VEBA funded with TOHI (TM)

[Don Levit]

George:

The point I am trying to make is that there are federal characteristics to state-regulated VEBAs.

These should be recognized and dealt with appropriately.

If not, then their federal tax-exempt status could be jeopardized.

Don Levit

[GBurns]

Don

You are flip flopping again, worse than some politicians do.

You made precise statements such as " VEBAs are a creation of federal law, passed by Congress in 1928."

[Don Levit]

George:

You're right.

I did take a detour, but you led me back to the issue at hand: there is a mixture of federal and state characteristics in VEBAs, and both should be honored.

Don Levit

[Steelerfan]

steelerfan:

512(a)(3)(E)(ii)(I) states Clause (i) shall not apply to any income attributable to an existing reserve for post-retirement medical or life insurance benefits.

This is because clause (i) deals with current medical benefits, not post-retirement medical benefits.

The set asides and, thus, the reserves are 2 distinct calculations for current medical benefits and post-retirement medical benefits.

The account limit for post-retirement medical benefits is calculated over the current employees' working lives.

Such a reserve may not be included in the account limit unless it is actually established and funded.

If the set-asides are within the limits, no UBTI occurs in either the current medical benefits reserve, or the post-retirement medical benefits reserve.

Don Levit

A §501©(9) organization must pay tax on its gross income unless that income qualifies as exempt function income. If income on post retirement medical reserves is not exempt function income, how can it escape taxation? RIA says the following:

"The limit on the amount set aside as exempt function income does not include a reserve for post-retirement medical benefits because, in view of the advance deductions provided to employers for these benefits, the allowance of the tax-exempt reserve would provide an unnecessary tax incentive with respect to these benefits.

RIA observation: Because reserves for post-retirement benefits are not tax-exempt, the funding for the benefits is entirely from after-tax money."

anyone care to comment on what that means? Is the income from post retirement medical reserves taxed (period) or just potentially "subject to UBIT"?

[Don Levit]

steelerfan:

It may be helpful for us to have the context in which this excerpt is provided.

I don't understand how a qualified reserve would not be not tax-exempt.

I also don't understand why the contributions to a qualified reserve would not be tax deductible.

I agree that only exempt function income escapes taxation.

Section 419A©(2) provides the account limit of a reserve for post-retirement medical benefits.

If the reserve is appropriate, Section 1.512(a)-5T, Q&A-4(a) states that income that is either directly or indirectly attributable to the existing reserve will not be treated as UBIT.

Because earnings of the existing reserve are directly attributable to the existing reserve, such earnings shall not be treated as UBIT.

Furthermore, earnings on such earnings are indirectly attributable to the existing reserve and also should not be treated as UBIT.

To help clarify that the appropriate reserve for post-retirement medical benefits is calculated separately from the reserve for current benefits, we look at Treasury regulation 1.512(a)-5T under Q&A-3.

The amounts set aside in a VEBA to provide for the payment of life, sick, accident or other benefits may not be taken into account for purposes of determining exempt function income to the extent that such amounts exceed the qualified asset account limit under section 419A©. In calculating the qualified asset account limit FOR THIS PURPOSE, a reserve for post-retirement medical benefits is not to be taken into account.

Don Levit