Is Failure to Deposit into a VEBA a Reversion? Any correction?

[KEC79]

Employer withheld premiums for welfare benefits from employees' pay, but only deposited a portion of such premiums into the VEBA/trust. (Reasoning is unclear, but may have been to avoid UBI/UBTI, as VEBA is overfunded.)

Employer held in its general assets the remainder of those employee "premiums" apparently for its own use.

If the "surplus" premiums never went to the VEBA is it a reversion? Does it matter that the contributions were not dictated by the VEBA but rather simply by open enrollment materials? How does one correct an issue like this? Is there a correction program for VEBAs?

Appreciate any thoughts!

[Gina Alsdorf]

My first thoughts, you don't really specify what the benefit is. These are my thoughts generally speaking, the Department of Labor (DOL) considers healthcare premiums that are withheld from employee pay to be plan assets (29 CFR § 2510.3-102(a)(1)). This would be true, even if they are not segregated from employer assets (AO 92-24A). In general those assets should be held in trust, additionally VEBA assets cannot be used for anyone other than participants and beneficiaries for permitted benefits. You can mess up your tax exemption by breaking the "no inurement rule." I hear possible fiduciary problems and possible exempt status problems in what you are saying. That's all my thoughts.  Good Luck. 

[rocknrolls2]

I share Gina's concern on this situation for the same reasons. You can correct the situation for the amounts that were not contributed in the past by filing under the Voluntary Fiduciary Correction Program and contributing the amount owed plus interest using the DOL's calculator. As far as the IRS is concerned, I am not aware that they have any program in place to address voluntary correction of tax exemption issues. Because of this, you should retain highly competent ERISA counsel to assist you in rectifying this problem.  The DOL program would likely resolve any prohibited transactions and other fiduciary issues. The danger is, that you do not want the IRS to know about this and hit your client with a 100% excise tax on a reversion. Perhaps there is a closing agreement you could pursue to address any IRS issues. Regarding the overfunded status of the VEBA, you could, prospectively, collect lower premium amounts from employees or amend the VEBA going forward to add additional benefits to help soak up some of that excess amount. I hope these suggestions prove helpful to you.

[Peter Gulia]

Think about what each Form 990 or Form 5500 will show.

Think about what an independent qualified public accountant, if any, might find.

KEC79, if you’re a service provider anywhere near this VEBA’s situation, lawyer-up to Cover Your Assets. There might be ways for an employer’s blunder to become a service provider’s liability exposure. A service provider might evaluate whether doing something now could help improve opportunities for avoiding or dismissing a claim.

This is not advice to anyone.

[KEC79]

Thanks all.