Using VEBA assets as a death benefit.

[katieinny]

A public school teacher's association has a VEBA for medical expense reimbursements. The plan is funded by the school district as part of the union contract.

Some teachers are letting the assets accumulate in the plan under the assumption that the balance will simply be distributed to their heirs or the estate at death.

To my way of thinking, the VEBA wasn't established to provide a death benefit to heirs. Is this permissible? If not, is there a regulation I can refer to?

[lbell]

The Regs list a death benefit as a permissible plan benefit but you have to check the Plan documents and Initial 1023 filing to see what is set forth.It shouldnot be difficault to amend the plan docs and file with the Service - but will you have sufficiaent funding because its got to be across the board benefit for a covered members/

[katieinny]

My concern is that some teachers are using the plan as a deferred compensation plan rather than a medical reimbursement plan. The plan document says that a lump sum payment can be paid at retirement or termination of service (taxable, of course). I read that only a de minimus amount can be used for anything other than the primary purpose of the plan (medical expenses) without putting the plan's tax exempt status in jeopardy.

Any remaining plan balance can and should be paid to beneficiaries or the participant's estate. But providing a death benefit isn't the plan's primary purpose.

The majority of the participants are using the plan for medical expense reimbursements. Only a handful are letting their balances accumulate without making any medical claims. Am I right to be concerned, or am getting carried away?

[Don Levit]

You are not getting carried away. If the benefits are similar to a pension or annuity at mandatory or voluntary reitrement would be classified as other benefits. Other benefits do not include deferred compensation payable by reason of the passage of time rather than because of an unanticipated event. Treas. Reg. 1.501©(9)-3(f).

Don Levit

[Ron Snyder]

IRS, in their VEBA Manual, has taken the position that there is no such thing as a variable death benefit. However, the recent Health Reimbursement Account rulings permit use of the funds after the participant's death by dependents and beneficiaries.

We have seen collectively-bargained, governmental VEBAs that make a non-elective lump sum distribution upon the death of a participant receive a letter of determination letter from the IRS, presumably estopping them from disqualifying the plan (at least for some period of time).

My advice would be to submit the VEBA with the language included and ask for a determination letter. The cover letter may even point out the issue for special attention.

[katieinny]

This plan has been around awhile. It was written back in the early 80's with the language that says a lump sum can be paid at retirement or termination of service, or to beneficiaries or the estate at the participant's death. It received an IRS letter in 1983.

I don't know if there was any consideration back then that participants might not use the plan for its primary purpose, but rather as deferred compensation or as a death benefit for their heirs.