ARTICLES at Campbell & Associates PC

VOLUNTARY EMPLOYEE BENEFICIARY ASSOCIATIONS

BY DANIEL T. CAMPBELL AND SUSAN BRUNO
DECEMBER, 2007

     As we’ve seen in recent news stories, companies like General Motors that are struggling to address the rising cost of retiree health benefits without damaging their balance sheets and credit ratings are rediscovering VEBAs: Voluntary Employee Beneficiary Associations. 

     A VEBA trust may be a useful way for employers, including public sector employers, to increase the company’s “bottom line” while deducting contributions made to fund such benefits.

     A VEBA is an organization of employment-related employees  in which membership is voluntary, and which is created to provide “life, sick ( health), accident or other (similar) benefits to its members, or their dependents or designated beneficiaries”.

     However, a VEBA is not just for healthcare costs. Any benefit that will “improve the health” of its members, or protect against a contingency that could impact the members’ earning power, may be funded with a VEBA. 

     Benefits such as providing child care facilities, job retraining and temporary housing costs in times of disaster can all be funded with a VEBA.

     Placing life, health, accident and other benefits ( including retiree health benefits) into a VEBA permits a company to remove potential liability for these benefits from its books. Moreover, the assets in a VEBA cannot be touched by company creditors. Companies creating VEBAs can fund them with both stock and cash, thus reducing their  present out-of-pocket funding costs. Notably, VEBAs need not be fully funded for expected liabilities. 

     Since the assets of a VEBA grow tax free and are untaxed when used to pay benefits, the employer creating a VEBA can look to investment income to make up the rest of the funding.

     Because the funding of the VEBA is set at its creation, the company funding it determines its obligations in advance and will not be unpleasantly surprised with an increase in benefit contributions at year’s end. 

     Additionally, the company need not take on the responsibility of running the VEBA. A VEBA exists as an entity separate from the member employees and their employer and must be controlled by its members, independent trustees, or a group of trustees, some of whom have been designated by, or on behalf of, the members.  If there is a union involved, it may be jointly administered as a Taft-Hartley fund.


     There are potential disadvantages to a VEBA that must also be weighed when determining whether to set one up. Most importantly, because a VEBA is usually expected to increase its assets through interest income and rising stock prices, there is no guarantee that it will be fully funded for all future liabilities. Additional pitfalls may exist where a VEBA is used to fund retiree health costs.

     The tax courts have denied tax deductions for several companies that did not segregate their reserves for retiree benefits, fund the reserves in a gradual, level manner and demonstrate an intent to completely fund all retiree benefits. It is, therefore, extremely important to utilize the assistance of professionals who have experience working with VEBAs when considering shifting your client’s benefit liabilities to a VEBA.