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VEBA discrimination rules -- how do they work?

Guest Matthew Newman

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Guest Matthew Newman

How do the VEBA Discrimination rules of 502(b)work. Would a plan be discriminatory if highly paid employees were entitled to received 60% of their income through a buy-up option, but rank-and-file employees had no by-up option and were stuck at 40% of their compensation as an LTD benefit?

Is there something akin to the 401(a)(4)/410(B) rules that applies in this situation?

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Guest John Koresko

You asked about VEBA discrimination rules in 502(B). As far as I knew, there are discrimination rules in the VEBA regs at 1.501©(9)-1, 2, 3, and 4. Furthermore, there are statutory discrimination rules at section 505(B).

The issue of discrimination with respect to plans partially paid by employees continues to be unclear. The regulations allow VEBAs to be voluntary, so it's clear employees do not have to participate if they elect not to. It is also clear, under the general test, that income replacement benefits provided by an employer should provide an equal proportion of compensation in order to be nondiscriminatory. See 505(B) and American Association of Christian Schools v. U.S. The Code also embraces the nebulous test from the pension rules - a classification that the Secretary finds nondiscriminatory.

It is clear that the first 40% LTD is okay. What about the elective portion {20%}?

My considered opinion is that the extra cannot be discriminatory under present rules because there is no limitation on an employee's voluntary contribution. Moreover, the VEBA regulations permit the same types of employment-related classifications observed by the pension regs. Therefore, it appears that a salaried vs. non-salaried classification would qualify on its face. There is, however, the question of "discriminatory effect", and nobody can predict this with certainty. But I emphasize that this is a tenuous argument, and the Service will not find any substantial authority for its position.

I would question,however, why there would be the need for any distinction among employees. If they want to buy the LTD with their own money, why would the employer care?

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