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VEBA, retiree drug subsidy and inurement issue

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If employer maintains a VEBA to fund its insured retiree health plan, which includes a drug plan, is the retiree drug subsidy payable to the employer or to the VEBA?

Is there an inurement issue if the subsidy is paid to the employer?

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Very good question, of which I have a couple of comments.

Two letter rulings may be helpful.

Let. Rul. 9006051 states that a rebate as described in 1.501©(9)-4© is not a reversion as defined in sec. 4976(b)(1).

This refers to a return of excess insurance premiums to their payor, based on mortality or morbidity experience, is not prohibited.

In this letter ruling, premiums were contributed by the employers and the employees.

The rebates went to the employers, who paid a pro rata share to the contributing employees.

Also, in letter ruling 9214030, it stated that sec. 1.501©(9)-4© said that the rebate of excess insurance premiums to the persons whose contributions were applied to such premiums, does not constitute prohibited inurement.

The rebates from the Medicare drug subsidy are not based on morbidity experience. And, according to these rulings, only the excess over the insurance premium can be rebated.

So, we are back to square one.

Is the subsidy a rebate? If so, is it taxable to the employer, if the premiums were deducted?

I am looking to enlightenment from others to your very good question.

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  • 14 years later...

The regs and everything I have looked at refer to the "plan sponsor" as the eligible recipient so I think in the context of a single-employer, self-insured health plan that is funded by a VEBA, retiree drug subsidy should be paid to the employer. I think this is an interesting question, but that's my interpretation. Has anyone else looked at this issue?

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