Introduction to Voluntary Employees’ Benefit Associations (VEBA)
A voluntary employees’ beneficiary association is a type of trust fund formed to provide members and their beneficiaries with a specified set of employee benefits. Life, health, accident, and medical (including retiree medical) coverage are the most common benefits provided through a VEBA.
A VEBA fund, which is tax exempt under IRC §501(c)(9), may be established by a group of employees with common employment-related connections. A common employer, membership in a collective bargaining agreement, or membership in a labor union are typical situations in which a VEBA can be formed. The VEBA benefits may be funded by the employees or employers.
A VEBA must meet three IRS requirements:
1. It must be a voluntary association of employees.
2. The organization must provide for payment of life, sick, accident, or other similar benefits to members or their dependents or designated beneficiaries. Substantially all of its operations must be devoted to this purpose.
3. VEBA earnings must be used solely for the administration and payment of member benefits and may not be used for the advantage of any private individual or shareholder.
A single employer may establish a VEBA under some circumstances and subject to fiduciary requirements.
VEBA benefits must not favor highly-compensated employees, and any membership eligibility restrictions must be on a reasonable and objective basis.
U.S. Auto Industry Adopts VEBA Model
The UAW Retiree Medical Benefits Trust, a VEBA created by the United Auto Workers (UAW) in March 2008, became effective on January 1, 2010. In March the Department of Labor granted Ford a prohibited transaction exemption allowing it to fund the VEBA with a higher than otherwise permissible amount of company securities. Retiree medical benefits are the primary focus of this VEBA, which was negotiated between the union and automakers General Motors, Ford Motor and The New Chrysler Corp.
The initial funding level was determined to be $57 billion, which was later changed through negotiation to approximately $37 billion in cash equivalents and $20 billion in estimated value of the automakers’ stock.
VEBA Funding Issues
Providing an adequate level of funding for future VEBA benefits is viewed as problematic by the IRS. Future benefits – which may be unknown in the case of ever increasing health care costs – must be accounted for annually and unless an employer elects to set aside assets for future liabilities, are funded on a current, or pay-as-you-go, basis.
According to the IRS, an employer is not required to adequately fund a VEBA (assuming that appropriate funding levels can be determined). Additionally, ERISA pension plan funding and vesting requirements do not apply to VEBA. A VEBA provides a level of security for future benefits, but is not inherently a guarantor of full plan benefits. It is not the equivalent of a pension trust for welfare benefits, but can be a very important part of retirement security and is certainly an improvement over no prefunding at all.
VEBA Plans and Litigation
Courts have generally ruled that retiree obligations can be modified or terminated if the employer includes a “reservation of rights” provision in the plan documents and does not contradict the reservation in other documents or with its behavior. The VEBA trust is an important plan document with needs to be consistent with the other instruments under which the plan is created, maintained and operated.
Overall, ERISA and the IRS provide clearly proscribed procedures that must be closely followed by VEBA plan sponsors and administrators. Questions about VEBA trusts should be directed to an attorney experienced in ERISA matters.
Health Care Costs Result in Changes to GM Retiree Medical Benefits
On January 1, 2009, General Motors changed the level of benefits provided to certain non-union retirees and their beneficiaries aged 65 and over. Eligible retirees and surviving spouses now receive a monthly pension increase in lieu of coverage for medical, dental, prescription drugs, and other benefits. While separate from the UAW VEBA, the GM action is an example of how employers continue to move away from directly offering retiree medical benefits to other models providing a partial guarantee, a subsidy, benefits terminating with Medicare eligibility, or no retiree benefit at all.
ABOUT THE AUTHOR: Dr. Mark Johnson, J.D.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances. ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.