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Guest Teague

VEBA amendment - employee to retiree

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Guest Teague

A client wants to amend their 501©9 exempt VEBA to provide health insurance premium payment/reimbursement. This was a physician practice, two covered persons - the Dr (+spouse) and his office manager (+spouse). (I'm not convinced that these were the only eligible participants, but that's what they tell me.)

When set up in 1986, the VEBA was actuarially certified and is fully funded. Office Manager is the trustee. The plan was written to provide LTD & STD, and severance for current employees only. No claims have ever been made. All contributions were apparently made by the employer. All 990s & 5500s have been filed.

The employer sold most of its assets and dissolved in 1995. So I don't think there are any employees anymore, and therefore no plan participants. Also, both former employees are now retired. There's one clause in the trust giving the trustee the power to pay "future claims of Plan Participants until no monies or other assets remain in the Trust" in the case of termination by the employer.

It seems like the plan needs to be amended in two ways: to provide health insurance benefits in addition to LTD & STD, and to provide these benefits to the retirees. The severance benefit does not seem applicable anymore.

Here's what I can't figure out:

What happens when we re-characterize contributions made under the original plan (severance & LTD, STD for employees only) as benefits for retirees? It seems like this will violate the reserve limitations for post-retirement benefits and create UBIT for the last 23 years.

Is this right? If not, what am I missing? Could anybody suggest guidance? I can't find any, maybe I am reading the wrong regs.

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This has been a wasting trust since 1995. The fact that a determination letter was received in 1986 notwithstanding, this is no longer a VEBA nor a viable welfare benefit trust.

You are correct that the severance benefit is no longer applicable. So, also, are the STD and LTD coverages applicable (no compensation to replace).

I agree that the plan/trust need amended. The clause you refer to does not establish any other benefits nor the right to pay them. However, with no employer, who can amend the plan? Review the plan and trust documents to see if the issue is addressed.

Why would you re-characterize contributions made previously. There simply are excess assets that need to be disbursed for providing welfare benefits, as you desired.

The UBIT you refer to was actually created by selling the sponsoring corporation in 1986. The fact that they haven't been reporting this leaves them liable for taxes for open tax years (assuming net income in the VEBA). Whoever was handling the VEBA in 1986 messed up, and the problem has compounded since then.

IMHO, unless the plan and trust documents provide an escape (amendment capability, termination provisions, etc.) the participants are screwed. Expect the possibility of excise taxes - review IRS Notice 2007-84 for example. This should have been used up or closed down before October 2007.

Finally, you fail to mention whether the plan assets are $30,000 or $3,000,000. If the assets exceed $500,000, they should engage legal counsel to walk them through the correction process.

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Guest Teague

Thanks. The trustee has the power to amend and there is about $2M in the plan. (And I am their legal counsel, at least until I get a call back from the benefits-only lawyer I just left a voice message for)

This is how I understood your comments:

Upon sale of the employer the actuarially determined amount funding the VEBA loses its tax exemption and becomes excess benefits subject to UBIT. Then later, the excess benefits can used to provide retiree health benefits to the (retired) employees just by amending the plan, and if it qualifies for tax exemption it wll once again be a VEBA.

I guess I was hung up on the deduction rules for employers contributing to retiree benefits funds. But I guess all that doesn't apply in this situation, where the funds were for an approved VEBA plan for LTD & severance, which just didn't end up providing any benefits

Edit: The business sold in 1995, 9 years after the VEBA was set up, and I just confirmed that they have not been paying UBIT.

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This is how I understood your comments:

Upon sale of the employer the actuarially determined amount funding the VEBA loses its tax exemption and becomes excess benefits subject to UBIT. Then later, the excess benefits can used to provide retiree health benefits to the (retired) employees just by amending the plan, and if it qualifies for tax exemption it will once again be a VEBA.

I guess I was hung up on the deduction rules for employers contributing to retiree benefits funds. But I guess all that doesn't apply in this situation, where the funds were for an approved VEBA plan for LTD & severance, which just didn't end up providing any benefits

Edit: The business sold in 1995, 9 years after the VEBA was set up, and I just confirmed that they have not been paying UBIT.

This is how I intended for you to understand my comments:

Upon sale of the employer the VEBA became a wasting trust that had to be distributed within one year.

The "tax exemption" of a VEBA is meaningless when the accumulations are subject to other taxation (such as UBIT).

The fact that the VEBA had excess assets means that the deductions were probably claimed fraudulently. However, the 7-year statute of limitations (for fraud or substantial underpayment of taxes) is now over. However, IRS would like to tax all amounts for the oldest open tax year, including penalties and interest, to anyone with a vested right to the benefits.

It can never quality for tax exemption again. It has no sponsor. IRS will not issue determination letters to trusts that primarily benefit HCEs.

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