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VEBA for Retiree Medical


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this blurb from bna is helpful. It 's in the context of mergers, etc., but is generally applicable. I could be mistaken (its been a long time since i read it), but I though some cases declared that although erisa doesn't require welfare benefits to be vested that if a plan provided for vesting, then benefits were vested for purposes of erisa.

"The buyer may be limited to the extent to which retiree healthcare benefits may be curtailed or eliminated in the future. Although employer promises to pay retiree health costs are not subject to statutory "vesting" provisions, 386 such benefits may be vested as a matter of contract law. 387 In addition, even if such benefits are not vested, the modification or elimination of such benefits may be difficult as a practical matter given the adverse publicity and impact on employee relations frequently associated with any such action.

If the workforce is unionized, the buyer's ability to eliminate or curtail retiree health benefits also may be limited, due to a collective bargaining agreement, 388 or the union's refusal to negotiate reduced benefits for future retirees and the inability of the union to negotiate on behalf of former employees.

Also of note is the Retiree Benefits Bankruptcy Protection Act 389 which generally precludes an employer which is in Chapter 11 bankruptcy from unilaterally eliminating retiree medical coverage during the pendency of the bankruptcy proceeding."

See, e.g., Curtiss-Wright v. Schoonejongen, 514 U.S. 73, 18 EBC 2841 ( 1995).

387 See, e.g., In re White Farm Equipment Company v. White Motor Corp., 788 F.2d 1186, 7 EBC 1411 ( 6th Cir 1986), In re Unisys Corp. Retiree Medical Benefit ERISA Litigation, 58 F.3d 896, 25 EBC 2105 ( 3d Cir. 1995).

388 See, e.g., UAW v. Yard-Man Inc., 716 F.2d 1476, 4 EBC 2108 ( 6th Cir. 1983).

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Guest Exec_Ben_N_Ret_Med_Guru
I have an employer considering using a VEBA to fund post retirement medical benefits, which are currently being paid on an as you go basis by the ER, with FAS 106 liabilities being booked. All covered individuals are already retired, ie, no active employees are eligible for retiree medical. Employer already has a VEBA set up for other welfare benefits, such as LTD, so adding this benefit would not be a major problem or hassle--my questions relate to whether or not using the VEBA would be the best solution.


1. Under 419A, if the employer funds the VEBA with cash equal to present value of benefits (being that the remaining working lives of all the retirees is "0"), would income accumulation on the assets in the reserve be subject to UBIT?

2. If so, does funding the VEBA with life or health insurance solve that problem?

3. Is a VEBA really necessary, or would a taxable welfare benefit trust or full insurance essentially provide the same result as a VEBA.

Anyone have any insight--the goal is to reduce the FAS 106 liability and obtain maximum tax benefits?

#1: YES. Don Levitt incorrectly wrote no. The amount contributed is deductible within the Wells Fargo case he quotes, but the earnings accumulation is subject to UBIT.

If the VEBA purchases VOHI, the contribution to the VEBA is STILL deductible to the company, but the premiums are not deductible by the VEBA.

#2. Yes, it does. There are PLR's backing this up.

3. The VEBA appears to be necessary to have the assets counted as a FAS 106 offset. We have done some research on eliminating the VEBA, but it is only theoretical at this point. Because assets would likely be subject to the general creditors of the company, the standard thinking is that not having the VEBA to segregate the assets would cause the structure to fail.

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thanks for your input.

with regards to number 3, my thinking is that a taxable welfare benefit trust would be regarded as a funded ERISA welfare benefit plan. As such, I'd think that the assets cannot revert to the employer and would not be subject to creditors. I could be wrong, but it's not a grantor trust so why would the assets have to be subject to general creditors? I'd think (and I'd strongly argue) that this would be like a vested employee trust.

I'm not an accountant, but I was under the impression that the rules provided that if the liability was transfered to a third party, such as a trust, that was sufficient. There seems at times to be a fascination with VEBAs bordering on obsession (no offense).

Not that it's your job to convince me otherwise, but I'm still thinking that it would be a heck of a lot better easier and to administer a taxable trust. (despite Don's glowing remarks about creative benefits)

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If the amount is deductible, how does one determine what portion of the interest is UBIT?

I am under the impression that if the set-aside is appropriate, there is no UBIT.

Can you cite any regilations which state all (or a portion of) a proper set aside is subject to UBIT?

Don Levit

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It is the contribution that is deductible.

It is the accumulation of earnings that could be UBTI.

The "set aside" is the contribution. It is different from interest and accumulated earnings etc.

Where did anyone say that all or a portion of a set aside was subject to UBIT ?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Exec_Ben stated in #1 that while the contributions were deductible, the earnings were taxable.

I am saying that would be incorrect, as long as the reserve was actually funded.

If the set-aside limit is complied with, and thus, the contribution is deductible, no UBIT occurs.

Don Levit

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