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Expansion of Geographic Locale of VEBA Beyond Single State

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I do not work often with VEBAs but have recently been contacted by an existing VEBA set up by a professional association that provides benefits to professionals who are employers operating within one state. Based on their limitation of eligibility to employer members in a single state, they previously obtained a favorable determination letter of their tax-exempt VEBA status and have been operating in this manner for a few years. They have been requested by professional employers in a contiguous state to consider expanding benefits to same group of professionals in the border state.

Based on the current VEBA regulations, the expansion beyond the single state would appear to be a potential threat to the "geographic locale" restrictions for the VEBA. What they are considering, however, would appear to be within the scope of the proposed three-state safe harbor standard set forth in Treasury's Proposed Regs. 1.501©(9)-2(d) from August 1992.

Does anyone have experience with how the IRS generally handles VEBA requests for providing benefits where the geographic locale stretches across a single state along the lines of the proposed three-state safe harbor? Are there other VEBAs that have been granted a favorable determination along these lines even though the regulations have been in proposed form for 23 years? Am assuming an existing VEBA wishing to expand along the lines of the three-state safe harbor would need to seek a new / updated determination letter from the IRS in order to do so safely?

Thanks

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I am not familiar with this "three-state safe harbor standard". Note that they are merely "Proposed Regs" which, not only because they are old, but by their very title, raises the question of their effectiveness/ usability.

As far a i know a VEBA determination letter only addresses the tax exempt status of the VEBA and does not address the marketing or operation of the VEBA and so would not grant the right to expand.

From what you have described, i think that you would be creating a MEWA. I suggest that you contact EBSA and BOTH state Depts of Insurance (home state and expansion state). It might only need an M-1 filing, but, better safe than very sorry.

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Thanks GB.

We definitely agree that we have a MEWA and would contemplate working with both states' Departments of Insurance, etc.

Critical question is what to think of the existing VEBA status in light of the fact that they (or at least some at the IRS) have indicated some willingness to broaden the geographic locale standard but those regs never have been finalized. It appears that the IRS itself in some checklists and PLRs, etc. has noted the proposed regs and broader geographic scope in some releases but I have a blind spot as to how the IRS currently reacts to such requests.

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I do not think that the IRS really cares. The tax exempt status of a VEBA has no bearing on its operation or compliance with state insurance laws or EBSA ERISA or HIPAA issues. As a result, there are no Determination Letters which address the issue.

Unscrupulous scheme promoters usually point to the IRS Determination Letter which really has no relevance. I would be very wary of anyone who claims that the Determination Letter allows anything.

Can you cite any of these checklists and PLRs etc ?

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GB, Many thanks. I am not sure I understand your comments. We agree that the IRS Determination Letter does not address the state insurance, MEWA, HIPAA issues, etc. I only mentioned those because you had raised those issues in your earlier post and I was trying to be responsive to those comments while attempting to re-focus the post on the IRS's current application of the "geographic locale" standard.

I do think the IRS cares about there being an employment-related common bond among the VEBA participants for Determination Letter purposes. In the case of the existing VEBA, that common bond was shown by the VEBA limiting participation to members of a particular industry located within a single state (i.e., within the same "geographic locale" found acceptable to the IRS per 1.501©(9)-2(a)(1)). Hence the original question regarding whether the VEBA's previously-approved geographic locale might be extended to all working in that particular line of business stretching across two contiguous states. My understanding is the scope of an acceptable "geographic locale" has been the source of much debate and evolution including case law (Water Quality Association Employees Benefit Corp. v U.S., 795 F.2d 1303) and then Treasury's Proposed Regs. from 1992, etc.

I'm simply trying to determine if others have recent experience with the IRS approving VEBAs that stretch across more than one state but would satisfy the safe-harbor standard included in the proposed regulations even though those regulations are old and remain in proposed form.

Thanks.

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The 3-state safe harbor rule was issued after the IRS lost a Court of Appeals case against a VEBA operating nationally. They tried to establish a position which was not clearly in violation of that case but which gave them the ability to continue to regulate geographically.

Based upon the proposed Regs., we have obtained determination letters with respect to VEBAs which operate in 3 or fewer states. There is no harm in submitting the proposed trust for a D-letter.

Clearly other, more important, legal and regulatory issues exist with respect to these trusts, so be careful.

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As vebaguru points out " other, more important, legal and regulatory issues exist ..... so be careful."

In other words while there is no harm in getting a DL, it should not be your focus.

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