We have been contacted about a type of VEBA being pitched to an employer. We're not sure if this type of VEBA will work or not. Here's how I understand the promotional materials for this VEBA--

This VEBA would be for retiree medical benefits. It works like a defined contribution plan. Each employee will have its own account. When an employee and spouse die without having used all of that employee's account, the remainder is reallocated to the VEBA accounts of the other employees. This reallocation is in proportion to the balances then in the other employees' VEBA accounts. On the other hand, no employee or spouse can receive retiree medical benefits in excess of the balance of the employee's VEBA account.

All contributions to the VEBA are made by the employer. The employer adopts a health reimbursement arrangement--HRA--that calls for employer contributions equal to the value of the retiring employee's earned but unused paid vacation time and sick leave. The retiring employee has no choice of a cash out or receiving anything else for that vacation time and sick leave.

All other HRA contributions the employer makes to the VEBA are made in the discretion of the employer, like profit sharing contributions to a 401k plan. The allocation of the employer's HRA contributions to the VEBA are not factored upon differences in the employees' compensations.

In the VEBA brochure refers to private letter rulings (200452013 9/14/04 and 200549008 9/16/05) in the claim that the IRS allows this. From my quick read, it looks like the IRS has allowed a design like this.

There is no ruling cited for the part of the VEBA that is most appealing to our client. While the allocation of the discretionary employer contributions do not depend in any way on differences in compensation among the eligible employees, different numbers of years to retirement are. It is explained that this is like new comparability for profit sharing contributions to a 401k plan. It gives an example of a situation with two employees, the owner at age 56 (9 years to age 65 retirement age) and the other employee at age 38 (27 years to age 65). If 8% earnings are assumed, then of a $100 contribution made by the employer, $20 can be allocated to the 38 year old and $80 to the 56 year old. Both will have $160 in benefits when they separately reach age 65.

The brochure explains that there is no IRS ruling allowing for this new comparability factor in the allocation of the discretionary employer contributions, but explains it makes more sense to compare the benefits of each employee at age 65 rather than when money is contributed since Code section 105(h)(2)(B) calls for nondiscrimination in "benefits provided". That makes sense to me, but I would feel more assured if the IRS had ruled on this.

Any comments on this type of 'new comparability' VEBA?

Thanks for posting this.
As we know, highly compensated employees must have individual accounts, and all employees can do so as well.
I see 2 problems with this scenario.
First, the IRS is concerned about the benefits primarily going to highly compensated employees.
If this turns out to be that type of arrangement, there could be discrimination problems lurking in the future.
Second, monies contributed to retiree medical count againt the maximum that can be contributed for "regular" retirement plans.
Don Levit

The only comment that I have on this VEBA promotion is the example given is more like age-weighting than new comparability. So I find the terminology 'new comparability' misleading.

Don Levit--

Is that reduction to maximum that can be contributed for "regular" retirement plans a provision from 415 or 401(h)?

I am curious. Where can I get a brochure etc ?

You might want to reply via the private message feature, just in case you do not want to appear to be promoting for the vendor.

John:
It is section 415. See Secs. 419A(d)(2), 419A(h)(1)(A).
Don Levit

Oh so-
This sounds like someone who read one of my articles and decided to go ahead and market an unproven concept. As mentioned by others, there is no problem with individual accounts for all employees.

IRS would not be happy about account reallocation: they would believe that this is a way to attempt to get around the account limits imposed under IRC 419A. Forfeitures, therefore, should reduce cost for the concept to pass muster. That also avoids discrimination issues from reallocation on account balances. [See Notice 2007-84.]

Althouth HRAs go back several years since they were approved by the IRS, there have been no specific rulings about funded HRAs. IRS has been asked for clarification on this issue on many occasions, but such guidance has not been issued.

Please note that PLRs are subject to the usual disclaimers (ie, they apply only to the taxpayer named).

Ironically, the nondiscrimination testing provided under Regs 1.105(h) does factor in compensation. A plan cannot discriminate in favor of HCEs, even if the allocation method claimed is based on age rather than compensation.

As pointed out, this is not a cross-tested plan. A cross-testing approach would make sense and it is probably only a matter of time until IRS approves it in some form. However, the 105 Regs specifically state that an allocation that is based on compensation IS DISCRIMINATORY. [As an aside, the penalty for such "discrimination" is that the HCEs are to put the excess allocation they receive on their W-2. So, technically, a straight salary allocation would be discriminatory with no penalty.]

I would worry about the issues raised in Notice 2007-84, which applies to VEBAs as well as other welfare benefit plans.

Don-
Please note that IRC section 415 makes no reference to "annual additions" being allocated to HCEs under section 419, so the effect of the cross-reference to sec 415 under sec 419A is to limit contributions to the WBP and not to the DCP. This kind of plan would pair very nicely with a DBP. But even if the employer maintains a DCP, the WBP can simply include failsafe language that limits the WBP allocation to the lesser of the amount the HCE is eligible to receive, or the 415 dollar limit LESS any annual additions allocated under the employer's DC plan or plans.

We would all like to see the brochure.

I agree with vebaguru: we would all like to see the brochure. I'm curious as to how indepth it analyzes Treas Reg §1.105-11(b)(3)(i) and (iii).

Treas Reg §1.105-11(b)(3)(i) provides


Treas Reg §1.105-11(b)(3)(iii) provides


These two provisions suggest to me that for 105(h) nondiscrimination purposes,
1-retirees would be as a group tested separately from the active employee group
2-the type of benefits provided must be the same for all retirees for them to be nondiscriminatory as to those retirees who were highly compensated individuals (HCIs)
3-the dollar amount of benefits provided must be the same for all retirees for them to be nondiscriminatory as to those retirees who were HCIs.

It seems to me that proposition #3, that the dollar amount of benefits provided must be the same for all retirees, could provide promise or be problematic for the VEBA described in the OP. This provision does suggest that for nondiscrimination purposes, the comparative measure should be of benefits provided in retirement, not of the amounts contributed to an HRA funded through a VEBA trust. Differences in the contributions would seem irrelevant.

However, proposition #3 could be problematic in that the amount of benefits provided in retirement for a retiree that received contributions over 20 years as compared to a retiree that received contributions over 30 years. They would have different dollar amounts of benefits provided to retirees. However, this regulation was drafted and issued long before 2002, when 105(h) self-insured plans were viewed as a defined benefit. The HRA rulings in 2002 infused a defined contribution concept into 105(h)--allowing an employee to carry over unused benefits from one year to the next. This in turn allows for differences in the maximum amounts reimbursable in the 2nd and later years of a plan depending on how much each employee carried into the current year from prior years. The carryover allowed by the 2002 HRA rulings suggests that for retirees too, those with more years of benefit accrual ought to be permitted greater maximums of benefits provided in retirement than those with fewer years of benefit accrual.

Like Oh so, I would like the assurance of an IRS ruling. Like vebaguru, I hope it is only a matter of time until the IRS approves it in some form.

Sorry for dredging up an old post, but I am working in the dark on some similar questions. Did anyone ever get a brochure? Any blessing from the IRS on such a plan? Would it matter in this discussion if the proposing employer is a non-profit? Someone we deal with tangentially has a goal of something that resembles the VEBA under discussion, although he has only focused on funding the retiree benefit and somehow carving the assets out of the employer's assets and funding "something." Research indicates the only "something" might be a trust, and in the arena of welfare benefits the trust might only be a VEBA....about which I know nothing. Any help/comments/ideas appreciated! Thanks.

A tax-exempt nonprofit entity would not need a VEBA, and there would be little advantage to it.
Remember that the nondiscrimination rules exist in IRC section 105 (pertaining to taxability of contributions to employees), so discrimination could still occur. However, with no shareholders and only those earning over $110,000 counting as highly-compensated, most such entities would be able to pass the test or, at the very least, come close enough so that HCEs would have only a very small of taxable income from the transaction.

I never saw the brochure.

Thanks for the reply. So, pardon my ignorance (this area is not mine!) but what sort of funding vehicle would the entity use, if it wants to carve out the actuarially determined amount of money to get it off the books? The entity wouldn't want to pay taxes on the income, nor would it want its retirees to be taxed on the reimbursements...I am probably missing something elemental and therefore feel like I am floundering around in the dark!

A grantor trust which would be taxed back to the non-profit entity should sufficiently get the assets "off the books" for your purposes. In your shoes, I would only choose to use a VEBA if the benefits were collectively bargained and the CBA stipulated that a 501(c)(9) trust is required. If your non-profit org. is a governmental entity, a section 115 trust would be quite suitable.
A reminder: only the HCEs would be taxed at all, and they would be taxed only to the extent that they received disproportionate benefits. This would be unusual rather than common in your situation.