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VEBA of Tax-Exempt Entity


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Would everyone agree that, in the case of a VEBA maintained by a tax-exempt entity, 419A(d) does not require the entity to establish separate accounts for key employees?  Since 419A(d)(1) states that it applies to the first taxable year for which a reserve is taken into account under 419A(c)(2), I assume that no separate accounts would be required.  Obviously, these employers aren't concerned with the general deduction limitations of 419 and 419A.  However, I want to make sure these amounts don't need to be taken into account for 415(c) purposes under 419A(d)(2) and that no excise tax is triggered under 4976(b)(1)(A).

Thanks in advance!

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They certainly are required* for the tax-exempt entities I do OPEB work for.  Just because an entity is tax-exempt, it doesn't mean it doesn't have a tax year.  

The requirement for a separate account for Key Employees has nothing to do with the deductibility limit.  It has to do with nondis issues.

* Whether or not you set up a separate account for a Key Employee is optional.  What is required is that no expense for any Key Employee is paid from the non-Key (or general) account.  This would include any Key Employees who retired before any funding ever occurred.

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Thank you very much for the response, but I've continued to look at this and I can't say that I agree with you.  Section 419A(d)(1) states that "the requirements of this paragraph shall apply to the first taxable year for which a reserve is taken into account under subsection (c)(2) and to all subsequent taxable years."  If the entity is tax exempt, then the deduction rules of 419 are irrelevant, and there is no UBIT under 512.  Therefore, the entity would never take any additional reserve requirements into account under 419A(c)(2), and so 419A(d)(1) would never apply under the quoted language above.  In addition, there would be no 4976 excise tax, because 4976(b)(1)(A) provides that there is only a disqualified benefit "if a separate account is required to be established for such employee under section 419A(d)" and that rule is not followed.  Thus, I'm just not seeing where this requirement is made applicable to tax-exempt employers.

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  • 8 months later...

Just saw this reply.  I have several nontaxable clients with funded OPEB plans (about the only funded OPEB plans that exist) and they either maintain separate accounts for Key Employees OR they make sure to not pay benefits for the retired Key Employee and their beneficiaries from the VEBA or other H&W trust.  

The point of the separate account limit isn't so much to limit the plan sponsor, but instead it's a limit on the participant because any amount allocated to their separate account counts towards their annual 415(c) limit.  [I presume the 415(c) limit still applies to nontaxable entities.]  

I would check your logic with ERISA counsel, but in any case, is it worth risking a 100% excise tax over the matter? 

I usually recommend that clients not prefund their OPEBs (you're effectively vesting a nonvested benefit), but for clients that insist on prefunding the benefit I recommend 1) they identify all current and "former" Key Employees (because "former Keys" and their beneficiaries are still Key Employees for H&W trust purposes) and 2) to not set up any separate accounts for them and just make sure their benefits aren't paid from the trust.  If #2 is a deal breaker for the client, then there is a lot of flexibility in what is considered a "separate account", especially if the employer is the trustee.  Separate accounts can just be tracked in a spreadsheet as long as the trust spending for the Key Employee and their beneficiaries stops when the spreadsheet account balance hits zero.

#1 is a must for any employer as soon as they put $1 in a H&W trust whether or not they decide to create separate accounts, which is another big reason why I recommend the client not prefund the OPEBs.

Good luck.

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