Section 125 plans and VEBAs

[Guest m_johnson_90]

Without getting into the issue of why it is held in a trust, are Section 125 plans that are held in a trust considered VEBAs?

[pjkoehler]

The label "section 125 plan" or "cafeteria plan" is really confusing, because it isn't a plan in the sense of an "employee benefit plan," as that term is defined in ERISA Section 3(3), at all. It's a form of employer-provided fringe benefit, which, if all the requirements are satisfied, allows the employee to claim an exclusion from gross income under Code Sec. 125(a), equal to the amount of cash or taxable benefits that the employee agreed to forego in exchange for "qualified [nontaxable] benefits." "Qualified Benefits" are the component ERISA welfare benefit plans with respect to which the employee may elect coverage. A VEBA is a form of ERISA employee welfare benefit plan. While coverage under a VEBA that provides "qualified benefits" may be among the component welfare benefit plans with respect to which the Code Section 125(a) exclusion is applicable, the "cafeteria plan" itself is not a VEBA, regardless of whether the employer establishes a "cafeteria plan" trust, because the "cafeteria Plan" is not the plan, fund or arrangments that provides any welfare benefits. It's merely a fringe benefit, the sole "benefit" of which is a tax benefit, i.e. the avoidance of the "constructive receipt" doctrine as set forth in Code Sec. 451 and the regulations, in other words, the pre-tax treatment of any cash or other taxable benefits that the employee elected to forego in exchange for such VEBA participation, or any other "qualified benefit" coverage.[Edited by PJK on 08-17-2000 at 07:18 PM]

[Axel]

Phil, 

Thank you for a great explanation!