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How to Get Out of a VEBA?


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Companies A and B are members of a controlled group. Several years ago, they created a VEBA to fund self-insured health and LTD benefits for their employees. The VEBA also paid premiums for a group life insurance policy. Company B was named as the trustee. The trust fund has always consisted entirely of employer contributions.

After a few years, Company B stopped participating in the VEBA's life and LTD plans and set up its own, fully-insured plans for those benefits outside the VEBA. Thus, currently, Company A contributes to the VEBA to fund health and LTD and to pay the life insurance premiums on its employees. Company B participates only in the health plan under the VEBA. Company B is still trustee and charges Company A administrative fees.

The VEBA contains approximately $300,000 relating to Company A. One Company A employee currently receives monthly LTD benefits. Those payments will continue for another 20 years or until she dies, if sooner.

Company A now wants to set up fully-insured LTD and AD&D plans for its employees. The new LTD policy will not cover the existing LTD claimant. In addition, it has found a cheaper life insurance policy than the one in the VEBA. As in the past, no employee contributions will be required.

To the extent possible, Company A would like to get out of the VEBA, primarily to avoid paying the administrative fees to Company B for the plans under which only Company A participates.

Because Company A's new life, LTD and AD&D benefits will be fully insured and paid entirely by Company A, there is no real need for a VEBA with respect to those benefits. However, the $300,000 in the VEBA must be used up without causing prohibited inurement.

Here are the alternatives I have come up with:

1. Approach the LTD claimant with a settlement offer of a lump sum or the purchase of an annuity in exchange for a waiver of her claims. Use whatever is left to pay premiums on the new life, LTD and AD&D policies until the funds are extinguished.

QUESTIONS: (A) is the settlement an allowable use of VEBA funds? (B) would the use of VEBA assets to pay the premiums on the new policies be prohibited inurement since Company A is getting an indirect benefit? © would the new policies have to be issued to the VEBA? (D) if so, could the policies be removed from the VEBA when the funds are extinguished?

2. If either the settlement alternative is not allowed or the claimant does not agree to it, use the VEBA funds to continue making the monthly LTD payments to her and to pay premiums on the new life, LTD and AD&D policies. Also, amend the VEBA to name Company A as trustee with respect to Company A's benefits (all except health) to eliminate the administrative fees to Company B.

QUESTIONS: Same as (B), © and (D) under 1. Also, could the VEBA have 2 trustees - Company B for health only and Company A for everything else?

Anyone have any thoughts? Is there another, better alternative that I'm completely missing? Thanks.

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  • 2 weeks later...

1. (A) Your first approach is sensible. If a lump sum settlement is not permitted under the terms of the plan/trust, however, it might not be an allowable use of the VEBA funds. However, IMHO, on plan termination funds in the plan are to be used to settle liabilities and, so long as the claimant is not a HCI or "private shareholder or individual", such settlement should be fine. (B) Use of funds to pay premiums on life, LTD, etc. policies is fine, so long as it is in accordance with the terms of the plan/trust documents. You might need an amendment (first) and a plan termination to accomplish this approach, but it can work. Company A gets no more "benefit" than any other employer gets from providing benefits to its employees. © If the insurance contracts have any cash values or nonforfeiture options or rights to be exercised, they should be issued to the VEBA. However, some carriers resist this. (D) Policies could be transferred/distributed upon termination of the VEBA. But care needs to be taken that such contracts have no value. They could also be reissued to or renewed in the name of the employer.

2. In my scenario, above, the claimant would not need to agree. But if the VEBA were not terminating, the VEBA funds could be used to continue making the monthly LTD payments to her and to pay premiums on the new life, LTD and AD&D policies, so long as the plan/trust documents so provide.

I have a hard time believing that you obtained a determination letter with a corporation who is a member of a controlled group serving as the trustee. VEBA rules require either an independent trustee or control by the members of the plan. Such trustee could never be independent. And making Company A trustee of its own VEBA has the same effect as terminating the trust IMHO. A VEBA could have 2 trustees as you describe, but it would likely need 2 funds. Again, the documents should be consistent with the actions and procedures.

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I have been surprised at the number of VEBAs that I have been running into lately, both old and recently established, that have no determination letter and no trustee. I have even seen a VEBA concept that is currently being marketed as a VEBA Plan to School Districts in the Northwest that claims that they have a Master Determination Letter so that new clients only have to sign an Adoption Agreement to fall under the Master and do not need its own Document or a Trust or Trustee (there could not be control by the members in a School district).

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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