Funding Question - Can VEBA use contributions of active EEs to fund re

[Guest yikesyikes]

I have no substantive knowledge of VEBAs so please excuse the ignorance. Can a VEBA use contributions of active employees to fund the retiree medical benefits of former employees? What if the former employees were never contributing members of the VEBA? Even if the former employees were former VEBA members, can they receive benefits in excess of what they had previously contributed for? i.e., can employer use "excess" of contributions by actives to fund retiree medical benefits? ANY thoughts would be welcome.

[vebaguru]

Generally an employer can adopt or terminate any welfare it desires. That includes the ability to terminate a benefit and add a separate benefit, so long as funds are applied to provide benefits for employees (whether active or retired), their dependents and beneficiaries.

Without reviewing the plan and trust documents and subject to other limitations under IRC 501©(9), the answer to your question generally is "yes". Obviously there would have to be funding of each benefit provided, but excess funds in the trust could be allocated to provide such benefits.

[Kirk Maldonado]

I think that you need to make this point very clear to the participants. If you do, I don't know why anybody would elect to contribute. If you don't, I think that you would have potential liability.

[E as in ERISA]

If I recall correctly, I believe that it's often a good idea from a tax perspective to have separate funding vehicles for current and retired employees. Under 419 there are account limits for current employees, but no account limits for retired employees. If you put them together, you can sometimes have UBI issues that could otherwise be avoided.

[Kirk Maldonado]

Katherine:

Has the IRS bought off on your approach?

[E as in ERISA]

I should have limited myself to saying that some employers believe that it is a good idea to have separate VEBAs for actives and retirees based on the differences in the 419A account limit rules and the UBI rules.

I was too hasty and I'm getting my groups and rules mixed up. I went to far in suggesting there is no limit on retirees -- 419A just allows certain reserves -- which there are differences in opinion about how to calculate. And since those reserves are ignored for UBI purposes, the real answer is that there are different strategies for how to fund and invest the assets.

[GBurns]

Did you really mean to say "that some employers believe that it is a good idea to have separate VEBAs for actives and retirees based on the differences in the 419A account limit rules and the UBI rules." or did you mean some promoters convinced or try to convince some employers?

I would also question your comment that "the real answer is that there are different strategies for how to fund and invest the assets." It more likely is that there are different sales ideas being promoted that really should be questioned rather than regarded as being answers.

As Kirk asked...Has the IRS bought any of this approach?

[vebaguru]

One reason for separating the VEBAs of current employees from that of retirees is that the employer's level of commitment may be different. The employer may desire to provide an absolute guarantee of benefits for current employees, but may limit its commitment for retirees to the assets in the VEBA.

UBIT may apply to medical amounts that carry over from year to year inside a VEBA whether for actives or retirees. Also note that even in a collectively bargained context, UBIT may apply with respect to those retirees who are no longer covered under the CBA.