Contribution to VEBA

[Guest DLearning]

Does anyone know whether a company can contribute a promissory note or its stock to fund a VEBA and, if it can, whether such a contribution is deductible? Also, if you could include any cites (to the law, regs, etc) I would appreciate it.

Thank you for any comments. I appreciate it.

D.L.

[mbozek]

Promissory notes are the lending of money by the plan sponsor to the plan which is a PT under IRC 4975 for qualified plans and IRAs. The IRS pt rules do not apply to a VEBA but the DOL rules might apply to a funded welfare plan. There may also be PT prohibitions for TXOs under IRC 512-14. Also the IRS does not permit deductions to qualified plans for amount of a p. note. Rev. Rul 80-140. I dont know about contributions of stock.

[GBurns]

A Promissory Note is a promise that the issuer will pay the holder the money when due. In this case the issuer (the Company and Plan Sponsor) is promising to pay the holder (the VEBA) an amount of money which it cannot currently pay at some future date. As far as the facts posted are concerned there is no mention nor a need for lending of any money and definitely no lending by the Plan Sponsor to the Plan or even vice versa.

The Plan Sponsor might just want to give the Plan Participants some assurance that the VEBA will be funded one way or another, so here is his promise in writing. It might even be possible for the VEBA to use the Note as collateral and borrow the money.

By "contribute a promissory note " do you mean that the Company issues it to the VEBA or do you mean that the Company assigns a note previously issued by a third party to the Company which is then endorsed by the Company and turned over to the VEBA?

If the Company contributes a third party issued promissory note it could be deductible (provided the VEBA can accept it) but the value would have to be appraised etc and probably discounted for issues of collectibility etc much in the same way as any other tangible appreciated asset.

[mbozek]

GB: Regardless of whether there is a PT, a contribution of an employer's promissory note does not constitute payment which is deductible as an employer contribution to a retirement plan until the note is paid. Don E. Williams Co. v. US, 439 US 569 (1977). I dont know whether the proceeds from the sale of the note by the VEBA would be deemed payment by the employer since the note is a plan asset and the deduction could be delayed until the employer paid the holder of the note. It would be easier for the employer to sell the note to a third party and contribute the proceeds to the VEBA. An employer contribution of a promissory note of another party would be a deductible payment at its FMV.