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Christine Roberts

Recent PLR re: VEBA/LT Disability

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PLR 199930015 recently held that LTD coverage provided by a VEBA and obtained either through purchase of new coverage or by modification of existing plans is attributable to employee contributions for purposes of Code Section 104(a)(3), even when the employer acts a conduit for the purchase of coverage or the payment of premiums, such that benefits received under such plans are excluded from employees' gross income. Specifically, employer either purchased coverage and reimbursed itself through after tax payroll deductions, or paid for premiums and include premiums in employees gross income, with additional payment to employees to compensate for cost of coverage & additional income tax burden. Am wondering if the result was directly related to use of a VEBA or if it would also apply to the same practice (employer as conduit), without a VEBA.

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Guest JD Colville

Ms. Roberts: If I understand your question, you are asking if an employer can provide its employees with the opportunity to purchase disability income coverage on an after tax basis through payroll deductions without using a VEBA. PLR 199930015 indicates that this would be possible to accomplish using a VEBA. While I have not found any specific rulings, my understanding is that the same result would apply without the VEBA. I am not certain from the dissertation of facts in the ruling why a VEBA was chosen, except perhaps that several school districts were involved. I believe that the important consideration determining the taxation of disbility benefits is the ultimate source of the funds, either employee or employer; and, if from the employee, whether the funds are pre-tax (disability benefit taxable) or after-tax (disability benefit not taxable).

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