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Guest wwcpa

Dependent Care Assistance Programs

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Guest wwcpa

We have heard there may be a special advantage to using Veba's in providing a dependent care assistance program. What we heard is that the annual $5,000 limitation to the employee does not apply if used with a VEBA.

Is this correct?

Thanks for any help.

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Maybe the prudent thing to do first is to get the promoter of the idea to prove their case that the limit does not apply by providing the relevant cites of IRC, Treas Regs and case law.

I would also get them to do the same thing regarding using a VEBA for this purpose.

If they cannot prove their case satisfactorily then there is no need for research. If they can prove it and you can verify the proof again there would be no need for research. However, if their "proof" etc is questionable, then you need to ask the questions and do the research.

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Putting aside the question of whether there is some advantage to funding a 129 program through a VEBA, it strikes me that dependent care assistance may not be a permissible "other benefit" which is allowed to be funded through a VEBA (i.e., the funding vehicle could not qualify as a tax-exempt VEBA under Section 501©(9) of the Code). Is there any authority from IRS on this issue?

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Guest b2kates

I agree with JPOD, I do not believe that dependent care are permitted benefits under the Veba rules. If the promoter provides you some authority, I would love to look at it.

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Guest wwcpa

I will try to find the "source" and reference and will post the updated information when I can obtain it.

Thanks

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Guest wwcpa

The position that they are taking is as follows:

"The term "other benefits" is strictly limited to benefits that are similiar to life, sick, or accident benefits. [Regs 1.501. ©(9)-3(d)]. A benefit is considered to be similiar if it is intended to safeguard or improve the health of a member or a member's dependents [Regs 1.501©(9)-3(d)(1)]. Under this test, "other benefits" include but are not limited to the following

[Regs 1.501©(9)-3(e)]:

(e) Examples of "other benefits". Paying vacation benefits, providing vacation facilities, reimbursing vacation expenses, and subsidizing recreational activities such as athletic leagues are considered "other benefits". The provision of child-care facilities for preschool and school-age dependents is also considered "other benefits". The provision of job readjustment allowances, income maintenance payments in the event of economic dislocation, temporary living expense loans and grants at times of disaster (such as fire or flood), supplemental unemployment compensation benefits (as defined in section 501©(17)(D)(i) of the Code), severance benefits (under a severance pay plan within the meaning of 29 CFR §2510.3-2(B)) and education or training benefits or courses (such as apprentice training programs) for members, are considered "other benefits" because they protect against a contingency that interrupts earning power. Personal legal service benefits which consist of payments or credits to one or more organizations or trusts described in section 501©(20) are considered "other benefits". Except to the extent otherwise provided in these regulations, as amended from time to time, "other benefits" also include any benefit provided in the manner permitted by paragraphs (5) et seq. of section 302© of the Labor Management Relations Act of 1947, 61 Stat. 136, as amended, 29 U.S.C. 186© (1979).

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They are saying because there is no limitation noted in the regulations, there is no $5,000 cap on the benefits. It appears they are also assuming that "child care facilities" would also include a Dependent Care Spending plan - even though the facility would be operated and maintained by other parties. The Regs do make reference to allowances for vacation and recreational - you would think that dependent care - which is very common - they would reference it too.

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This is not the most aggressive technique used with respect to VEBAs. There was a consultant in San Diego that was promoting using VEBAs as a means to fund nonqualified deferrred compensation plans that were limited to senior executives.

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I came across this old topic in my research as I am looking at almost exactly this issue.

My reading of subsection (e) is that it only provides a list of "examples" of "other benefits" (hence the title of the subsection). As long as the program "protects against a contingency that interrupts or impairs a member's earning power” under section (d)(2) and is not listed as a nonqualifying benefit in section (f), I think it would be okay, even if the program is not listed in section (e) (i.e., it is not a “facility”).

If the program is set up to meet the requirements of Code Section 129, which permits tax-free day care reimbursements only to the extent that they enable the employee to be “gainfully employed” (subject to the other requirements of Section 129, including the $2,500/$5,000 limit), I read that to be a program that protects against a participant’s earning power being impaired due to having to take care of a child during work hours. Therefore, it should meet the requirements of 501(c(9).

Anyone have any thoughts on this?

(To answer the OP's question, even if a VEBA could provide dependent care assistance program benefits in excess of the $5,000 cap under Code Section 129, without it participants would be taxed on the reimbursements, in my view, if the requirements of Section 129 are not met.)

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