to the VEBA
  • In return, Employer makes a large, fixed contribution to the VEBA in exchange for transferring the employer’s benefit liability to the liability
  • In theory, the payment is designed to approximate the total projected cost of the benefits, but involves no guarantee by the employer of a certain level of benefits.
  • Fixed Contributions can be:
    • One time payment or Paid over time
    • Made in cash or with stocks/fortunes of the company
  • In many, if not all instances, employer transfers significantly less money to the VEBA than the present value of current obligation
  • VEBA created in fall of 2007 by the United Auto Workers representing the Big 3 is not the first of its kind of new VEBAs, although the media sure makes it seem that way. Oldest is 25 yrs old and another 5 VEBAs have been in operation for at least 15 years

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Q: What are typical situations when VEBAs are formed?

A: More than half of VEBAs are formed as a result of bankruptcy or for financially distressed companies with significant retiree health liabilities. Examples include:

Part of Negotiated Settlement of outstanding liabilities when employer is in bankruptcy (Delta & Dana Corp)
  • Delta received $2M at inception and the employer continues to contribute around $15M per year into their VEBA indefinitely for some groups and up to 2016 for others. Established in 2007
  • Other examples: Dana Corporation (involved salaried retirees and 2 for the union retirees). Made a 1-time $78 million payment in cash for non-union group in 2006.
  • Delphi recently settled for $8.75M for the salaried retirees and are in the process of setting up a VEBA trust now which will take over the job of providing retiree medical benefits.
Result of a collective bargaining agreement when an employer in financial difficulty proposes a major restructuring of its health obligations as an alternative to bankruptcy
  • Most notable is the agreement between the UAW and Big 3 automobile companies
  • Largest, most ambitious and complicated VEBA structure to date
Method of settling a class action suit brought by retirees, unions, or both to block termination or modification of retiree medical benefits
  • Employers believe they have the right to terminate or modify their retiree health promises at any time since ERISA statutory vesting rules only apply to pension plans
  • Court rules if there is non-statutory basis for finding that the benefits have vested.
  • Usually, vesting claims for retiree health benefits for non-union or management retirees fare worse in the courts than union retirees
  • Retirees file class action suit to stop the termination of benefits. Settlement involves setting up a stand alone VEBA contributing a fixed cash amount.
  • Other examples: Delphi (pending), Goodyear Tire and Rubber and United Steelworkers Union

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