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Tax Treatment of Group Legal Coverage


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A client maintains a VEBA which provides the following coverages: dental, life insurance, critical illness and accident benefits, vision coverage and group legal services coverage. All coverages except group legal coverage are excludable from the participants' gross income. The employer pays the premium for all such coverages and employees do not have the ability to choose whether or not to have certain coverages, other than to indicate for dental and vision whether the coverage is for the employee only, the employee and spouse or family coverage. If the client was unaware that the group legal plan was not excludable from members' gross income but learns for the first time that such coverage is taxable, should the client limit the taxability of such coverage to the current year and prospectively thereafter, prospectively only from the point of learning its true taxability or should the employer retroactively revise its tax treatment of such coverage?

A related question relates to the treatment of benefits received for such coverage. Section 120 of the Code excluded both the employer's contribution or premium payment for coverage as well as the value of benefits received for such coverage. How should the employer determine the value of such coverage for tax purposes?

A final question is whether the group legal benefit should be completely removed from the VEBA since it is taxable.

Thank you.

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Regarding the last part of my question in the above, the regulations at Section 1.501(c)(9)-4(e) provide "Personal legal services which consist of payments or credits to one or more organizations or trusts described in section 501(c)(20) are considered 'other benefits.'" Since the tax exemption under Section 501(c)(20) for group legal trusts was stricken from the Code, this suggests that group legal benefits may not be legitimately provided under a VEBA but it is not necessarily determinative.

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