A government agency wants to amend its VEBA to provide for reversion of assets to the employer. It will then terminate the plan and credit the assets to an "integral part" (or grantor) trust that's not taxable under section 115 of the Code.
I think this will work, because the assets will be used to provide the same benefits provided under the VEBA. There's no excise tax on the reversion, because the governmental employer didn't deduct its VEBA contributions.
As Walter Sobcek says, "Am I wrong?"
(If you don't know who Walter Sobcek is, you haven't seen "The Big Lebowski," and shame on you!)
Full Version: VEBA to 115
This will NOT work because the prohibition against private inurement included in IRC 501©(9) precludes returning amounts to the employer (excepting current, undeducted mistake of fact contributions).
What might work would be to set up the 115 and begin funding it, while continuing to use the VEBA to pay all benefit expenses until the assets are exhausted.
What might work would be to set up the 115 and begin funding it, while continuing to use the VEBA to pay all benefit expenses until the assets are exhausted.
QUOTE (vebaguru @ Oct 4 2007, 03:08 PM) 
This will NOT work because the prohibition against private inurement included in IRC 501©(9) precludes returning amounts to the employer (excepting current, undeducted mistake of fact contributions).
What might work would be to set up the 115 and begin funding it, while continuing to use the VEBA to pay all benefit expenses until the assets are exhausted.
What might work would be to set up the 115 and begin funding it, while continuing to use the VEBA to pay all benefit expenses until the assets are exhausted.
So what are the consequences if the employer goes ahead and amends the VEBA to permit transfer of its assets to the 115 trust upon termination? Taxation of earnings for the period between date of the amendment and the date of the transfer? Or would the tax on earnings somehow be retroactive?
The employer wants to get rid of the VEBA right away because of expensive, but poor, service. I think they'd be willing to pay tax on earnings for a brief period to make this happen.
Did the VEBA receive a determination letter from IRS? Has the VEBA been filing 990s and treating the VEBA as qualified? If the answer to those questions are yes, the agency would likely be estopped from arguing that it wasn't really a tax-qualified VEBA. If it is a qualified VEBA it may not be amended to provide for reversion of contributions to the employer, because that would constitute prohibited inurement.
If the answer to the questions is no, the plan could probably be amended from a pretend VEBA to a 115 trust. But the earnings in the trust for the time it existed are taxable, and form 1041 is the income tax return filed by the trust.
When you ask the consequences, I presume that you are wondering about under tax laws. However, it is likely that the VEBA was part of an ERISA welfare benefit plan as well, so there may be consequences there as well, although most governmental entities are exempt from much of ERISA.
It is arguable that the greatest potential problems with the proposal are: (1) If a participant sued for violation of his/her rights under the plan and trust; (2) under state laws, because many states have fairly specific requirements for benefit plans of government agencies.
Government agencies are already tax-exempt and don't need VEBAs. I already recommended how to get out in my prior post.
If the answer to the questions is no, the plan could probably be amended from a pretend VEBA to a 115 trust. But the earnings in the trust for the time it existed are taxable, and form 1041 is the income tax return filed by the trust.
When you ask the consequences, I presume that you are wondering about under tax laws. However, it is likely that the VEBA was part of an ERISA welfare benefit plan as well, so there may be consequences there as well, although most governmental entities are exempt from much of ERISA.
It is arguable that the greatest potential problems with the proposal are: (1) If a participant sued for violation of his/her rights under the plan and trust; (2) under state laws, because many states have fairly specific requirements for benefit plans of government agencies.
Government agencies are already tax-exempt and don't need VEBAs. I already recommended how to get out in my prior post.
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