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VEBA Being Reorganized as 501(c)(3) Organization

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A client is interested in having their existing VEBA reorganized as a 501(c)(3) organization? Has anyone ever heard of this being done? Even assuming that the IRS would agree to grant this type of request, what are the pros and cons of going down this route?

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 I caveat my comments by telling you that I am not a VEBA consultant but I do file for 501(c )(3) exemptions and assist several organizations with the ongoing reporting and filing required.

A VEBA is a 501(c )(9) organization.  The heart of a successful 501(c )(3) exemption is a charitable purpose and substantiation of this activity (these activities) and purpose(s) are a required part of the filing.  I do not see how a VEBA would qualify.

PNJ

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I have never looked at this before, but my first instinct is that it probably would not work.  VEBAs serve the members' health care costs and the assets need to be used for that.  Probably still worth looking into, since maybe my first instinct is wrong.  But you do not want this treated as a reversion to the employer, because then you could be facing confiscatory excise taxes.

But I have to ask, what is their goal?  Are they just trying to spend down an over-funded VEBA?  Because there are other options that are more common and easier to achieve.  I have had to help clients decide how to spend locked-away money and there are easier ways that pose less risk of violating tax law.

Do they actually want to start a charity and this seems like a convenient pile of free money?  Because that seems like a bad way to start off a charity.

Here is a recent PLR for a VEBA that added a new benefit (to spend itself down, presumably) and the IRS blessed the arrangement. (PLR 201833014)

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I've looked at related issues and would be very surprised if a VEBA would qualify without some significant restructuring of its activities and beneficiaries.  As Patricia Neal Jensen and loserson point out, a VEBA exists primarily for the private benefit of its members (through, e.g., the provision of welfare benefits).  Courts and the IRS generally view this type of private benefit, if substantial in nature, as inconsistent with 501(c)(3) status.  Here is a link to a case that is not directly on point but sets out the relevant analysis: https://casetext.com/case/police-benev-assn-of-richmond-v-us

 

 

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I've done this, but the situation is fairly unique. The organization was an apprenticeship training program. Initially qualified as a 501(c)(9) organization, we have been granted 501(c)(3) status as an educational organization. The benefit is to qualify for exemptions for property tax. In NY it requires registration and annual filings with the Attorney General's office.

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A VEBA  is a 501(c)(9) Trust for the payment of eligible medical expenses and other permissible benefits.

A VEBA cannot be a 501(c)(3) organization. However, the sponsoring employer can be.

A  VEBA usually is not usually involved in the payment of property taxes unless it owns property, which is unusual. 

Qualifying for property tax exemption is more in keeping with being  a 501(c)(3) than being a VEBA.

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On 9/19/2019 at 4:32 PM, MarkS said:

I've done this, but the situation is fairly unique. The organization was an apprenticeship training program. Initially qualified as a 501(c)(9) organization, we have been granted 501(c)(3) status as an educational organization. The benefit is to qualify for exemptions for property tax. In NY it requires registration and annual filings with the Attorney General's office.

Actually, this appears to be on all fours with what I am confronting, albeit in a different state. According to a colleague, most organizations operating an apprenticeship training program are established as 501(c)(3) organizations, from what he has seen. The trust assets are being used exclusively to provide for the apprenticeship training program and not to pay benefits to individual members.

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So why not start a new 501(c)(3) org. and pay for the apprenticeship training through the VEBA until the funds run out?

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