VEBA assets reverting to employer

[Alonzo]

I don't know what your employer's benefit programs are like, but the idea that comes to my mind is to use the VEBA amounts to pay group medical or dental premiums.

[Guest Matthew Hartmann]

I am seeking strategies to allow an employer to use the excess assets in a dormant VEBA without incurring the 100% excise tax. Please advise should you be aware of any recourse.

[Guest Matthew Hartmann]

I am unsure if a VEBA may pay the obligations of the employer's cafeteria plan for health insurance and escape the characterization that the assets are reverting to the employer. I have heard that the VEBA may make donations to charities. I am looking for additional possible strategies in this area.

[Guest hank]

You should look at the VEBA trust document to see whether it currently permits use of trust assets for multiple types of benefits (e.g., LTD, medical, STD). If so, the use of the VEBA assets to fund those benefits isn't a refversion that inures to the benefit of the employer.

[pjkoehler]

I'm assuming the source of the excess VEBA assets is associated with a reserve for incurred but not reported medical claims. The company may accelerate the use of the trust funds to pay other benefits, e.g. vacation, sick and holiday pay and thus free up corporate cash for other purposes. Check the VEBA document to make sure that assets may be used to pay VEBA-qualified benefits other than medical claims. Presumably the company's cost of cash is higher than the return on VEBA assets, so you not only improve cash flow, there is a financial benefit which reflects the use of lower yielding assets.

[This message has been edited by PJK (edited 05-12-2000).]

[vebaguru]

Can a VEBA be amended to a nonqualified (grantor) welfare benefit trust? It would lose its qualified status under IRC 501©(9), but the penalty for disqualification is that the trust's income is thereafter taxable.

There is no equivalent to IRC 411(d)(6) (anti-cutback rules) which applies to welfare plans and no IRC 401(a)(2) (prohibition against reversion). There is a prohibition against private inurement under IRC 501©(9) which would be obviated by any amendment to the trust which took it out of that section anyway.

The excess funds could still not revert to the employer without creating a 100% exceise tax under IRC 4976. But what could be done with them? They could be used for any permissible (welfare) purpose: used to pay health premiums, to provide retiree health benefits, to pay severance (or supplemental unemployment) benefits, to provide disability income benefits, etc. They could even be used to provide child care or a vacation facility for participants.[Edited by vebaguru on 09-01-2000 at 08:13 AM]

[IRC401]

vebaguru-

Why is that the real question? Doesn't IRC 4976 apply to the trust regardless of whether the trust is taxable?

[Guest JD Colville]

In GCM 39782 (4/3/1989), the Service discussed the transfer of VEBA assets to a 401(h) account set up under a defined benefit plan. The GCM indicated that such a transfer would result in (1) loss of the tax exempt status of the VEBA trust, (2) inclusion by employer of all of the assets transferred, and (3) trigger of the 100% excise tax under IRC 4976.

The rationale of the Service was that the 401(h) provisions could allow for the reversion of some of the assets to the employer. One statement of the GCM seems particularly relevant to the instant discussion:

"We therefore believe, as a general rule, that the transfer of assets from a VEBA to a section 401(h) arrangement under a qualified pension plan would not provide sufficient safeguards to prevent the inurement of net earnings from the VEBA to the employer."

While the suggested transfer of assets does not involve a 401(h) account, unless any subsequent trust to which VEBA assets are transferred contains an absolute restriction against reversion to the employer, I would be concerned about the Ruling in GCM 39785 and the stated rationale for the Ruling.

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[Guest lawallach]

we have a way to remove the liability for post retirement medical expenditures from the balance sheet required under FASB 106 by removing it to a trust

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[Guest Matt Tuttle]

We now have a way for a VEBA to do for welfare benefits what 401k's did for pensions. Have the employees pick up most of the cost and appreciate doing it. In this case any type of welfare benefit can be offered in the plan and the employee can choose what they want their money to go towards.

[vebaguru]

A transfer to 401(h) accounts doesn't make sense. Anything that can be done with a 401(h) account can already be done by a VEBA. Moreover, distributions for payment of medical expenses from a VEBA are excluded from taxable income, while 401(h) distributions are taxable and the taxpayer is allowed a deduction only for the portion which exceeds 7.5% of FAGI.

[Guest]

VEBA Guru --

Distributions from a 401(h) account to pay medical expenses are *not* taxable.